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Chapter 20: Q9Q. (page 1161)

Identify the five components that comprise pension expense. Briefly explain the nature of each component.

Short Answer

Expert verified

The pension expense of an organization strictly depends upon its five components.These components are equally responsible for the overall enhancement of the projected defined benefit pension plan.

Step by step solution

01

The five components of the pension expense are

  1. Service cost
  2. Interest cost
  3. Actual return on plan assets
  4. Amortization of past services
  5. Gains and losses
02

Nature of each component

1. Service cost:Service cost measures the present value of pension benefits by using the pension benefit formula for the total number of years of service of an employee during the period of an accounting year.

2. Interest cost:It is calculated by multiplying the amount of projected benefit obligation with its settlement rate that measures the increase in the defined benefit obligation pension plan.

3. Actual return on plan assets:It measures the inevitable decrease in the pension cost for the investment made by an organization towards the pension plans. It is responsible for measuring the variation in the amount of plan value of assets.

4. Amortization of past services:It is a term used to measure the cost of benefits (retroactive) that are acceptable in the pension plan amendment of the organization.

5. Gains and losses:It measures the variation in the amount of defined benefit obligation and the plan assets of the organization. It arises due to the difference in the actual and the expected value of plan assets according to the actuarial assumptions.

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Most popular questions from this chapter

Question: The following defined pension data of Doreen Corp. apply to the year 2017.

Defined benefit obligation, 1/1/17 (before amendment) $560,000

Plan assets, 1/1/17 546,200

Pension asset/liability 13,800 Cr.

On January 1, 2017, Doreen Corp., through plan amendment,

grants past service benefits having a present value of 120,000

Discount rate 9%

Service cost 58,000

Contributions (funding) 65,000

Actual return on plan assets 49,158

Benefits paid to retirees 40,000

Instructions

For 2017, prepare a pension worksheet for Doreen Corp. that shows the journal entry for pension expense and the year-end balances in the related pension accounts.

The following items appear on Brueggen Company鈥檚 financial statements. 1. Under the caption Assets: Pension asset/liability. 2. Under the caption Liabilities: Pension asset/liability. 3. Under the caption Stockholders鈥� Equity: Prior service cost as a component of Accumulated Other Comprehensive Income. 4. On the income statement: Pension expense. Instructions Explain the significance of each of the items above on corporate financial statements. (Note: All items set forth above are not necessarily to be found on the statements of a single company.)

Gottschalk Company sponsors a defined benefit plan for its 100 employees. On January 1, 2017, the company鈥檚 actuary provided the following information. Accumulated other comprehensive loss (PSC) \(150,000 Pension plan assets (fair value and market-related asset value) 200,000 Accumulated benefit obligation 260,000 Projected benefit obligation 380,000 The average remaining service period for the participating employees is 10 years. All employees are expected to receive benefits under the plan. On December 31, 2017, the actuary calculated that the present value of future benefits earned for employee services rendered in the current year amounted to \)52,000; the projected benefit obligation was \(490,000; fair value of pension assets was \)276,000; the accumulated benefit obligation amounted to \(365,000. The expected return on plan assets and the discount rate on the projected benefit obligation were both 10%. The actual return on plan assets is \)11,000. The company鈥檚 current year鈥檚 contribution to the pension plan amounted to $65,000. No benefits were paid during the year. Instructions (a) Determine the components of pension expense that the company would recognize in 2017. (With only one year involved, you need not prepare a worksheet.) (b) Prepare the journal entry to record the pension expense and the company鈥檚 funding of the pension plan in 2017. (c) Compute the amount of the 2017 increase/decrease in gains or losses and the amount to be amortized in 2017 and 2018. (d) Indicate the pension amounts reported in the financial statement as of December 31, 2017.

What are the major differences between postretirement healthcare benefits and pension benefits?

Keeton Company sponsors a defined benefit pension plan for its 600 employees. The company鈥檚 actuary provided the following information about the plan. January 1, December 31, 2017 2017 2018 Projected benefi t obligation \(2,800,000 \)3,650,000 \(4,195,000 Accumulated benefi t obligation 1,900,000 2,430,000 2,900,000 Plan assets (fair value and market-related asset value) 1,700,000 2,900,000 3,790,000 Accumulated net (gain) or loss (for purposes of the corridor calculation) 鈥�0鈥� 198,000 (24,000) Discount rate (current settlement rate) 9% 8% Actual and expected asset return rate 10% 10% Contributions 1,030,000 600,000 The average remaining service life per employee is 10.5 years. The service cost component of net periodic pension expense for employee services rendered amounted to \)400,000 in 2017 and \(475,000 in 2018. The accumulated OCI (PSC) on January 1, 2017, was \)1,260,000. No benefits have been paid. Instructions (Round to the nearest dollar.)

(a) Compute the amount of accumulated OCI (PSC) to be amortized as a component of net periodic pension expense for each of the years 2017 and 2018.

(b) Prepare a schedule which reflects the amount of accumulated OCI (G/L) to be amortized as a component of pension expense for 2017 and 2018.

(c) Determine the total amount of pension expense to be recognized by Keeton Company in 2017 and 2018.
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