Chapter 17, Problem 17.10P

(1)

To determine

Pension expense: Pension expense is an expense to the employer paid as compensation after the completion of services performed by the employees.

Pension expense includes the following components:

• Service cost
• Interest cost
• Expected return on plan assets
• Amortization of prior service cost
• Amortization of net loss or net gain

To calculate: The pension expense for 2016

Explanation of Solution

The following table shows the pension expense for 2016:

Particulars	Amount in millions ($)
Service Cost	75
Interest cost	45
Expected return on the plan assets	(24)
Amortization of prior service cost	0
Amortization of net gain or net loss – AOCI	0
Pension Expense	96

Table (1)

Working Notes:

The prior service cost will not amortize as the amendment was done at the end of the year.

Determine the expected return on plan assets.

$\begin{array}{c}\text{Plan assets }\left(\text{Expected return on assets }\right)=\text{Rate}\times \text{Plan assets }\\ =\text{8\%}\times \text{\$300}\\ =\text{\$24}\end{array}$

Conclusion

Therefore, the amount of pension expense is $96.

(2)

To determine

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

To prepare: The journal entries to record pension expense, gains or losses, prior service cost, funding, and payment of benefits for 2016.

Explanation of Solution

Journalize pension expense for 2016.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
				($ in Millions)
		Pension Expense		96
		Plan Assets		24
		Projected Benefit Obligation (PBO)			120
		(To record pension expense)

Table (2)

• Pension Expense is an expense account. Expenses decrease Equity value, and a decrease in equity is debited.
• Plan Assets is an asset account. The return on assets increases plan assets, and an increase in assets is debited.
• PBO is a liability account. Service cost and interest cost increase PBO, and an increase in liability is credited.

Journalize the gains and losses related to pension obligation.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Prior Service Cost–OCI		12,000,000
		PBO			12,000,000
		(To record gains related to PBO)

Table (3)

• Prior Service Cost–OCI is an expense account. Expenses decrease shareholders’ equity, and a decrease in shareholders’ equity is debited.
• PBO is a liability account. Since liability has increased, and an increase in liability is credited, so PBO is credited.

Journalize the gain – other comprehensive income. 

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Projected Benefit Obligation		22,000,000
		Gain – OCI			22,000,000
		(To record gains related to PBO)

Table (4)

• PBO is a liability account. Since liability has decreased, and a decrease in liability is debited, so PBO is debited.
• Gain–OCI is a gain or revenue account. Gains and revenues increase shareholders’ equity, and an increase in shareholders’ equity is credited.

Journalize the loss- other comprehensive income.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Loss–OCI		4,000,000
		Plan Assets			4,000,000
		(To record loss related to plan assets)

Table (5)

• Loss–OCI is a loss or expense account. Losses and expenses reduce shareholders’ equity, and a reduction in shareholders’ equity is debited.
• Plan Assets is an asset account. Since loss occurred due to excess of expected return ($24,000,000) over actual return ($20,000,000), assets are decreased by $4,000,000 $\left(\$20,000,000–\$24,000,000\right)$, and a decrease in assets is credited.

Journalize the contributions made.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Plan Assets		60,000,000
		Cash			60,000,000
		(To record plan assets being funded)

Table (6)

• Plan Assets is an asset account. Since cash is contributed to plan assets, assets are increased, and an increase in assets is debited.
• Cash is an asset account. Since cash is contributed by the company, asset amount is decreased and a decrease in asset is credited.

Journalize the amount of pension paid to retirees.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		PBO		36,000,000
		Plan Assets			36,000,000
		(To record the pension being paid and liability reduced)

Table (7)

• PBO is a liability account. Since the pension benefits are paid to retirees, the liability to pay decreases, and a decrease in liability is debited.
• Plan Assets is an asset account. Since cash is paid to retirees, assets are decreased, and a decrease in assets is credited.

(3)

To determine

Funded status: The net difference of the total of projected benefit obligation (PBO) and pension plan assets are referred to as funded status. If the balance of PBO is more than plan assets, the difference is referred to as underfunded status, and reported as net pension liability on the balance sheet. If the balance of plan assets is more than PBO, the difference is referred to as overfunded status, and reported as net pension asset on the balance sheet.

To determine: The amount that E Distribution will report in 2016 balance sheet as a net pension asset or net pension liability

Explanation of Solution

Determine the net pension liability.

Particulars	Amount ($)
PBO balance, December 31, 2016	554,000,000
Less: Plan assets balance, December 31, 2016	(344,000,000)
Net pension liability	$210,000,000

Table (8)

Working Notes:

Determine the PBO balance as on December 31.

Particulars	Amount ($)
PBO balance, January 1, 2016	480,000,000
Service cost	75,000,000
Interest cost	45,000,000
Less: Gain from change in actuarial assumption	(22,000,000)
Prior service cost (new)	12,000,000
Less: Benefits paid	(36,000,000)
PBO balance, December 31, 2016	$554,000,000

Table (9)

Determine the plan assets as on December 31.

Particulars	Amount ($)
Plan assets balance, January 1, 2016	300,000,000
Actual return on plan assets	20,000,000
Contributions 2016	60,000,000
Less: Benefits paid	(36,000,000)
Plan assets balance, December 31, 2016	$344,000,000

Table (10)

Conclusion

Therefore, the net pension liability is $210,000,000.