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.

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

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

$\begin{array}{c}\text{Gain or (Loss) on Plan Assets = Actual Returns}-\text{Expected Returns}\\ \text{= \$216,000}-\$240,000(3)\\ =\left(\$24,000\right)\end{array}$ (2)

Working Note:

Compute the expected returns.

$\begin{array}{c}\text{Expected Returns = Plan Assets }\times \text{ 10\%}\\ \text{=}\text{\$2,400,000 }\times \text{ 10\%}\\ \text{=}\text{\$240,000}\end{array}$ (3)

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.

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

$\begin{array}{l}\Rightarrow \text{Service Cost}\text{=}\left[\begin{array}{l}\left(\$2,501,000+\$270,000\right)\\ -\left(\$2,300,000+\$161,000(5)\right)\end{array}\right]\\ \Rightarrow \text{Service Cost}\text{=}\$2,771,000-2,461,000\\ \Rightarrow \text{Service Cost}\text{=}\$310,000\end{array}$ (4)

Working Note:

Compute the interest cost.

$\begin{array}{c}\text{Interest Cost = 7\% of PBO}\\ \text{=}\text{\$2,300,000}\times \text{7\%}\\ \text{= \$161,000}\end{array}$ (5)

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 (4)
Interest cost	161,000 (5)
Return on plan assets	(240,000) (3)
Amortization of Prior Service Cost - AOCI	25,000 (6)
Amortization of net gain	6,000 (7)
Pension Expense	$250,000

Table (1)

Working Note:

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

$\begin{array}{c}\text{Amortization of Prior Service Cost - AOCI}\text{=}\left[\begin{array}{l}2016\text{ Beginning Balance }\\ -\text{ 2016 Ending Balance}\end{array}\right]\\ =\$325,000-\$300,000\\ =\$25,000\end{array}$ (6)

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

(7)

Table (2)

5.

To determine

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

Explanation of Solution

Compute the average service period.

$\begin{array}{l}\text{Amortization Amount = }\frac{\text{Amount to be Amortized}}{\text{Number of Years}}\\ \Rightarrow \text{Number of Years }\text{= }\frac{\text{Amount to be Amortized}}{\text{Amortization Amount}}\\ \Rightarrow \text{Number of Years }\text{=}\frac{\$90,000(8)}{\$6,000(7)}\\ \Rightarrow \text{Number of Years }\text{=}15\text{ Years}\end{array}$

Working Note:

Calculate the amount to be amortized.

Average Remaining Service Life of Active Employees:	Amount ($)
Net Gain, Beginning	330,000
10% of $2,400,000	240,000
Amount to be Amortized	90,000

(8)

Table (3)

Conclusion

Therefore, the average remaining service life of active employees is15 years.