Interm.acct.:reporting.(ll)-w/access
Interm.acct.:reporting.(ll)-w/access
3rd Edition
ISBN: 9780357251775
Author: Unknown
Publisher: CENGAGE L
Question
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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.

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.

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

EmployeeExpected years of future serviceNumber of service years rendered in each year
201920202021202220232024Total
A11     
B3111   
C41111  
D511111 
E511111 
F6111111 
Total65543124
Amortization fraction6/245/245/244/243/24 1/24 

Table (1)

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

YearTotal prior service cost (A)

Amortization fraction

(B)

Amortization to increase pension expense(C=A×B)

Remaining prior service cost

(1)

2019$1,200,0006/24$300,000$900,000
2020$1,200,0005/24$250,000$650,000
2021$1,200,0005/24$250,000$400,000
2022$1,200,0004/24$200,000$200,000
2023$1,200,0003/24$150,000$50,000
2024$1,200,0001/24$50,000$ 0

Table (2)

Working note (1):

Calculate the reaming prior service cost.

YearBeginning prior service cost (D)Amortization to increase pension expense (E)

Remaining prior service cost

(F=DE)

2019$1,200,000$300,000$900,000
2020$900,000$250,000$650,000
2021$650,000$250,000$400,000
2022$400,000$200,000$200,000
2023$200,000$150,000$50,000
2024$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 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 1,200,000 
 Accrued/prepaid pension cost  1,200,000
 (To record the beginning liability for prior service cost for 2019)   

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 2019:

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

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31,2019Pension 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 2019:

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31,2019Accrued/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 2020:

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

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31,2020Pension 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 2020:

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31, 2020Accrued/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 2019 and 2020:

Particulars20192020
Service cost469,000507,000
Add: Interest cost on projected benefit obligation108,000159,930
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)

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Chapter 19 Solutions

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