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Chapter 20: P20-8 (page 1172)

Lemke Company sponsors a defined benefit pension plan for its employees. The following data relate to the operation of the plan for the years 2017 and 2018. 2017 2018 Projected benefi t obligation, January 1 \(600,000 Plan assets (fair value and market-related value), January 1 410,000 Pension asset/liability, January 1 190,000 Cr. Prior service cost, January 1 160,000 Service cost 40,000 \) 59,000 Settlement rate 10% 10% Expected rate of return 10% 10% Actual return on plan assets 36,000 61,000 Amortization of prior service cost 70,000 50,000 Annual contributions 97,000 81,000 Benefits paid retirees 31,500 54,000 Increase in projected benefi t obligation due to changes in actuarial assumptions 87,000 鈥�0鈥� Accumulated benefi t obligation at December 31 721,800 789,000 Average service life of all employees 20 years Vested benefi t obligation at December 31 464,000 Instructions (a) Prepare a pension worksheet presenting both years 2017 and 2018 and accompanying computations and amortization of the loss (2018) using the corridor approach. (b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31 of each year. (c) For 2018, indicate the pension amounts reported in the financial statements.

Short Answer

Expert verified

Plan assetsare those organizations' assets or financial investmentsmaintained to providepension benefitsto their employees. It is prescribed under thepension worksheetto compute the amount ofpension expense.

Step by step solution

01

Working notes: Computation of unexpected loss or gain and amortization of gain/loss for 2017 and 2018.

Unexpectedloss2017=Planassets脳Expectedrateofreturn-Actualreturnonplanassets=$410,000脳10%-$36,000=$41,000-$36,000=$5,000

Unexpectedgain2018=Planassets+Actualreturnonplanassets+Contributions-Benefits脳Settlementrate-Actualreturn=$410,000+$36,000+$97,000-$31,500脳10%-$61,000=$511,500脳10%-$61,000=$51,150-$61,000=$9,850

Amortizationofloss2018=Accumulatednetgainorlossatthebeginning-FairvalueofplanasstesNumberofyears=$92,000-$75,55020years=$823

02

(a) Preparation of pension worksheet for the years 2017 and 2018.

Lemke Company
Pension Worksheet for the years 2017 and 2018
General journal entries
Memo Record

Particulars

Annual pension expense

Cash

OCI-Prior service cost

OCI-Gain/Loss

Pension asset/liability

Projected benefit obligation

Plan assets

Balance Jan 1, 2017

$190,000 Cr.

$600,000 Cr.

$410,000 Dr.

Service cost

$40,000 Dr.

$40,000 Cr.

Interest cost

$60,000 Dr.

$60,000 Cr.

Actual return

$36,000 Cr.

$36,000 Dr.

Unexpected loss

$5,000 Cr.

$5,000 Dr.

Amortization of PSC

$70,000 Dr.

$70,000 Cr.

Contributions

$97,000 Cr.

$97,000 Dr.

Benefits

$31,500 Dr.

$31,500 Cr.

Increase in PBO

$87,000 Dr.

$87,000 Cr.

Journal entry for 2017

$129,000 Dr.

$97,000 Cr.

$70,000 Cr.

$92,000 Dr.

$54,000 Cr.

Accumulated OCI Dec 31, 2017

$160,000 Dr.

0

Balance Dec 31, 2017

$90,000 Dr.

$92,000 Dr.

$244,000 Cr.

$755,500 Cr.

$511,500 Dr.

Service cost

$59,000 Dr.

$59,000 Cr.

Interest cost

$75,550 Dr.

$75,550 Cr.

Actual return

$61,000 Cr.

$61,000 Dr.

Unexpected gain

$9,850 Dr.

$9,850 Cr.

Amortization of PSC

$50,000 Dr.

$50,000 Cr.

Amortization of loss

$823 Dr.

$823 Cr.

Contributions

$81,000 Cr.

$81,000 Dr.

Benefits

$54,000 Dr.

$54,000 Cr.

Journal entry for 2018

$134,223 Dr.

$81,000 Cr.

$50,000 Cr.

$10,673 Cr.

$7,450 Dr.

Accumulated OCI Dec 31, 2017

$90,000 Dr.

$92,000 Dr.

Balance Dec 31, 2018

$40,000 Dr.

$81,327 Dr.

$236,550 Cr.

$836,050 Cr.

$599,500 Dr.

03

(b) Journal entry to record the pension expense for the years 2017 and 2018

Lemke Company
Journal Entry

Date

Particulars

Debit

Credit

2017

Pension expense

$129,000

Other comprehensive income (gain/loss)

$92,000

Cash

$97,000

Pension asset/liability

$54,000

Other comprehensive income (PSC)

$70,000

(To record the pension expense)

2018

Pension asset/liability

$7,450

Pension expense

$134,223

Cash

$81,000

Other comprehensive income (PSC)

$50,000

Other comprehensive income (gain/loss)

$10,673

(To record the pension expense)

04

(c) Indication of the amounts in the financial statements.

Lemke Company
Income Statement

Particulars

Amount

Pension expense

$134,223

Lemke Company
Comparative income statement

Particulars

Amount

Net Income

-

Other comprehensive loss

Asset gain

$9,850

Amortization of loss

$823

Prior service cost amortization

$50,000

$60,673

Comprehensive Income

-

Lemke Company
Balance sheet

Liabilities

Amount

Pension liability

$236,550

Stockholder鈥檚 Equity

Accumulated other comprehensive loss (PSC)

$40,000

Accumulated other comprehensive loss (Gain/Loss)

$481,327

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Most popular questions from this chapter

Norton Co. had the following amounts related to its pension plan in 2017. Actuarial liability loss for 2017 \(28,000 Unexpected asset gain for 2017 18,000 Accumulated other comprehensive income (G/L) (beginning balance) 7,000 Cr. Determine for 2017 (a) Norton鈥檚 other comprehensive income (loss) and (b) comprehensive income. Net income for 2017 is \)26,000; no amortization of gain or loss is necessary in 2017.

What is a private pension plan? How does a contributory pension plan differ from a noncontributory plan?

What are 鈥渓iability gains and losses,鈥� and how are they accounted for?

Hiatt Toothpaste Company initiates a defined benefit pension plan for its 50 employees on January 1, 2017. The insurance company which administers the pension plan provided the following selected information for the years 2017, 2018, and 2019

For Year Ended December 31, 2017 2018 2019 Plan assets (fair value) \(50,000 \) 85,000 \(180,000 Accumulated benefi t obligation 45,000 165,000 292,000 Projected benefi t obligation 60,000 200,000 324,000 Net (gain) loss (for purposes of corridor calculation) 鈥�0鈥� 78,400 81,033 Employer鈥檚 funding contribution (made at end of year) 50,000 60,000 105,000

There were no balances as of January 1, 2017, when the plan was initiated. The actual and expected return on plan assets was 10% over the 3-year period, but the settlement rate used to discount the company鈥檚 pension obligation was 13% in 2017, 11% in 2018, and 8% in 2019. The service cost component of net periodic pension expense amounted to the following: 2017, \)60,000; 2018, \(85,000; and 2019, \)119,000. The average remaining service life per employee is 12 years. No benefits were paid in 2017, \(30,000 of benefits were paid in 2018, and \)18,500 of benefits were paid in 2019 (all benefits paid at end of year). Instructions (Round to the nearest dollar.) (a) Calculate the amount of net periodic pension expense that the company would recognize in 2017, 2018, and 2019. (b) Prepare the journal entries to record net periodic pension expense, employer鈥檚 funding contribution, and related pension amounts for the years 2017, 2018, and 2019

Hollenbeck Foods Inc. sponsors a postretirement medical and dental benefit plan for its employees. The following balances relate to this plan on January 1, 2017. Plan assets \(200,000 Expected postretirement benefit obligation 820,000 Accumulated postretirement benefit obligation 200,000 No prior service costs or OCI balances exist. As a result of the plan鈥檚 operation during 2017, the following additional data are provided by the actuary. Service cost is \)70,000 Discount rate is 10% Contributions to plan are \(65,000 Expected return on plan assets is \)10,000 Actual return on plan assets is \(15,000 Benefi ts paid to employees are \)44,000 Average remaining service to full eligibility: 20 years Instructions (a) Using the preceding data, compute the net periodic postretirement benefit cost for 2017 by preparing a worksheet that shows the journal entry for postretirement expense and the year-end balances in the related postretirement benefit memo accounts. (Assume that contributions and benefits are paid at the end of the year.) (b) Prepare any journal entries related to the postretirement plan for 2017 and indicate the postretirement amounts reported in the financial statements for 2017.
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