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 2018.

Explanation of Solution

The following table shows the pension expense for 2018.

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)

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

Conclusion

Therefore, the amount of pension expense is $96.

2.

To determine

To Prepare: The journal entry to record pension expense, gains or losses, prior service cost, funding, and payment of benefits for 2018.

Explanation of Solution

Record the pension expense.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Pension expense (Table 1)		96
	Plan assets (2)		24
	Projected Benefit Obligation (3)			120
	(To record the pension expense.)

Table (2)

Working Note:

Determine the plan assets.

$\begin{array}{c}\text{Plan assets }\left(\text{Expected return on assets }\right)=\text{Rate}\times \text{Plan assets }\\ =\text{8\%}\times \text{\$300}\\ =\text{\$24}\end{array}$ (2)

Determine projected benefit obligation.

$\begin{array}{c}\text{Projected benefit obligation}=\text{Service cost}+\text{Interest cost }\\ =\text{\$75}+\text{}\text{\$45}\\ =\text{\$120}\end{array}$ (3)

• Pension expense account is an expense and it is decreased the equity value by $96. Therefore, debit pension expense account with $96.
• A plan asset is an asset and it is increased by $24. Therefore, debit plan asset account with $24.
• Projected Benefit Obligation is a liability and it is increased by $120. Therefore, credit Projected Benefit Obligation account with $120.

Record the prior service cost – other comprehensive income.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Prior service cost – Other Comprehensive Income		12
	Projected Benefit Obligation			12
	(To record the prior service cost.)

Table (3)

• Prior service cost – Other Comprehensive Income account is an expense and it is decreased the equity value by $12. Therefore, debit Prior service cost – Other Comprehensive Income account with $12.
• Projected Benefit Obligation is a liability and it is increased by $12. Therefore, credit Projected Benefit Obligation account with $12.

Record the gain – other comprehensive income.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Projected Benefit Obligation		22
	Gain – Other Comprehensive Income			22
	(To record the gain.)

Table (4)

• Projected Benefit Obligation is a liability and it is decreased by $22. Therefore, debit Projected Benefit Obligation account with $22.
• Gain – Other Comprehensive Income account is an income and it is increased the equity value by $22. Therefore, credit gain – Other Comprehensive Income account with $22.

Record the loss- other comprehensive income.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Loss – Other Comprehensive Income (4)		4
	Plan assets			4
	(To record the loss.)

Table (5)

Working Note:

Determine the loss - other comprehensive income.

$\begin{array}{c}\text{Loss }\left(\text{Other comprehensive income}\right)=\text{Actual return }-\text{Expected return }\\ =\text{\$20}-\$24\\ =\text{\$4}\end{array}$ (4)

• Loss – Other Comprehensive Income account is a loss and it is decreased the equity value by $4. Therefore, debit loss – Other Comprehensive Income account with $4.
• A plan asset is an asset and it is decreased by $4. Therefore, credit plan asset account with $4.

Record the contributions made.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Plan assets		60
	Cash			60
	(To record the contributions made.)

Table (6)

• A plan asset is an asset and it is increased by $60. Therefore, debit plan asset account with $60.
• Cash is an asset and it is decreased by $60. Therefore, credit cash account with $60.

Record the retiree benefits.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Projected benefit obligation		36
	Plan assets			36
	(To record the retiree benefits.)

Table (7)

• Projected Benefit Obligation is a liability and it is decreased by $36. Therefore, debit Projected Benefit Obligation account with $36.
• A plan asset is an asset and it is decreased by $36. Therefore, credit plan asset account with $36.

3.

To determine

The amount that E distribution will report in 2018 balance sheet as a net pension asset or net pension liability.

Explanation of Solution

Determine the net pension liability.

Particulars	Amount ($ in millions)
PBO balance, December 31 (Table 9)	554
Less: Plan assets balance, December 31 (Table 10)	(344)
Net pension liability	210

Table (8)

Working Notes:

Determine the PBO balance as on December 31.

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

Table (9)

Determine the plan assets as on December 31.

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

Table (10)

Conclusion

Therefore, the net pension liability is $210.