Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
Question
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Chapter 19, Problem 10E

1.

To determine

Calculate the amount of pension expense of Company S for 2019 and 2020.

1.

Expert Solution
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Explanation of Solution

Pension plan: Pension plan is the plan devised by corporations to pay the employees an income after their retirement, in the form of pension.

Calculate the amount of pension expense of Company S for 2019:

Particulars20192020
Amounts in ($)Amounts in ($)
Service cost$147,000$153,000
Add: Interest cost$125,000 (1)$152,200 (2)
Less: Expected return on plan assets$0$33,000
Add: Amortization of prior service cost (3)$62,500$62,500
Pension expense for 2019$334,500$334,700

Table (1)

Working note (1):

Calculate the interest cost for 2019.

Interest cost = Projected benefit obligtion×Discount rate=$1,250,000×10100=$125,000

Working note (2):

Calculate the interest cost for 2020.

Interest cost = Projected benefit obligtion for 2020×Discount rate=$1,522,000×10100=$152,200

Working note (3):

Calculate the value of amortization of prior service cost for 2019 and 2020.

Amortization of prior service cost = Projected benefit obligationUseful life=$1,250,00020 years=$33,000

2.

To determine

Prepare the necessary journal entries of Company S for 2019 and 2020.

2.

Expert Solution
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Explanation of Solution

Prepare journal entry to record the beginning liability for prior service cost for 2019:

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
January 1, 2019Other comprehensive income: Prior service cost 1,250,000 
 Accrued/prepaid pension cost  1,250,000
 (To record the beginning liability for prior service cost for 2019)   

Table (2)

  • Other comprehensive income: Prior service cost is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the other comprehensive income: Prior service cost account with $1,250,000.
  • Accrued/prepaid pension cost is a liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $1,250,000.

Prepare journal entry to record the pension expense for 2019:

In this case, Company S has underfunded the pension contribution by $4,500($334,500$330,000), hence credit the accrued/prepaid pension cost account by $4,500.

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31, 2019Pension expense 334,500 
 Cash  330,000
 Accrued/prepaid pension cost  4,500
 (To record the pension expense incurred and its underfunded by $4,500)   

Table (3)

  • Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $334,500.
  • Cash is an asset account and it is decreased. Therefore, credit the cash account with $330,000.
  • Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $4,500.

Prepare journal entry to record the amortized prior service cost for 2019:

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31, 2019Accrued/prepaid pension cost 62,500 
 Other comprehensive income: Prior service cost  62,500
 (To record the amortization of prior service cost)   

Table (4)

  • Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $62,500.
  • Other comprehensive income: Prior service cost is component of shareholders’ equity, and it increases the value of shareholders equity. Hence, credit the other comprehensive income: Prior service cost account with $62,500.

Prepare journal entry to record the pension expense for 2020:

In this case, Company S has overvalued the pension contribution by $15,300($350,000$334,700), hence debit the accrued/prepaid pension cost account by $15,300.

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31, 2020Pension expense 334,700 
 Accrued/prepaid pension cost 15,300 
 Cash  350,000
 (To record the pension expense overvalued by $15,300)   

Table (5)

  • Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $334,700.
  • Accrued/prepaid pension cost is asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $15,300.
  • Cash is an asset account and it is decreased. Therefore, credit the cash account with $350,000.

Prepare journal entry to record the amortized prior service cost for 2020:

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31, 2020Accrued/prepaid pension cost 62,500 
 Other comprehensive income: Prior service cost  62,500
 (To record the amortization of prior service cost)   

Table (6)

  • Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $62,500.
  • Other comprehensive income: Prior service cost is component of shareholders’ equity, and it increases the value of shareholders equity. Hence, credit the other comprehensive income: Prior service cost account with $62,500.

3.

To determine

Explain the manner in which company S’s pension expense would differ, if the prior service cost was vested under IAS 19.

3.

Expert Solution
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Explanation of Solution

Explain the manner in which company S’s pension expense would differ if the prior service cost was vested under IAS 19 as follows:

When the prior service cost was vested, then Company S would consider the prior service cost of $1,250,000 as an expense under IFRS.

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Intermediate Accounting: Reporting And Analysis

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