Chapter 20 PENSIONS Day 1

Exercise 20-2: Computation of Pension Expense

Rebekah Co. provides following info about its defined benefit pension plan for the year 2011. Service cost…………………… $ 90,000 Contribution to plan………….$105,000 Prior service cost amortization.. $10,000 Actual and expected return on P.A. $64,000 Benefits paid…………………… $40,000 Plan assets at 1/1/11………………………$640,000 Projected Benefit Obligation at 1/1/11…. $800,000 AOCI (PSC) at 1/1/11…………………..… $150K Interest/discount (settlement) rate…………. 10%

S I R P G O L Compute the pension expense for the year 2011. ervice Cost: $90,000 $80,000 Beg PBO x i/r nterest Cost $800K x .10 eturn on Plan Assets (actual) ( $64,000 ) S I R P G O L rior Service Cost Amortization $10,000 ain r oss Component

S I R P G O L $116,000 Compute the pension expense for the year 2011. ervice Cost: $90,000 $80,000 Beg PBO x i/r nterest Cost $800K x .10 eturn on Plan Assets (actual) ( $64,000 ) S I R P G O L rior Service Cost Amortization $10,000 ain $116,000 r oss Component

E 20-3

Using information from E 20-2 prepare a PENSION WORKSHEET inserting 1/1/11 balances, showing December 31, 11 balances and the journal entry recording pension expense. What does the LEFT side of the PWS show? FORMAL ENTRIES? which means? They get shown on the Balance Sheet, Income Statement or Comprehensive Income Statement What does the RIGHT side of the PWS show? INFORMAL ENTRIES? which means? They get put in the footnotes

Start by filling in 1/1/11 figures………. Dr Pension Expense Cr Pension Asset/Liab Cr Cash Cr Dr PBO Plan Assets Items Beg Bal at 1/1/11 Service Cost Interest Cost Actual Return Contributions Start by filling in 1/1/11 figures……….

They have outstanding debt of $800,000 Dr Pension Expense Cr Cash Cr Pension Asset/Liab Dr. OCI PSC Dr Cr Plan Assets Items PBO Beg Bal at 1/1/11 $800,000Cr $640,000Dr $160,000Cr Service Cost Interest Cost They have outstanding debt of $800,000 but have set aside $640,000 to cover it. Thus they must show a pension Liability of $160,000. Actual Return Contributions

Dr Pension Expense Cr Cash Cr Pension Asset/Liab Dr. OCI PSC Dr Cr Plan Assets Items PBO Beg Bal at 1/1/11 $800,000Cr $640,000Dr $160,000Cr Service Cost $90,000 Dr $90,000 Cr Interest Cost $80,000 Dr $80,000 Cr Actual Return $64,000 Cr. $64,000 Dr. Contributions $105K Cr $105K Dr Amtz of PSC $10,000 Dr. $10,000 Cr. Benefits Paid 105K Cr 10,000 Cr $40,000 Dr $40,000 Cr Jrn ent. $116,000 Dr

Pension Expense….$116,000 Cash……………….$105,000 AOCI (PSC)………$10,000 Dr Pension Expense Cr Cash Cr Pension Asset/Liab Dr. OCI PSC Dr Cr Plan Assets Items PBO Beg Bal at 1/1/11 $800,000Cr $640,000Dr $160,000Cr Service Cost $90,000 Dr $90,000 Cr Pension Expense….$116,000 Cash……………….$105,000 AOCI (PSC)………$10,000 Pension Asset/Liab $ 1,000 Interest Cost $80,000 Dr $80,000 Cr Actual Return $64,000 Cr. $64,000 Dr. Contributions $105K Cr $105K Dr Amtz of PSC $10,000 Dr. $10,000 Cr. $1,000 Cr Benefits Paid 105K Cr 10,000 Cr $40,000 Dr $40,000 Cr Jrn ent. $116,000 Dr

Pension Expense….$116,000 Cash……………….$105,000 AOCI (PSC)………$10,000 Dr Pension Expense Cr Cash Cr Pension Asset/Liab Dr. OCI PSC Dr Cr Plan Assets Items PBO Beg Bal at 1/1/11 $800,000Cr $640,000Dr Pension Expense….$116,000 Cash……………….$105,000 AOCI (PSC)………$10,000 Pension Asset/Liab $ 1,000 $160,000Cr Service Cost $90,000 Dr $90,000 Cr Interest Cost $80,000 Dr $80,000 Cr Actual Return $64,000 Cr. $64,000 Dr. Contributions $105K Cr $105K Dr Amtz of PSC $10,000 Dr. $10,000 Cr. Benefits Paid $40,000 Dr $40,000 Cr Jrn ent. $116,000 Dr 105K Cr 10,000 Cr $1,000 Cr Acc OCI 12/31/10 $150,000Dr. Bal 12/31/11 $140,000Dr $930,000 Cr $769,000Dr

Reconciliation: $930,000 CR - $769,000 DR ------------------- Pension Expense Cr Cash Cr Pension Asset/Liab Dr. OCI PSC Dr Cr Plan Assets Items PBO Beg Bal at 1/1/11 $800,000Cr $640,000Dr $160,000Cr Service Cost $90,000 Dr $90,000 Cr Reconciliation: $930,000 CR - $769,000 DR ------------------- $161,000 CR Interest Cost $80,000 Dr $80,000 Cr Actual Return $64,000 Cr. $64,000 Dr. Contributions $105K Cr $105K Dr Amtz of PSC $10,000 Dr. $10,000 Cr. Benefits Paid $40,000 Dr $40,000 Cr Jrn ent. $116,000 Dr 105K Cr 10,000 Cr $1,000 Cr Acc OCI 12/31/10 $150,000Dr. $161.000Cr Bal 12/31/11 $140,000Dr $930,000 Cr $769,000Dr

Basic Pension Worksheet Exercise E 20-4 Basic Pension Worksheet

The following facts apply to pension of Trudy Borke for year 11: Plan assets 1/1/11………………….. $490K PBO (1/1/11)………………………… 490K Settlement rate………………………. 8.5% Annual pension service cost………. $40,000 Contributions (funding)…………… $30,000 Actual return on plan assets……….. $49,700 Benefits paid to retirees……………. $33,400 Required: Using data above, compute pension expense for 11 by doing a PWS.

Dr Pension Expense Cr Cash Cr Pension Asset/Liab Cr Dr PBO Plan Assets Items Beg Bal at 1/1/11 $490,000 $490,000 Service Cost 40,000Dr 40,000Cr Interest Cost $41,650Dr ($490K x .085) $41,650Cr Actual Return $49,700Cr $49,700Dr Contributions 30,000Cr 30,000Dr Benefits paid 33,400Dr 33,400Cr Journal: $31,950Dr $30,000Cr $1,950Cr $1,950Cr $538,250Cr $536,300Dr

Exercise 20-7 Basic Pension Worksheet

The following defined pension data of Doreen Corp. apply to the year 11. PBO (1/1/11 before amendment)…….. $560,000 Plan assets (1/1/11)……………………. 546,200 Pension liability................. …………. 13,800 On 1/1/11 through amendment, grants prior service benefits with PV of……. 100,000 Settlement Rate……………………… 9% Annual pension service cost………….. 58,000 Contributions (funding)……………… 55,000 Actual (expected) return on P.A…. 52,280 Benefits paid to retirees…………….. 40,000 Prior service cost amortization for 11 17,000 Required: Prepare PWS.

Dr Pension Expense Cr Cash Cr Pension Asset- Liab Dr OCI- PSC Cr Dr Items PBO Plan Assets Beg Bal at 1/1/11 $13,800Cr $560,000Cr $546,200Dr $100,000Dr From PSC amendment $100,000Cr Service Cost 58,000Dr 58,000Cr Interest Cost $59,400Dr $59,400Cr ( $660,000 x .09) Actual Return $52,280Cr $52,280Dr Contributions 55,000Cr 55,000Dr Amortz of PSC $17,000Dr $17,000Cr Benefits paid 40,000Dr 40,000Cr $82,120Dr $55K Cr $110,120Cr $83,000Dr $737,400Cr $613,480Dr

RECONCILIATION Dr Pension Expense Cr Cash Cr Pension Asset- Liab Dr OCI- PSC Cr Dr Items PBO Plan Assets Beg Bal at 1/1/11 $13,800Cr $560,000Cr $546,200Dr $100,000Dr From PSC amendment $100,000Cr Service Cost RECONCILIATION 58,000Dr 58,000Cr Interest Cost $59,400Dr $59,400Cr ( $660,000 x .09) PBO....... $737,400 - Plan Assets $613,480 ----------------------- Pension Liability $123,920 Actual Return $52,280Cr $52,280Dr Contributions 55,000Cr 55,000Dr Amortz of PSC $17,000Dr $17,000Cr Benefits paid 40,000Dr 40,000Cr $82,120Dr $55K Cr $110,120Cr $83,000Dr $737,400Cr $613,480Dr $123,920

Exercise 20-8

Dougherty Corp. has beg-of-year PVs for its PBO and MRVPA. PBO MRVPA 2009 $2,000,000 $1,900,000 2010 2,400,000 2,500,000 2011 2,900,000 2,600,000 2012 3,600,000 3,000,000 The average remaining service life per employee in 09 and 10 is 10 years and in 11 and 12 is 12 years. The net gain or loss that occurred during each year is as follows: 2009, $280,000 loss; 2010 $90,000 loss 2011 $10,000 loss 2012 $25,000 gain (In working the solution the gains and losses must be aggregated to arrive at year-end balances). 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.

Gain or Loss Component of Pension Expense OCI Gains and Losses Unexpected Gains and Losses Actual RPA not equal to expected RPA Liability Gains and Losses Unexpected Gains and Losses Actuary PBO not equal to Book PBO Actual RPA not equal to expected RPA

What is the corridor in 2009? Beg PBO $2,000,000 x .10 = $200,000 vs Beg MRVPA $1,900,000 x .10 = $190,000 How much OCI loss gets over the corridor in 2009? NONE! Because there was no balance at 1/1/09 * The $280,000 loss was incurred DURING 2009.

What is the corridor in 2010? Beg PBO $2,400,000 x .10 = $240,000 vs Beg MRVPA $2,500,000 x .10 = $250,000 How much OCI loss gets over the corridor in 2010? $280,000 - $250,000 = $30,000/10 = $3,000

How much of the 1/1/10 OCI loss is still left? $280,000 - $3,000 = $277,000 So what’s the balance at 1/1/11 of OCI gain/loss? $277,000(from 09) + $90,000(during 10) = $367,000 How much OCI loss gets over the corridor in 2010? $280,000 - $250,000 = $30,000/10 = $3,000

What is the corridor in 2011? Beg PBO $2,900,000 x .10 = $290,000 vs Beg MRVPA $2,600,000 x .10 = $260,000 How much OCI loss gets over the corridor in 2011? $367,000 – 290,000 = $77,000 / 12 = $6,417

How much of the 1/1/11 unrecognized loss is still left? $367,000 - 6,417 = $360,583 So what’s the balance at 1/1/12 of unrecognized gain/loss? $360,583 + $10,000 = $370,583 How much unrecognized loss gets over the corridor in 2011? $367,000 – 290,000 = $77,000 / 12 = $6,417

What is the corridor in 2012? Beg PBO $3,600,000 x .10 = $360,000 vs Beg MRVPA $3,000,000 x .10 = $300,000 How much unrecognized loss gets over the corridor in 2012? $370,583 - $360,000 = $10,583/12 = $882 How much of the 1/1/12 unrecognized loss is still left? $370,583 - 882 = $369,701 So what’s the balance at 1/1/13 of unrecognized gain/loss? $369,701 - $25,000 gain = $344,701 UNRECOGNIZED LOSS

Exercise 20-9

Mildred Enterprises provides the following information relative to its defined benefit pension plan: Balances or Values at 12/31/11 Projected Benefit Obligation................... $2,737,000 Accumulated Benefit Obligation.......... 1,980,000 Fair value of plan assets... 2,278,329 AOCI (PSC) 205,000 AOCI (G/L) (1/1/11 bal, -0-_ 45,680 Pension liability 207,991 Other pension plan data: Service cost for 2011 $ 94,000 Unrecognized prior service cost amtz for 2011 45,000 Actual return on plan assets in 2011 130,000 Expected return on plan assets in 2011 175,680 Interest on January 1, 2011 PBO 253,000 Contributions to plan in 2011 92,329 Benefits paid.... 140,000

Prepare the NOTE disclosing the components of pension expense for year 2011. ervice Cost $94,000 (given) $253,000 (given) nterest Cost eturn on Plan Assets $175,680 MUST show expected! S I R P G O L rior Service Cost $45,000 (given) amortization for 2011 ain NO unrecognized loss adjustment here because beginning balance was zero. r oss PENSION EXPENSE.. $216,320

Determine the amounts of other comprehensive income and comprehensive income for 2011. Net income for 2011 is $35,000. OTHER COMPREHENSIVE INCOME Amortization of PSC................ ($45,000) * The amtz of PSC into pension expense makes comprehensive income INCREASE (its like its not in fake NI anymore, its in real NI). Actuarial Loss......................... $45,680 OTHER COMPREHENSIVE LOSS.......... $680

Determine the amounts of other comprehensive income and comprehensive income for 2011. Net income for 2011 is $35,000. COMPREHENSIVE INCOME FOR 2011 Real Net income.............................. $35,000 -OCI Loss......................................... $680 ----------------------------------------------------- COMPREHENSIVE INCOME.......... $34,320

c. Compute the amount of AOCI reported at 12/31/11 Beginning AOCI 1/1/11 PSC G/L Beginning Balance......................... $250,000 (205K bal given + 45K which was amtz this year) $0 Amortization of PSC. ($45,000) -- Liability Loss (45,680) Ending balance 12/31/11 $205,000 Dr $45,680 Dr