Chapter 17, Problem 17.14P

(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 compute: The amount of actual return on plan assets

Explanation of Solution

Calculate the amount of actual return.

$\begin{array}{l}\text{Ending Balance of Plan Assets = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Beginning Balance + Actual Returns }\\ \text{+ Cash Contributions}\end{array}\right)\\ -\text{Retiree Benefits}\end{array}\right]\\ \Rightarrow \text{Actual Returns}\text{=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Ending Balance of Plan Assets }\\ \text{+ Retiree Benefits }\end{array}\right)\\ -\left(\begin{array}{l}\text{Beginning Balance }\\ \text{+ Cash Contributions}\end{array}\right)\end{array}\right]\end{array}$

$\begin{array}{l}\Rightarrow \text{Actual Returns}\text{=}\left[\begin{array}{l}\left(\$2,591,000+\$270,000\right)\\ -\left(\$2,400,000+\$245,000\right)\end{array}\right]\\ \Rightarrow \text{Actual Returns}\text{=}\$2,861,000-\$2,645\\ \Rightarrow \text{Actual Returns}\text{=}\$216,000\end{array}$ (1)

Conclusion

Therefore, the amount of actual returns is $216,000.

(2)

To determine

To compute: The loss or gain on plan assets

Explanation of Solution

Compute the loss or gain on plan assets.

Step 1: Compute the expected returns.

$\begin{array}{c}\text{Expected Returns = Plan Assets }\times \text{ 10\%}\\ \text{=}\text{\$2,400,000 }\times \text{ 10\%}\\ \text{=}\text{\$240,000}\end{array}$ (2)

Step 2: Compute the loss or gain on plan assets (Refer to Equations (1) and (2) for both the values).

$\begin{array}{c}\text{Gain or (Loss) on Plan Assets = Actual Returns}-\text{Expected Returns}\\ \text{= \$216,000}-\$240,000\\ =\left(\$24,000\right)\end{array}$

Conclusion

Therefore, the loss on plan assets is $24,000.

(3)

To determine

To compute: The service cost.

Explanation of Solution

Compute the service cost.

Step 1: Compute the interest cost.

$\begin{array}{c}\text{Interest Cost = 7\% of PBO}\\ \text{=}\text{\$2,300,000}\times \text{7\%}\\ \text{= \$161,000}\end{array}$ (3)                                                     

Step 2: Compute the service cost (Refer to Equation (3) for interest cost value).

$\begin{array}{l}\text{Ending Balance of PBO = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Beginning Balance + Service Cost }\\ \text{+ Interest Cost + Loss }\left(\text{Gain}\right)\end{array}\right)\\ -\text{Retirer Benefits}\end{array}\right]\\ \Rightarrow \text{Service Cost}\text{=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Ending Balance of PBO }\\ \text{+ Retirer Benefits }\end{array}\right)\\ -\left(\begin{array}{l}\text{Beginning Balance }\\ \text{+ Interest Cost }\text{+}\text{Loss}\left(\text{Gain}\right)\end{array}\right)\end{array}\right]\end{array}$

$\begin{array}{l}\Rightarrow \text{Service Cost}\text{=}\left[\begin{array}{l}\left(\$2,501,000+\$270,000\right)\\ -\left(\$2,300,000+\$161,000\right)\end{array}\right]\\ \Rightarrow \text{Service Cost}\text{=}\$2,771,000-2,461,000\\ \Rightarrow \text{Service Cost}\text{=}\$310,000\end{array}$                            

Conclusion

Therefore, the service cost is $310,000.

(4)

To determine

To compute: The pension expense

Explanation of Solution

The following table shows pension expense.

Particulars	Amount ($)
Service Cost	$310,000
Interest cost	161,000
Expected return on plan assets	(240,000)
Amortization of Prior Service Cost - AOCI	25,000
Amortization of net gain	6,000
Pension Expense	$250,000

Table (1)

Working Note:

Refer to Requirement (3) for service cost, Equation (3) for interest cost, and Equation (2) for expected return on plan assets value.

Compute the amount of Amortization of Prior Service Cost – AOCI.

$\begin{array}{c}\text{Amortization of Prior Service Cost - AOCI}\text{=}\left[\begin{array}{l}2016\text{ Beginning Balance }\\ -\text{ 2016 Ending Balance}\end{array}\right]\\ =\$325,000-\$300,000\\ =\$25,000\end{array}$

Compute the Amortization of Net Gain –AOCI.

Amortization of Net Gain –AOCI:
Beginning Balance	$330,000
Less:
Ending Balance	(300,000)
Loss on Plan Assets	(24,000)
Net Gain – AOCI Amortization	$6,000

Table (2)

(5)

To determine

To compute: The average remaining service life of active employees.

Explanation of Solution

Compute the average service period.

$\begin{array}{l}\text{Amortization Amount = }\frac{\text{Amount to be Amortized}}{\text{Number of Years}}\\ \Rightarrow \text{Number of Years }\text{= }\frac{\text{Amount to be Amortized}}{\text{Amortization Amount}}\\ \Rightarrow \text{Number of Years }\text{=}\frac{\$90,000}{\$6,000}\\ \Rightarrow \text{Number of Years }\text{=}15\text{ Years}\end{array}$

Working Note:

Refer to Table (2) for Net Gain amount amortized.

Calculate the amount of Net Gain to be amortized.

Details	Amount ($)
Net Gain, Beginning	$330,000
10% of $2,400,000	240,000
Amount to be Amortized	$90,000

Table (3)

Conclusion

Therefore, the average remaining service life of active employees is 15 years.