Chapter 19, Problem 7P

1.

To determine

Prepare necessary journal entries of Company F 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.

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		80,000
	Accrued/prepaid pension cost			80,000
	(To record the beginning liability for prior service cost for 2016)

Table (1)

• 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 $80,000.
• Accrued/prepaid pension cost is a liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $80,000.

Prepare journal entry to record the pension expense for 2016:

In this case, Company F has underfunded the pension contribution by $12,000$\left(\$137,000-\$125,000\right)$, hence credit the accrued/prepaid pension cost account by $12,000.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31,2016	Pension expense		137,000
	Cash			125,000
	Accrued/prepaid pension cost			12,000
	(To record the underfunded pension expense of $12,000)

Table (2)

• Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $137,000.
• Cash is an asset account and it is decreased. Therefore, credit the cash account with $125,000.
• Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $12,000.

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 (1)		8,000
	Other comprehensive income: Prior service cost			8,000
	(To record the amortization of prior service cost)

Table (3)

• 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.

Working note (1):

Calculate the other comprehensive income: prior service cost for 2016.

$\begin{array}{c}\begin{array}{l}\text{Other comprehensive}\\ \text{income prior service cost}\end{array}\}=\frac{\text{ Prior service cost }}{\text{Estiamted life}}\\ =\frac{\$80,000}{10}\\ =\$8,000\end{array}$

Note: For accrued/prepaid pension cost no other adjustment is required. Because the credit balance of $124,000 $\left(\$40,000+\$80,000+\$12,000–\$8,000\right)$ is equal to the $124,000 $\left(\$579,000–\$455,000\right)$ difference between the $579,000 projected benefit obligation and the $455,000 fair value of the plan assets at the end of 2017.

2.

To determine

List the amounts that are to be reported on the balance sheet of company F as of December 31, 2016 and also indicate the sections under which it would be reported.

Explanation of Solution

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

List the amounts that are to be reported on the balance sheet of company F as of December 31, 2016 as follows:

Company F
Balance sheet
As of December 31, 2016
Liabilities:	Amounts ($)
Accrued pension cost	124,000
Shareholders’ Equity:
Accumulated Other Comprehensive Income:
Unrealized loss from underfunding prior service cost of pension plan (2)	72,000

Table (4)

Working note (2):

Calculate the unrealized loss from underfunding prior service cost of pension plan for 2016:

$\begin{array}{c}\begin{array}{l}\text{Unrealized loss from}\\ \text{prior service cost for 2016}\end{array}\}=\left[\begin{array}{l}\text{Prior service cost}-\text{Other comprehensive}\\ \text{income of prior service cost for 2016 (1)}\end{array}\right]\\ =\$80,000-\$8,000\\ =\$72,000\end{array}$

3.

To determine

Prepare necessary journal entries of Company F for 2017.

Explanation of Solution

Prepare journal entry to record the pension expense for 2017:

In this case, Company F has underfunded the pension contribution by $10,900$\left(\$152,900-\$142,000\right)$, hence credit the accrued/prepaid pension cost account by $10,900.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31,2017	Pension expense		152,900
	Cash			142,000
	Accrued/prepaid pension cost			10,900
	(To record the underfunded pension expense of $10,900)

Table (5)

• Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $152,900.
• Cash is an asset account and it is decreased. Therefore, credit the cash account with $142,000.
• Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $10,900.

Prepare journal entry to record the amortized prior service cost for 2017:

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2017	Accrued/prepaid pension cost (1)		8,000
	Other comprehensive income: Prior service cost			8,000
	(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 $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.

Note: For accrued/prepaid pension cost no other adjustment is required. Because the credit balance of $126,900 $\left(\$124,000+\$10,900–\$8,000\right)$ is equal to the $126,900 $\left(\$769,400–\$642,500\right)$ difference between the $769,400 projected benefit obligation and the $642,500 fair value of the plan assets at the end of 2017.

4.

To determine

List the amounts that are to be reported on the balance sheet of company F as of December 31, 2017 and also indicate the sections under which it would be reported.

Explanation of Solution

List the amounts that are to be reported on the balance sheet of company F as of December 31, 2017 as follows:

Company F
Balance sheet
As of December 31, 2017
Liabilities:	Amounts ($)
Accrued pension cost	126,900
Shareholders’ Equity:
Accumulated Other Comprehensive Income:
Unrealized loss from underfunding prior service cost of pension plan (3)	64,000

Table (7)

Working note (3):

Calculate the unrealized loss from underfunding prior service cost of pension plan for 2017:

$\begin{array}{c}\begin{array}{l}\text{Unrealized loss from}\\ \text{prior service cost for 2017}\end{array}\}=\left[\begin{array}{l}\text{Prior service cost remaining (2)}-\text{Other}\\ \text{comprehensive income of prior service}\\ \text{cost (1)}\end{array}\right]\\ =\$72,000-\$8,000\\ =\$64,000\end{array}$