Chapter 19, Problem 9P

1.

To determine

Prepare a set of schedules to calculate (a) the amortization fraction for each year and (b) the amortization of the prior service cost of company B.

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.

(a) Prepare a schedule to calculate the amortization fraction for each year as follows:

Employee	Expected years of future service	Number of service years rendered in each year
		2016	2017	2018	2019	2020	2021	Total
A	1	1
B	3	1	1	1
C	4	1	1	1	1
D	5	1	1	1	1	1
E	5	1	1	1	1	1
F	6	1	1	1	1	1	1
Total		6	5	5	4	3	1	24
Amortization fraction		6/24	5/24	5/24	4/24	3/24	1/24

Table (1)

(b) Prepare a schedule to calculate the amortization of the prior service cost as follows:

Year	Total prior service cost (A)	Amortization fraction (B)	Amortization to increase pension expense$\left(C=A\times B\right)$	Remaining prior service cost (1)
2016	$1,200,000	6/24	$300,000	$900,000
2017	$1,200,000	5/24	$250,000	$650,000
2018	$1,200,000	5/24	$250,000	$400,000
2019	$1,200,000	4/24	$200,000	$200,000
2020	$1,200,000	3/24	$150,000	$50,000
2021	$1,200,000	1/24	$50,000	$ 0

Table (2)

Working note (1):

Calculate the reaming prior service cost.

Year	Beginning prior service cost (D)	Amortization to increase pension expense (E)	Remaining prior service cost $\left(F=D-E\right)$
2016	$1,200,000	$300,000	$900,000
2017	$900,000	$250,000	$650,000
2018	$650,000	$250,000	$400,000
2019	$400,000	$200,000	$200,000
2020	$200,000	$150,000	$50,000
2021	$50,000	$50,000	$ 0

Table (3)

Note: The remaining service cost for the previous year is considered as the beginning prior service cost for the current year.

2.

To determine

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

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		1,200,000
	Accrued/prepaid pension cost			1,200,000
	(To record the beginning liability for prior service cost for 2016)

Table (4)

• 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 $1,200,000.
• Accrued/prepaid pension cost is a liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $1,200,000.

Prepare journal entry to record the pension expense for 2016:

In this case, Company B has underfunded the pension contribution by $27,000$\left(\$877,000-\$850,000\right)$, hence credit the accrued/prepaid pension cost account by $27,000.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31,2016	Pension expense (2)		877,000
	Cash			850,000
	Accrued/prepaid pension cost			27,000
	(To record the underfunded pension expense of $27,000)

Table (5)

• Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $877,000.
• Cash is an asset account and it is decreased. Therefore, credit the cash account with $850,000.
• Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $27,000.

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		300,000
	Other comprehensive income: Prior service cost			300,000
	(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 $300,000.
• 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 $300,000.

Prepare journal entry to record the pension expense for 2017:

In this case, Company B has underfunded the pension contribution by $1,930$\left(\$831,930-\$830,000\right)$, hence credit the accrued/prepaid pension cost account by $1,930.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31,2017	Pension expense (2)		831,930
	Cash			830,000
	Accrued/prepaid pension cost			1,930
	(To record the underfunded pension expense of $1,930)

Table (7)

• Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $831,930.
• Cash is an asset account and it is decreased. Therefore, credit the cash account with $830,000.
• Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $1,930.

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		250,000
	Other comprehensive income: Prior service cost			250,000
	(To record the amortization of prior service cost)

Table (8)

• Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $92,000.
• 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 $92,000.

Working note (2):

Compute the pension expense for 2016 and 2017:

Particulars	2016	2017
Service cost	469,000	507,000
Add: Interest cost on projected benefit obligation	108,000	159,930
Less: Expected return on plan assets	$0	($85,000)
Add: Amortization of prior service cost	$300,000 (1)	$250,000 (1)
Pension expense	$877,000	$831,930

Table (9)