Chapter 17, Problem 17.11P

(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

International Financial Reporting Standards (IFRS): IFRS are a set of international accounting standards which are framed, approved, and published by International Accounting Standards Board (IASB) for the preparation and disclosure of international financial reports.

To compute: Net pension cost of E Distribution for the year 2018

Explanation of Solution

As per International Accounting Standard Number: 19 of IFRS, the following components are recorded as pension expense on the income statement:

• Service cost
• Past service cost (Prior service cost under GAAP)
• Net interest cost

As per International Accounting Standard Number: 19 of IFRS, the following components are recorded as pension expense on the statement of comprehensive income:

• Loss (gain) on defined benefit obligation (DBO)
• Loss (gain) on plan assets

Determine net pension cost of E Distribution for the year 2018, as per IFRS.

Particulars	Amount ($)	Amount ($)
Profit and Loss (Income Statement):
Service cost:
Service cost	$75,000,000
Past service cost	12,000,000
Service cost		$87,000,000
Net interest cost (income):
Net interest cost		18,000,000
Other Comprehensive Income (OCI):
Re-measurement cost:
Loss (gain) on DBO	(22,000,000)
Loss (gain) on plan assets	10,000,000	(12,000,000)
Net pension cost		$93,000,000

Table (1)

Working Notes:

Compute net interest cost.

$\begin{array}{c}\begin{array}{l}\text{Net interest }\\ \text{cost }\left(\text{income}\right)\end{array}\}\text{ = Interest rate × Net pension }\left(\text{liability}\right)\text{asset}\\ \text{= Interest on beginning DBO – Interest on beginning plan assets}\\ \text{= }\left(\text{10\%×\$480,000,000}\right)\text{–}\left(\text{10\%×\$300,000,000}\right)\\ \text{= \$18,000,000}\end{array}$ (1)

Compute loss (gain) on plan assets.

$\begin{array}{c}\begin{array}{l}\text{Loss }\left(\text{gain}\right)\text{ on}\\ \text{ plan assets}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Actual return – }\\ \left(\text{Interest rate × Beginning balance of plan assets}\right)\end{array}\right\}\\ \text{=\$20,000,000–}\left(\text{10\%×\$300,000,000}\right)\\ \text{=\$20,000,000–\$30,000,000}\\ \text{=\$10,000,000}\end{array}$ (2)

(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 journalize: Entries related to net pension cost, gains and losses, past service cost, funding, and retiree benefits paid in 2018

Explanation of Solution

Journalize the entry related to service cost of pension expense.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Service cost		87,000,000
		DBO (2018 Service Cost)			75,000,000
		DBO (Past Service Cost)			12,000,000
		(To record service cost)

Table (2)

• Service cost is an expense account. Expenses decrease Equity value, and a decrease in equity is debited.
• DBO is a liability account. Service cost increases DBO, and an increase in liability is credited.
• DBO is a liability account. Past service cost increases DBO, and an increase in liability is credited.

Journalize the entry related to net interest cost of pension cost.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Net interest cost		18,000,000
		Plan Assets		30,000,000
		DBO			48,000,000
		(To record net interest cost)

Table (3)

• Net interest cost 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.
• DBO is a liability account. Interest cost increases DBO, and an increase in liability is credited.

Working Notes:

Refer to Equation (1) for value and computation of net interest cost.

Compute expected return on plan assets.

$\begin{array}{c}\text{Expected return on plan assets = Interest rate × Beginning balance of plan assets}\\ \text{=10\%×\$300,000,000}\\ \text{=\$30,000,000}\end{array}$

Compute interest cost.

$\begin{array}{c}\text{Interest cost = Beginning balance of DBO × Interest rate}\\ \text{= \$480,000,000×10\%}\\ \text{= \$48,000,000}\end{array}$ (3)

Journalize the entry related to loss (gain) on plan assets of pension cost.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Re-measurement Loss on Plan     Assets–OCI		10,000,000
		Plan Assets			10,000,000
		(To record loss on plan assets)

Table (4)

• Re-measurement Loss on Plan Assets–OCI is a loss or expense account. Losses and expenses decrease shareholders’ equity, and a decrease in shareholders’ equity is debited.
• Plan Assets is an asset account. The loss on return on assets decreases plan assets, and a decrease in assets is credited.

Note: Refer to Equation (2) for value and computation of loss (gain) on plan assets.

Journalize the gains and losses related to pension obligation.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Defined Benefit Obligation (DBO)		22,000,000
		Re-measurement Gain–OCI			22,000,000
		(To record loss related to DBO)

Table (5)

• DBO is a liability account. Gains decrease DBO, and a decrease in liability is debited.
• Re-measurement Gain–OCI is a gain or revenue account. Gains and revenues increase shareholders’ equity, and an increase in shareholders’ equity is credited.

Journalize the amount funded to pension funds of plan assets.

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 expense 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.

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

Table (7)

• DBO 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

Net pension asset or net pension liability: The net total of DBO and pension plan assets are reported as net pension asset or net pension liability. Net pension asset is reported, if the net balance is a debit. Net pension liability is reported, if the net balance is a credit.

To determine: The net pension asset (liability) at the end of 2018

Explanation of Solution

Compute net pension asset or net pension liability to be reported at the end of 2018.

Step 1: Compute DBO at the end of 2018.

Particulars	Amount ($)
DBO at the beginning of 2018	$480,000,000
Service cost	75,000,000
Interest cost	48,000,000
Gain or loss on DBO	(22,000,000)
Past service cost	12,000,000
Less: Retiree benefits paid	(36,000,000)
DBO at the end of 2018	$557,000,000

Table (8)

Refer to Equation (3) for value and computation of interest cost.

Step 2: Compute pension plan assets at the end 2018.

Particulars	Amount ($)
Pension plan assets at the beginning of 2018	$300,000,000
Actual return on plan assets	20,000,000
Cash contributions	60,000,000
Retiree benefits paid	(36,000,000)
Pension plan assets at the end of 2018	$344,000,000

Table (9)

Step 3: Compute net pension asset or net pension liability to be reported at the end of 2018.

Particulars	Amount ($)
DBO at the end of 2018	$557,000,000
Plan assets at the end of 2018	344,000,000
Net pension liability at the end of 2018	$213,000,000

Table (10)

Note: Refer to Tables (8) and (9) for value and computation of both the values.