Chapter 19, Problem 11P

1.

To determine

Calculate the average remaining service life of Company T 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 T for 2016 as follows:

$\begin{array}{c}\text{Average remaining service year = }\frac{\text{Service years rendered}}{\text{Number of employees}}\\ =\frac{540\text{ years (1)}}{40\text{ employees}}\\ =13.5\text{ years}\end{array}$

Working note (1):

Calculate the total service years rendered.

Employee numbers	Expected years of future service	Service years rendered
1-5	3	15
6-10	6	30
11-15	9	45
16-20	12	60
21-25	15	75
26-30	18	90
31-35	21	105
36-40	24	120
Total service years rendered		540

Table (1)

2.

To determine

Prepare a schedule to calculate the net gain or loss component of pension expense of Company T during 2016 and 2017.

Explanation of Solution

Prepare a schedule to calculate the net gain or loss component of pension expense of Company T during 2016 and 2017 as follows:

Year	Cumulative net loss (gain) (A)	Corridor (B)	Excess net loss (gain) $\left(A-B\right)$	Amortized net loss (gain)
2016	$29,000	$47,000 (2)	-	-
2017	$29,000	$68,600 (3)	-	-

Table (2)

Working note (2):

Calculate the amount of corridor for 2016.

$\begin{array}{c}\text{Corridor for 2016}=\text{Actual projected benefit obligation }\times \text{10\%}\\ \text{=\$470,000}\times \frac{\text{10}}{100}\\ =\$47,000\end{array}$

Working note (3):

Calculate the amount of corridor for 2017.

$\begin{array}{c}\text{Corridor for 2020}=\text{Actual projected benefit obligation }\times \text{10\%}\\ \text{=\$686,000}\times \frac{\text{10}}{100}\\ =\$68,600\end{array}$

Note: The projected benefit obligation of both 2016 and 2017 is more than the fair value of plan asset. Hence, the amount of corridor is calculated from 10% of the projected benefit obligation.

The cumulative net loss of 2016 and 2017 does not exceed corridor, therefore no amortized net loss incurred during 2016 and 2017.

3.

To determine

Prepare a schedule to calculate the pension expense of Company T for 2016 and 2017.

Explanation of Solution

Prepare a schedule to calculate the pension expense of Company T for 2016 and 2017 as follows:

Particulars	Amount in ($)	Amount in ($)
Service cost	169,000	175,000
Add: Interest cost on projected benefit obligation	47,000 (4)	68,600 (5)
Less: Expected return on plan assets	(40,500)	(62,050)
Pension expenses	$175,500	$181,550

Table (3)

Working note (4):

Calculate the interest cost on projected benefit obligation for 2016:

$\begin{array}{c}\begin{array}{l}\text{Interest cost on projected }\\ \text{benefit obligation for 2016}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Projected benefit obligation for 2016}\times \\ \text{Discount rate}\end{array}\right)\\ =\$470,000\times \frac{10}{100}\\ =\$47,000\end{array}$

Working note (5):

Calculate the interest cost on projected benefit obligation for 2017:

$\begin{array}{c}\begin{array}{l}\text{Interest cost on projected }\\ \text{benefit obligation for 2017}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Projected benefit obligation for 2017}\times \\ \text{Discount rate}\end{array}\right)\\ =\$686,000\times \frac{10}{100}\\ =\$68,600\end{array}$

4.

To determine

Prepare necessary journal entries of Company T for 2016 and 2017.

Explanation of Solution

Prepare journal entry to record the pension expense for 2016:

In this case, Company T has underfunded the pension contribution by $500$\left(\$175,500-\$175,000\right)$, hence credit the accrued/prepaid pension cost account by $500.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31,2017	Pension expense		175,500
	Cash			175,000
	Accrued/prepaid pension cost			500
	(To record the underfunded pension expense of $500)

Table (4)

• Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $175,500.
• Cash is an asset account and it is decreased. Therefore, credit the cash account with $175,000.
• Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $500.

Note: For accrued/prepaid pension cost no other adjustment is required. Because there are no amortization of the cumulative net loss, and the balance of $65,500 $\left(\$65,000+\$500\right)$ is equal to the $65,500 $\left(\$686,000–\$620,500\right)$ difference between the $686,000 projected benefit obligation and the $620,500 fair value of the plan assets at the end of 2016.

Prepare journal entry to record the pension expense for 2017:

In this case, Company T has underfunded the pension contribution by $3,550$\left(\$181,550-\$178,000\right)$, hence credit the accrued/prepaid pension cost account by $3,550.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31,2017	Pension expense		181,550
	Cash			178,000
	Accrued/prepaid pension cost			3,550
	(To record the underfunded pension expense of $3,550)

Table (5)

• Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $181,550.
• Cash is an asset account and it is decreased. Therefore, credit the cash account with $178,000.
• Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $3,550.

5.

To determine

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

Accrued/prepaid pension cost
		Beg. Bal.	$65,000
		December 31, 2016	$500
		Total	$65,500
		Clos. Bal.	$65,500

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 ($65,500).