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Chapter 20: Question 3CA (page 1175)

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?

Short Answer

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Accounting principlesare those rules an organization should follow while reporting the amount under each financial statement during the fiscal year.

Step by step solution

01

(a) Discussions

1. Accrual recognition of pension costs

The accrual recognition of the total pension cost of an organization strictly depends upon the total pension expense incurred. These types of costs are incurred during the employment service of an employee.

2. Accrual versus cash (pay-as-you-go) accounting

The cash (pay-as-you-go) accounting concept does not consider the total pension cost earned during the year. It is magnified at the end of the computation of annual pension costs. The accrual accounting concept always provides a greater source of objectivity than the cash accounting concept.

02

(b) Explanation of the following terms:

1. Market-related asset value

The market-related asset value or the fair value of the assets determines the actual value of plan assets during a period of an accounting year. Organizations generally use the actuarial value of the plan assets to report an accurate pension value.

2. Projected benefit obligation

Projected benefit obligation is defined under the IAS 19, where the pension benefits depend upon the number of years of service of an employee and its future expected salary.

3. Corridor approach:

The corridor approach is the method used to calculate the unrecognized net gain or loss earned from the pension obligation during the year. The rate of corridor approach as prescribed under IASB is 10%.

03

(c) Information to be disclosed under the pension plans:

(1) The components of the pension expense.

(2) The amount of defined benefit obligation and the fair value of plan assets

(3) A detailed study of the pension plan and the accounting principles used.

(4) The discount rates and settlement rates are used in measuring the pension benefit amount.

(5) The total contributions made by the employer and the employee.

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Most popular questions from this chapter

Linda Berstler Company sponsors a defined benefit pension plan. The corporation鈥檚 actuary provides the following information about the plan.

January 1, 2017 December 31, 2017

Defined benefit obligations \(2,500 \)3,300

Plan assets (fair value) 1,700 2,620

Discount rate 10%

Pension asset/liability 800 ?

Service cost for the year 2017 400

Contributions (funding in 2017) 700

Benefits paid in 2017 200

Instructions

(a) Compute the actual return on the plan assets in 2017.

(b) Compute the amount of other comprehensive income (G/L) as of December 31, 2017. (Assume the January 1, 2017, balance was zero.)

Hanson Corp. sponsors a defined benefit pension plan for its employees. On January 1, 2017, the following balances related to this plan. Plan assets (market-related value) \(520,000 Projected benefi t obligation 700,000 Pension asset/liability 180,000 Cr. Prior service cost 81,000 Net gain or loss (debit) 91,000 As a result of the operation of the plan during 2017, the actuary provided the following additional data for 2017. Service cost \)108,000 Settlement rate, 9%; expected return rate, 10% Actual return on plan assets 48,000 Amortization of prior service cost 25,000 Contributions 133,000 Benefits paid retirees 85,000 Average remaining service life of active employees 10 years

Instructions Using the preceding data, compute pension expense for Hanson Corp. for the year 2017 by preparing a pension worksheet that shows the journal entry for pension expense. Use the market-related asset value to compute the expected return and for corridor amortization.

Kenseth Corp. has the following beginning-of-the-year present values for its projected benefit obligation and market-related values for its pension plan assets. Projected Plan Benefit Assets Obligation Value 2016 \(2,000,000 \)1,900,000 2017 2,400,000 2,500,000 2018 2,950,000 2,600,000 2019 3,600,000 3,000,000 The average remaining service life per employee in 2016 and 2017 is 10 years and in 2018 and 2019 is 12 years. The net gain or loss that occurred during each year is as follows: 2016, \(280,000 loss; 2017, \)90,000 loss; 2018, \(11,000 loss; and 2019, \)25,000 gain. (In working the solution, the gains and losses must be aggregated to arrive at year-end balances.) Instructions Using the corridor approach, compute the amount of net gain or loss amortized and charged to pension expense in each of the four years, setting up an appropriate schedule.

Aykroyd Inc. has sponsored a noncontributory, defined benefit pension plan for its employees since 1994. Prior to 2017, cumulative net pension expense recognized equaled cumulative contributions to the plan. Other relevant information about the pension plan on January 1, 2017, is as follows. 1. The company has 200 employees. All these employees are expected to receive benefits under the plan. The average remaining service life per employee is 12 years. 2. The projected benefit obligation amounted to \(5,000,000 and the fair value of pension plan assets was \)3,000,000. The market-related asset value was also \(3,000,000. Unrecognized prior service cost was \)2,000,000. On December 31, 2017, the projected benefit obligation and the accumulated benefit obligation were \(4,850,000 and \)4,025,000, respectively. The fair value of the pension plan assets amounted to \(4,100,000 at the end of the year. A 10% settlement rate and a 10% expected asset return rate were used in the actuarial present value computations in the pension plan. The present value of benefits attributed by the pension benefit formula to employee service in 2017 amounted to \)200,000. The employer鈥檚 contribution to the plan assets amounted to $775,000 in 2017. This problem assumes no payment of pension benefits. Instructions (Round all amounts to the nearest dollar.)

(a) Prepare a schedule, based on the average remaining life per employee, showing the prior service cost that would be amortized as a component of pension expense for 2017, 2018, and 2019.

(b) Compute pension expense for the year 2017.

(c) Compute the amount of the 2017 increase/decrease in net gains or losses and the amount to be amortized in 2017 and 2018.

(d) Prepare the journal entries required to report the accounting for the company鈥檚 pension plan for 2017

Englehart Co. provides the following information about its postretirement benefit plan for the year 2017. Service cost $ 90,000 Prior service cost amortization 3,000 Contribution to the plan 56,000 Actual and expected return on plan assets 62,000 Benefits paid 40,000 Plan assets at January 1, 2017 710,000 Accumulated postretirement benefit obligation at January 1, 2017 760,000 Accumulated OCI (PSC) at January 1, 2017 100,000 Dr. Discount rate 9% Instructions Compute the postretirement benefit expense for 2017.
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