The blank company has a defined benefit pension plan. Pension information for the fiscal years of...
The blank company has a defined benefit pension plan. Pension information for the fiscal years of 2024 and 2025 are presented below ($ in millions)
Info from by pension actuary
-
Projected benefit obligation as of December 31, 2023 = $1,800
-
Prior service cost from plan amendment on January 2, 2024 = $400 (straight line amortization for a 10 year average remaining service period)
-
Service cost for 2024 = $520
-
Service cost for 2025 = $570
-
Discount rate used by actuary on PBO for both years = 10%
-
Payment to retirees in 2024 = $380
-
Payment to retirees in 2025 = $450
-
No actual changes in actuarial assumptions or estimates
-
Net gain - AOCI on January 1, 2024 = $230
-
Net gains or losses are amortized for 10 years in 2024 and 2025
Info from by pension trustee
-
Plan asset balance at fair value on january 1, 2024 = $1,600
-
2024 contributions = $540
-
2025 contributions = $590
-
Expected long-term rate of return on plan assets = 12%
-
2024 actual return on plan assets = $180
-
2025 actual return on plan assets = $210
Required
-
Calculate pension expense for 2024 and 2025
-
Prepare the journal entries for 2024 and 2025 to record pension expense
-
Prepare the journal entries for 2024 and 2025 to record any gains and losses and new prior service cost
-
Prepare the journal entries for 2024 and 2025 to record to record (a) the cash contribution to plan assets and (b) the benefit payment to retirees
Homework Answers
Answer:-
Requirement 1 ($ in millions)
2024 2025
Service cost (given) $520 $570
Interest on PBO (2024: 10% x $2,200*; 2025: 10% x $2,560*) 220 256
Expected return (2024: 12% x $1,600; 2025: 12% x $1,940**) (192) (232.8)
Amortization of prior service cost ($400 ÷ 10 years) 40 40
Amortization of net gain *** (5) none
Pension expense $583 $633.2
*PBO **Plan Assets
Balance, 1-1-2024 $1,800 Balance, 1-1-2024 $1,600
Prior service cost 400
Balance, 1-2-2024 $2,200
Interest 10% 220 2018 contribution 540
Service cost 520 2018 actual return 180
Payments (380) Payments (380)
Balance, 12-31-2024 $2,560 Balance, 12-31-2024 $1,940
Interest 10% 256 2019 contribution 590
Service cost 570 2019 actual return 210
Payments (450) Payments (450)
Balance, 12-31-2025 $2,936 Balance, 12-31-2025 $2,290
*** Net Gain—AOCI
2024
Net
gain—AOCI at 1-1-2024 $230
10% of $1,800 ($1,800 is
greater than
$1,600): (180)
Excess at the
beginning of the
year $ 50
Average
remaining service
period ÷
10
years
Amount
amortized to 2024 pension
expense $
5
2025
Net
gain—AOCI at 1-1-2024 $230
Loss in 2024 (actual return:
$180 - expected return:
$192) (12)
Amortization in 2024 (calculated above) (5)
Net
gain—AOCI at 1-1-2025 $213
10% of $2,560 ($2,560 is
greater than
$1,940): (256)
No excess at
the beginning of the
year none
No amortization for 2025
Requirement 2
($ in millions)
2024
Pension
expense
(total).............................................................................. 583
Plan assets (expected return on plan
assets).............................................. 192
Amortization of net gain—OCI (2024 amortization)*.............................. 5
PBO ($520 service cost + $220 interest cost)..............................................................740
Amortization
of prior service cost—OCI (2024
amortization)*.................................40
2025
Pension expense (total)..............................................................................633.2
Plan assets (expected return on plan assets)..........................................232.8
PBO ($570 service cost + $256 interest cost).............................................................826.0
Amortization
of prior service cost—OCI (2025
amortization)*............................40.0
The amortization amounts are reported as other comprehensive income in the statement of comprehensive income. Companies report the service cost component of pension expense in the income statement as part of the total compensation costs arising from services rendered by the employees during the period, separate from the other components of pension expense. This presentation reflects the nature of service cost being different from that of the other elements of pension cost. The other components of pension expense are presented in the income statement also, but separate from the service cost component and outside the subtotal of income from operations.
Requirement 3
($ in millions)
2024
Loss—OCI ($180 actual return on assets less than $192 expected return) 12
Plan assets........................................................................................... 12
Prior service cost—OCI (from new amendment to the PBO)................. 400
PBO..................................................................................................... 400
2025
Loss—OCI ($210 actual return on assets less than $232.8 expected) 22.8
Plan assets........................................................................................... 22.8
Requirement 4
($ in millions)
2024
Plan
assets 540
Cash (contribution to plan
assets) 540
2025
Plan
assets 590
Cash (contribution to plan
assets) 590
2024
PBO 380
Plan assets (benefit
payments) 380
2025
PBO 450
Plan assets (benefit payments)
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