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Chapter 20: P20-9 (page 1172)

Hobbs Co. has the following defined benefit pension plan balances on January 1, 2017. Projected benefit obligation \(4,600,000 Fair value of plan assets 4,600,000 The interest (settlement) rate applicable to the plan is 10%. On January 1, 2018, the company amends its pension agreement so that prior service costs of \)600,000 are created. Other data related to the pension plan are: 2017 2018 Service cost \(150,000 \)170,000 Prior service cost amortization 鈥�0鈥� 90,000 Contributions (funding) to the plan 200,000 184,658 Benefits paid 220,000 280,000 Actual return on plan assets 252,000 350,000 Expected rate of return on assets 6% 8% Instructions (a) Prepare a pension worksheet for the pension plan in 2017. (b) Prepare any journal entries related to the pension plan that would be needed at December 31, 2017. (c) Prepare a pension worksheet for 2018 and any journal entries related to the pension plan as of December 31, 2018. (d) Indicate the pension-related amounts reported in the 2018 financial statements.

Short Answer

Expert verified

A pension agreementis a contract between the organization and its employees, which states the amount creditedto the employee's provident fund. The money collected can be used after retirement.

Step by step solution

01

(a) Preparation of the pension worksheet for 2017.

Hobbs Co.
Pension Worksheet for the year 2017
General journal entries
Memo Record

Particulars

Annual pension expense

Cash

OCI-Gain/Loss

Pension asset/liability

Projected benefit obligation

Plan assets

Balance Jan 1, 2017

$4,600,000 Cr.

$4,600,000 Dr.

Service cost

$150,000 Dr.

$150,000 Cr.

Interest cost

$4,600,000脳10%

$460,000 Dr.

$460,000 Cr.

Actual return

$252,000 Cr.

$252,000 Dr.

Unexpected loss

$4,600,000脳6%-$252,000

$24,000 Cr.

$24,000 Dr.

Contributions

$200,000 Cr.

$200,000 Dr.

Benefits

$220,000 Dr.

$220,000 Cr.

Journal entry for 2017

$334,000 Dr.

$200,000 Cr.

$24,000 Dr.

$158,000 Cr.

Accumulated OCI Dec 31, 2017

0

Balance Dec 31, 2017

$24,000 Dr.

$158,000 Cr.

$4,990,000 Cr.

$4,832,000 Dr.

02

(b) Journal entry to record the pension expense for 2017.

Hobbs Co.
Journal Entry

Date

Particulars

Debit

Credit

2017

Other comprehensive income (gain/loss)

$24,000

Pension expense

$334,000

Cash

$200,000

Pension asset/liability

$158,000

(To record the pension expense)

03

(c) Preparation of pension worksheet and the journal entry for 2018.

Hobbs Co.
Pension Worksheet for the year 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

Additional PSC Jan 1,2018

$600,000 Dr

$600,000 Cr

Balance Jan 1, 2018

.

$5,590,000 Cr.

Service cost

$170,000 Dr.

$170,000 Cr.

Interest cost

$4,990,000+$600,000脳10%

$559,000 Dr.

$559,000 Cr.

Actual return

$350,000 Cr.

$350,000 Dr.

Unexpected loss

$4,832,000脳8%-$350,000

$36,560 Cr.

$36,560 Dr.

Amortization of PSC

$90,000 Cr.

Contributions

$184,658 Cr.

$184,658 Dr.

Benefits

$280,000 Dr.

$280,000 Cr.

Journal entry for 2018

$432,440 Dr.

$184,658 Cr.

$510,000 Dr.

$36,560 Dr.

$794,342 Cr.

Accumulated OCI Dec 31, 2017

0

$24,000 Dr.

Balance Dec 31, 2018

$510,000 Dr.

$60,560 Dr.

$952,342 Cr.

$6,039,000Cr.

$5,086,658 Dr.

Hobbs Co.
Journal Entry

Date

Particulars

Debit

Credit

2018

Other comprehensive income (gain/loss)

$36,560

Other comprehensive income (PSC)

$510,000

Pension expense

$432,440

Cash

$184,658

Pension asset/liability

$794,342

(To record the pension expense)

04

(d) Preparation of financial statements to indicate the amount.

Hobbs Co.
Income Statement

Particulars

Amount

Pension expense

$432,440

Hobbs Co.
Balance sheet

Liabilities

Amount

Pension liability

$952,342

Stockholder鈥檚 Equity

Accumulated other comprehensive loss (PSC)

$510,000

Accumulated other comprehensive loss (Gain/Loss)

$60,560

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Most popular questions from this chapter

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

Differentiate between 鈥渁ccounting for the employer鈥� and 鈥渁ccounting for the pension fund.鈥�

In examining the costs of pension plans, Helen Kaufman, CPA, encounters certain terms. The components of pension costs that the terms represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financial statements of entities with pension plans. Instructions (a) (1) Discuss the theoretical justification for accrual recognition of pension costs. (2) Discuss the relative objectivity of the measurement process of accrual versus cash (pay-as-you-go) accounting for annual pension costs. (b) Explain the following terms as they apply to accounting for pension plans. (1) Market-related asset value. (2) Projected benefit obligation. (3) Corridor approach. (c) What information should be disclosed about a company鈥檚 pension plans in its financial statements and its notes?

On January 1, 2017, Harrington Company has the following defined benefit pension plan balances. Projected benefi t obligation \(4,500,000 Fair value of plan assets 4,200,000 The interest (settlement) rate applicable to the plan is 10%. On January 1, 2018, the company amends its pension agreement so that prior service costs of \)500,000 are created. Other data related to the pension plan are as follows. Insert Page Layout Formulas Data Review View A P18 fx BCD E F G Postretirement Benefit Worksheet鈥擧older Inc.xls Home 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Postretirement Asset/Liability Other Comprehensive Income鈥擯SC APBO Memo Record Items Plan Assets General Journal Entries Annual Expense Cash (1) (2) (3) 3,000 (6) 410,000 56,000 36,900 5,000 497,900 Cr. 120,000 2,000 (4) 5,000 183,000 Dr. Balance, Jan. 1, 2017 Service cost Interest cost Actual/Expected return Contributions Benefits Amortization of PSC Journal entry for 2017 Accumulated OCI, Dec. 31, 2016 Balance, Dec. 31, 2017 66,000 (7) (5) (8) 30,000 Dr. 27,000 Dr. 290,000 (9) 314,900 Cr. 2017 2018 Service cost \(150,000 \)180,000 Prior service cost amortization 鈥�0鈥� 90,000 Contributions (funding) to the plan 240,000 285,000 Benefi ts paid 200,000 280,000 Actual return on plan assets 252,000 260,000 Expected rate of return on assets 6% 8% Instructions (a) Prepare a pension worksheet for the pension plan for 2017 and 2018. (b) For 2018, prepare the journal entry to record pension-related amounts.

Question: What is meant by 鈥減ast service cost鈥�? When is past service cost recognized as pension expense?
See all solutions

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