Chapter 19, Problem 10P

1.

To determine

Calculate the average remaining service life of Company J for 2016 and prepare a schedule to calculate the amortization of the prior service cost of Company J for 2016.

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 average remaining service life of Company J for 2016 as follows:

$\begin{array}{c}\text{Average remaining service year = }\frac{\text{Service years rendered}}{\text{Number of employees}}\\ =\frac{550\text{ years (1)}}{50\text{ employees}}\\ =11\text{ years}\end{array}$

Working note (1):

Calculate the total service years rendered.

Employee numbers	Expected years of future service	Service years rendered
1-5	2	10
6-10	4	20
11-15	6	30
16-20	8	40
21-25	10	50
26-30	12	60
31-35	14	70
36-40	16	80
41-46	18	90
46-50	20	100
Total service years rendered		550

Table (1)

Prepare a schedule to calculate the amortization of the prior service cost of Company J for 2016:

Year	Total prior service cost (D)	Amortization to increase pension expense (E)	Remaining prior service cost $\left(F=D-E\right)$
2016	$ 88,000	$ 8,000 (2)	$ 80,000

Table (2)

Working note (2):

Calculate the amortization to increase pension expense.

$\begin{array}{c}\begin{array}{l}\text{Amortization to }\\ \text{increase pension expense}\end{array}\}\text{ =}\frac{\text{Total prior service cost}}{\text{Average remaining service life}}\\ \text{=}\frac{\$88,000}{11\text{ years}}\\ \text{=\$8,000 }\end{array}$

2.

To determine

Prepare a schedule to calculate the net gain or loss component of pension expense for Company J during 2016.

Explanation of Solution

Prepare a schedule to calculate the net gain or loss component of pension expense for Company J during 2016 as follows:

Year	Cumulative net loss (gain) (A)	Corridor (B)	Excess net loss (gain) $\left(A-B\right)$	Amortized net loss (gain)
2016	$64,500	$60,100 (3)	$4,400	$400 (4)

Table (3)

Working note (3):

Calculate the amount of corridor for 2016.

$\begin{array}{c}\text{Corridor for 2019 = Actual projected benefit obligation }\times \text{10\%}\\ \text{=\$601,000}\times \frac{\text{10}}{100}\\ =\$60,100\end{array}$

Note: The projected benefit obligation of $601,000 $\left(\$501,000+\$88,000\right)$  is more than the fair value of plan asset of $480,000. Hence, the amount of corridor is calculated from 10% of the projected benefit obligation.

Working note (4):

Calculate the value of amortized net loss (gain) for 2016.

$\begin{array}{c}\text{Amortized net loss }\left(\text{gain}\right)=\frac{\text{Excess net loss}}{\text{Average remaining service life}}\\ =\frac{\$4,400}{11\text{ years}}\\ =\$400\end{array}$

3.

To determine

Prepare a schedule to calculate the pension expense of Company J for 2016.

Explanation of Solution

Prepare a schedule to calculate the pension expense of Company J for 2016 as follows:

Particulars	Amount in ($)
Service cost	183,000
Add: Interest cost on projected benefit obligation (5)	54,090
Less: Expected return on plan assets	(48,000)
Add: Amortization of any prior service cost	8,000
Add: Amortization of net loss (4)	400
Pension expenses	$197,490

Table (4)

Working note (5):

Calculate the interest cost on projected benefit obligation.

$\begin{array}{c}\begin{array}{l}\text{Interest cost on projected}\\ \text{ benefit obligation}\end{array}\}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Beginning projected }\\ \text{benefit obligation}\end{array}\right)\text{ + }\\ \text{Prior service cost}\end{array}\right)\times \text{Discount rate}\\ =\left(\$513,000+\$88,000\right)\times \frac{9}{100}\\ =\$54,090\end{array}$

4.

To determine

Prepare necessary journal entries of Company J for 2016.

Explanation of Solution

Prepare journal entry to record the beginning liability for prior service cost for 2016:

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 1, 2016	Other comprehensive income: Prior service cost		88,000
	Accrued/prepaid pension cost			88,000
	(To record the beginning liability for prior service cost for 2016)

Table (5)

• 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 $88,000.
• Accrued/prepaid pension cost is a liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $88,000.

Prepare journal entry to record the pension expense for 2016:

In this case, Company J has overfunded the pension contribution by $2,510$\left(\$200,000-\$197,490\right)$, hence debit the accrued/prepaid pension cost account by $2,510.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Pension expense		197,490
	Accrued/prepaid pension cost		2,510
	Cash			200,000
	(To record the pension expense and its overfunded by $2,510)

Table (6)

• Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $197,490.
• Accrued/prepaid pension cost is asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $2,510.
• Cash is an asset account and it is decreased. Therefore, credit the cash account with $200,000.

Prepare journal entry to record the amortized prior service cost for 2016:

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Accrued/prepaid pension cost		8,000
	Other comprehensive income: Prior service cost			8,000
	(To record the amortization of prior service cost)

Table (7)

• Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $8,000.
• 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 $8,000.

Prepare journal entry to record the amortized net loss for 2016:

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Accrued/prepaid pension cost		400
	Other comprehensive income: Net gain or loss			400
	(To record the amortized net loss incurred during the year)

Table (8)

• Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $400.
• Other comprehensive income: Net gain/loss is component of shareholders’ equity, and it increases the value of shareholders equity. Hence, credit the other comprehensive income: net gain or loss with $400.

5.

To determine

Calculate the total accrued/prepaid pension cost of Company J at the end of the 2016, and explain whether it is considered as an asset or a liability.

Explanation of Solution

Calculate the total accrued/prepaid pension cost of Company J at the end of the 2016, and explain whether it is considered as an asset or a liability as follows:

Accrued/prepaid pension cost
December 31, 2016	$2,510	Beg. Bal.	$33,000
December 31, 2016	$8,000	January 1, 2016	$88,000
December 31, 2016	$400
Total	$10,910	Total	$121,000
		Clos. Bal.	$110,090

In this case, the accrued/prepaid pension cost account at the end of 2016 shows a credit balance, hence it is considered as the accrued pension cost liability ($110,090).