Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
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Question
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
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 | ||||||
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 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 |
Remaining prior service cost (1) |
| 2019 | $1,200,000 | 6/24 | $300,000 | $900,000 |
| 2020 | $1,200,000 | 5/24 | $250,000 | $650,000 |
| 2021 | $1,200,000 | 5/24 | $250,000 | $400,000 |
| 2022 | $1,200,000 | 4/24 | $200,000 | $200,000 |
| 2023 | $1,200,000 | 3/24 | $150,000 | $50,000 |
| 2024 | $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 |
| 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
Explanation of Solution
Prepare
| Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
| January 1, 2019 | 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 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 $27,000
| Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
| December 31,2019 | 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 $27,000.
Prepare journal entry to record the amortized prior service cost for 2019:
| Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
| December 31,2019 | 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 2020:
In this case, Company B has underfunded the pension contribution by $1,930
| Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
| December 31,2020 | 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 $1,930.
Prepare journal entry to record the amortized prior service cost for 2020:
| Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
| December 31, 2020 | 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 2019 and 2020:
| Particulars | 2019 | 2020 |
| 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)
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Chapter 19 Solutions
Intermediate Accounting: Reporting And Analysis
Ch. 19 - Prob. 1GICh. 19 - Prob. 2GICh. 19 - Prob. 3GICh. 19 - Prob. 4GICh. 19 - Prob. 5GICh. 19 - Prob. 6GICh. 19 - Prob. 7GICh. 19 - Prob. 8GICh. 19 - Prob. 9GICh. 19 - Prob. 10GI
Ch. 19 - Prob. 11GICh. 19 - Prob. 12GICh. 19 - Prob. 13GICh. 19 - Prob. 14GICh. 19 - Prob. 15GICh. 19 - Prob. 16GICh. 19 - Prob. 17GICh. 19 - Prob. 18GICh. 19 - Prob. 19GICh. 19 - Prob. 20GICh. 19 - Prob. 21GICh. 19 - Prob. 22GICh. 19 - Prob. 23GICh. 19 - The actuarial present value of all the benefits...Ch. 19 - Prob. 2MCCh. 19 - Prob. 3MCCh. 19 - Prob. 4MCCh. 19 - Prob. 5MCCh. 19 - Prob. 6MCCh. 19 - Which of the following is not a component of...Ch. 19 - Prob. 8MCCh. 19 - Prob. 9MCCh. 19 - Prob. 10MCCh. 19 - Prob. 1RECh. 19 - Prob. 2RECh. 19 - Pinecone Company has plan assets of 500,000 at the...Ch. 19 - Prob. 4RECh. 19 - Prob. 5RECh. 19 - Prob. 6RECh. 19 - Prob. 7RECh. 19 - Prob. 8RECh. 19 - Given the following information for Tyler Companys...Ch. 19 - At the beginning of Year 1, Cactus Company has...Ch. 19 - Prob. 11RECh. 19 - Prob. 1ECh. 19 - Prob. 2ECh. 19 - Prob. 3ECh. 19 - Prob. 4ECh. 19 - Prob. 5ECh. 19 - Prob. 6ECh. 19 - Prob. 7ECh. 19 - Prob. 8ECh. 19 - Prob. 9ECh. 19 - Prob. 10ECh. 19 - Prob. 11ECh. 19 - Prob. 12ECh. 19 - Prob. 13ECh. 19 - Refer to the information provided in E19-13....Ch. 19 - Prob. 15ECh. 19 - Prob. 16ECh. 19 - Prob. 1PCh. 19 - Prob. 2PCh. 19 - Prob. 3PCh. 19 - Prob. 4PCh. 19 - Prob. 5PCh. 19 - Prob. 6PCh. 19 - Prob. 7PCh. 19 - Prob. 8PCh. 19 - Prob. 9PCh. 19 - Prob. 10PCh. 19 - Prob. 11PCh. 19 - Prob. 12PCh. 19 - Prob. 1CCh. 19 - Prob. 2CCh. 19 - Prob. 3CCh. 19 - Prob. 4CCh. 19 - Prob. 5CCh. 19 - Prob. 6CCh. 19 - Prob. 7CCh. 19 - Prob. 9C
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