Sheridan Inc. has sponsored a noncontributory, defined benefit
pension plan for its employees since 1997. Prior to 2020,
cumulative net pension expense recognized equaled cumulative
contributions to the plan. Other relevant information about the
pension plan on January 1, 2020, 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 $4,903,000 and the fair value of pension plan assets was $2,946,000. The market-related asset value was also $2,946,000. Unrecognized prior service cost was $1,957,000. |
On December 31, 2020, the projected benefit obligation and the
accumulated benefit obligation were $4,936,000 and $4,081,000,
respectively. The fair value of the pension plan assets amounted to
$4,048,000 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
2020 amounted to $201,000. The employer’s contribution to the plan
assets amounted to $761,000 in 2020. This problem assumes no
payment of pension benefits.
Part 1)
The prior service cost amortization table is given below:
Prior Service Cost Amortization | ||
2020 | $163,083 | ($1,957,000/12) |
2021 | $163,083 | ($1,957,000/12) |
2022 | $163,083 | ($1,957,000/12) |
Part 2)
The pension expense for year 2017 is calculated as follows:
Service Cost | 201,000 |
Interest on Projected Benefit Obligation | 490,300 |
Actual Return on Plan Assets | -341,000 |
Unexpected Gain | 46400 |
Amortization of Prior Service Cost | 163083 |
Pension Expense | $559,783 |
Part 3)
The value of net gain is calculated as follows:
Fair Value of Plan Assets 31/12/2020 | 4,048,000 | ||
Less Expected Fair Value of Assets | |||
Add Fair Value of Plan Assets 01/01/2020 | 2,946,000 | ||
Expected Return | 294600 | ||
Contributions to the Plan | 761,000 | ||
Less Benefits | 0 | 4,001,600 | |
Asset Gain | -46400 | ||
Projected Benefit Obligation 31/12/2020 | 4,936,000 | ||
Less Projected Benefit Obligation 01/01/2020 | 4,903,000 | ||
Add Interest | 490300 | ||
Add Service Cost | 201,000 | ||
Less Benefits | 0 | 5,594,300 | |
Liability Gain | -658300 | ||
Net Gain | -$704,700 |
The value of Amortization in 2017 and 2018 is calculated as follows:
Year | Amortization |
2020 | $0 |
2021 | $17592 [(704700 - 493,600)/12] |
_______
Part 4)
The journal entries are as follows:
Account Titles and Explanation | Debit | Credit |
Pension Expense | $559,783 | |
Pension Asset/Liability | $1,069,000 | |
Other Comprehensive Income (G/L) | $704,700 | |
Other Comprehensive Income (PSC) | $163,083 | |
Cash | $761,000 |
Sheridan Inc. has sponsored a noncontributory, defined benefit pension plan for its employees since 1997. Prior...
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