Question

Exercise 17-22 IFRS; prior service cost [LO17-7, 17-12] Lacy Construction has a noncontributory, defined benefit pension plan. At December 31, 2018. Lacy received the following information: ($ in millions) $ 749 98 Projected Benefit Obligation Balance, January 1 Service cost Prior service cost Interest cost(5%) Benefits paid Balance, December 31 50 (96) $ 829 ($ in millions) $ 610 62 Plan Assets Balance, January 1 Actual return on plan assets Contributions 2018 Benefits paid Balance, December 31 98 (96) The expected long-term rate of return on plan assets was 10%. There were no AOCI balances related to pensions on January 1, 2018. At the end of 2018. Lacy amended the pension formula creating a prior service cost of $50 million. Assume Lacy Construction prepares its financial statements according to Intemational Financial Reporting Standards and that the actuary's discount rate is the rate on high quality corporate bonds. Required: 1. Determine Lacy's net pension cost for 2018. 2. Prepare the journal entry(s) to record Lacy's net pension cost, gains or losses, prior service cost, funding, and payment of retiree benefits for 2018

Answer 1

Requirement 1: Compute net pension cost as follows

Particulars	Amount (in millions)
Service cost in 2018	$98.00
Prior Service Cost	$50.00
Total service cost	$148.00
Net interest cost ($740 million − $610 million) × 5%	$6.50
Re-measurement Gain ($62 million − ($610 million × 5%))	($31.50)
Net Pension Cost	$123

Requirement 2: Prepare the following journal entries

Item	Account Title and Explanation	Debit	Credit
1	Service Cost	$148
	Defined Benefit Obligation (DBO) - 2018		$98
	Defined Benefit Obligation (DBO) - Prior Year		$50
	To record the service for the period
2	Net interest cost ($740 million − $610 million) × 5%	$6.5
	Plan Assets ($610 million × 5%)	$30.5
	Defined Benefit Obligation (DBO) ($740 million × 5%)		$37.0
	To record the net interest cost
3	Plan Assets	$31.5
	Re-measurement Gain - OCI ($62 − ($610 million × 5%))		$31.5
	To record gain on plan assets
4	Plan Assets	$98
	Cash		$98
	To record contributions plan assets
5	Defined Benefit Obligation (DBO)	$96
	Plan Assets		$96
	To record benefits paid

Note: In the case of IFRS prior service costs are expensed in the year those costs are created unlike under U.S. GAAP where they are amortized. Re-measurement gains are also not amortized in the case of IFRS.