Chapter 17, Problem 17.17P

(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 journalize: Entries related to pension expense, funding, gains and losses, and retiree benefits paid

Explanation of Solution

Journalize the entry related to pension expense.

Date		Account Titles and Explanation	Post Ref.	Debit	Credit
				($ in Millions)
		Deferred Tax Asset (DTA)		15.2
		Pension Expense		43.0
		Plan Assets		27.0
		Projected Benefit Obligation (PBO)			65.0
		Amortization of Prior Service Cost–OCI			2.4
		Amortization of Net Loss–OCI			0.6
		Income Tax Expense			17.2
		(To record pension expense)

Table (1)

• Deferred Tax Asset is an asset account. Tax expense is recorded on expense for which the tax deduction is available in future. To record this tax benefit, which is accounted as the tax expense payment in advance, this account is debited.
• 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.
• Amortization of Prior Service Cost–OCI is a contra to Prior Service Cost–OCI account. Since amortization reduces prior service cost balance, it is credited because Prior Service Cost–OCI account is debited.
• Amortization of Net Loss–OCI is a contra to Net Loss–OCI account. Since amortization reduces net loss balance, it is credited because Net Loss–OCI account is debited.
• Income Tax Expense is an expense account. Since tax expense is reduced for accounting purposes, tax expense is credited.

Working Notes:

Compute the deferred tax asset amount allocated.

$\begin{array}{c}\text{Deferred tax asset =}\left(\begin{array}{l}\text{Service cost+}\\ \text{Interest cost+}\\ \text{Expected return on plan assets}\end{array}\right)\times \text{Tax rate}\\ \text{=}\left(\text{\$41,000,000+\$24,000,000+\$27,000,000}\right)\times \text{40\%}\\ \text{= \$15,200,000}\end{array}$

Compute the income tax expense amount allocated.

$\begin{array}{c}\text{Income tax expense = Pension expense}\times \text{Tax rate}\\ \text{=\$43,000,000}\times \text{40\%}\\ \text{= \$17,200,000}\end{array}$

Note: Refer to the illustration 17-2 given in the textbook for the values of service cost, interest cost, and expected return on plan assets.

Journalize the entry related to funding the plan assets.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Plan Assets		48,000,000
		Cash			48,000,000
		(To record plan assets being funded)

Table (2)

• 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 entry for the reduction in income taxes payable on the portion of the plan assets realized.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Income Taxes Payable		19,200,000
		Deferred Tax Asset			19,200,000
		(To record reduction in income taxes payable)

Table (3)

• Income Taxes Payable is a liability account. Since the tax expense is recognized in advance, the future tax liability is reduced, and a reduction in liability is debited.

• Deferred Tax Asset (DTA) is an asset account. Since the tax expense which is paid in advance is recognized, asset is reduced and a reduction in asset is credited.

Working Notes:

Compute the deferred tax asset amount allocated.

$\begin{array}{c}\text{Deferred tax asset =Cash contributions}\times \text{Tax rate}\\ \text{=\$48,000,000}\times \text{40\%}\\ \text{= \$19,200,000}\end{array}$

Journalize the amount of pension paid to retirees.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		PBO		38,000,000
		Plan Assets			38,000,000
		(To record the pension being paid and liability reduced)

Table (4)

• 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.

Journalize the gains and losses related to pension obligation.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Deferred Tax Asset (DTA)		9,200,000
		Loss–OCI		13,800,000
		Projected Benefit Obligation (PBO)			23,000,000
		(To record loss related to PBO)

Table (5)

• Deferred Tax Asset is an asset account. The tax expense is recorded on loss on PBO for which the tax deduction is available in future. To record this tax benefit, which is accounted as the tax expense payment in advance, this account is debited.
• Loss–OCI is a loss or expense account. Losses and expenses decrease shareholders’ equity, and a decrease in shareholders’ equity is debited.
• PBO is a liability account. Losses increase DBO, and an increase in liability is credited.

Working Notes:

Compute the deferred tax asset amount allocated.

$\begin{array}{c}\text{Deferred tax asset =Loss on PBO}\times \text{Tax rate}\\ \text{=\$23,000,000}\times \text{40\%}\\ \text{= \$9,200,000}\end{array}$ (1)

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

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Plan Assets		3,000,000
		Gain–OCI			1,800,000
		Deferred Tax Liability			1,200,000
		(To record gain on plan assets)

Table (6)

• Plan Assets is an asset account. The loss on return on assets decreases plan assets, and a decrease in assets is credited.
• Gain–OCI is a loss or expense account. Gains and revenues increase shareholders’ equity, and an increase in shareholders’ equity is credited.
• Deferred Tax Liability is a liability account. The tax expense is recorded on gain on plan assets for which the tax should be paid in future. To record this accrued tax, which is accounted as the tax expense to be paid in future, this account is credited.

Working Notes:

Compute the deferred tax liability amount allocated.

$\begin{array}{c}\text{Deferred tax liability = Gain on plan assets }\times \text{Tax rate}\\ \text{=\$3,000,000}\times \text{40\%}\\ \text{= \$1,200,000}\end{array}$ (2)

(2)

To determine

To prepare: Statement of Comprehensive Income for G Communications for the year ended December 31, 2018.

Explanation of Solution

Prepare Statement of Comprehensive Income for G Communications for the year ended December 31, 2018.

G Communications
Statement of Comprehensive Income
Year Ended December 31, 2018
Net income		$300.000,000
Other comprehensive income:
Net unrealized holding gain on investments       ($30,000,000, net of $12,000,000 tax)	$18,000,000
Loss on pensions–PBO estimate ($23,000,000,       net of $9,200,000 tax)	(13,800,000)
Gain on pensions–return on plan assets       ($3,000,000, net of $1,200,000 tax)	1,800,000
Reclassification: Amortization of prior service       cost ($1,000,000, net of $400,000 tax)	600,000
Reclassification: Amortization of net loss       ($4,000,000, net of $1,600,000 tax)	2,400,000	9,000,000
Comprehensive income		$309,000,000

Table (7)

Working Notes:

Compute the tax on net unrealized gain on investments.

$\begin{array}{c}\text{Tax = Net unrealized holding gain }\times \text{Tax rate}\\ \text{=\$30,000,000}\times \text{40\%}\\ \text{= \$12,000,000}\end{array}$

Refer to Equations (1) and (2) for value and computation of tax on loss on PBO, and gain on pension plan assets.

Compute the tax on amortization of prior service cost.

$\begin{array}{c}\text{Tax = Amortization of prior service cost }\times \text{Tax rate}\\ \text{=\$1,000,000}\times \text{40\%}\\ \text{= \$400,000}\end{array}$

Compute the tax on amortization of net loss.

$\begin{array}{c}\text{Tax = Amortization of net loss }\times \text{Tax rate}\\ \text{=\$4,000,000}\times \text{40\%}\\ \text{= \$1,600,000}\end{array}$