Question

On January 1, 2020, McGee Co. had the following balances:

         Projected benefit obligation                                                $7,400,000

         Fair value of plan assets                                                        7,000,000

Other data related to the pension plan for 2020:

         Service cost                                                                               315,000

         Contributions to the plan                                                          459,000

         Benefits paid                                                                             450,000

         Actual return on plan assets                                                      444,000

         Settlement rate                                                                                 9%

         Expected rate of return                                                                     6%

         Average service periods (for amortization)                                    8yrs

(a)    Determine the projected benefit obligation at December 31, 2020. There are no net gains or losses.

(b)    Determine the fair value of plan assets at December 31, 2020.

(c)    Calculate pension expense for 2020 and prepare the journal entry to record pension expense and the contributions for 2020.

(d)    Assume that the beginning balance of net gains (OCI) is $ 1,050,000. Determine the projected benefit obligation and pension expense at December 31, 2020.

Answer 1

Answer :-

a)

Calculate the projected benefit obligation at December 31, 2020 as shown below :

Details	Amount
Projected benefit obligation on January 1, 2020	$7,400,000
Add : Service cost	$315,000
Add : Interest Cost
(7,400,000*9%)	$666,000
Total	$8,381,000
Less : Benefits paid	$450,000
Projected benefit obligation on December 31, 2020	$7,931,000

Thus , the projected benefit obligation on December 31, 2020.is $7,931,000.

b)

Calculate the fair value of asset at December 31, 2020 as shown below :

Details	Amount
Fair value of plan assets on january 1 , 2020	$7,400,000
Add : Actual Return	$444,000
Add : Contributions	$459,000
Total	$8,303,000
Less : Benefits paid	$450,000
Fair value of plan assets on December 31 , 2020	$7,853,000

Thus , the Fair value of plan assets on December 31, 2020.is $7,853,000.

c)

Pension expense for the year 2020. as shoen below:

Details	Amount
Service cost	315,000
Add : Interest cost	666,000
(7,400,000*9%)
Total	$981,000
Less : Actual return(Expected return on plan assets)	$444,000
Pension Expense for the year 2020.	$537,000

Thus, the pension expense for the year 2020. is $537,000

journal entry to recorded the pension expense as shown below:

Date	Account titles and Explanation	Debit	Credit
31-12-2020.	Pension Expense	$537,000
	Cash		$459,000
	Pension Liability		$78,000
	(To record the pension expense and the Contributions)

Note :

Calculate the pension liability for the year 2020 as shown below:

Pension liability = Pension expense - Cash paid (Contribution)

= $537,000-459,000

= $78,000.