Question

Electronic Distribution has a defined benefit pension plan. Characteristics of the plan during 2018 are as follows: ($ millions) PBO balance, January 1 $ 520 Plan assets balance, January 1 250 Service cost 95 Interest cost 65 Gain from change in actuarial assumption 34 Benefits paid (44) Actual return on plan assets 17 Contributions 2018 85 The expected long-term rate of return on plan assets was 8%. There were no AOCI balances related to pensions on January 1, 2018, but at the end of 2018, the company amended the pension formula creating a prior service cost of $17 million. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) Required: 1. Calculate the pension expense for 2018. 2. Prepare the journal entry to record pension expense, gains or losses, prior service cost, funding, and payment of benefits for 2018. 3. What amount will Electronic Distribution report in its 2018 balance sheet as a net pension asset or net pension liability?

Answer 1

1.

Calculate the pension expense as follows:

Pension expense = Service cost + interest cost - expected return on the plan assets + amortization of prior service cost

Pension expense = 95 + 65 - 20 +0

Pension expense = $ 140 million

2.

Prepare the journal entries as follows:

No	Accounts	Debit	Credit
1	Pension expense	140
	Plan assets (250 * 8%)	20
	Projected benefit obligation		160
	(Recording of pension expense)
2	Other comprehensive income	17
	Projected benefit obligation		17
	(Recording of prior service cost)
3	Projected benefit obligation	34
	Other comprehensive income - Gain		34
	(Recording gain)
4	Other comprehensive income - Loss (17-20)	3
	Plan assets		3
	(Recording loss)
5	Plan assets	85
	Cash		85
	(Record contributions )
6	Projected benefit obligation	44
	Plan assets		44
	(Record benefits paid)

3.

Determine the amount of PBO, closing as follows:

PBO, Closing = Opening balance + service cost + interest cost - gain from change in actuarial assumption + prior service cost - benefits paid

PBO, Closing = 520 + 95 + 65 - 34 + 17 - 44

PBO, Closing = $ 619 million

Determine the amount of closing plant asset as follows:

Closing plant asset = opening balance + Actual return on plan assets + Contributions 2018 - benefits paid

Closing plant asset = 250 + 17 + 85 - 44

Closing plant asset = $ 308 million

Determine the net pension liability as follows:

Net pension liability = 619 - 308

Net pension liability = $ 311 million