Question

Defined Benefit Pension Plan

Spath Company adopted a noncontributory defined benefit pension plan on January 1, 2016. Spath uses the benefit/years-of-service method, which results in the following information:

	2016	2017
Service cost	$300,000	$450,000
Amount funded	240,000	390,000
Discount rate	10%	10%
Expected rate of return	10%	10%

The actual rate of return is equal to the expected return, and the company has not made any payments to retirees.

In the journal entry to record pension expense, what is the amount of the credit entry to accrue pension cost on December 31?

a.

2016		2017
$60,000		$126,000

b.

2016		2017
$60,000		$60,000

c.

2016		2017
$60,000		$66,000

d.

2016		2017
$0		$60,000

Answer 1

The correct option is “c”

The difference between the amount contributed to pension plan assets and pension expense is recognized as accrued or prepaid pension cost as follows

Particulars	2016	2017
Service cost	$300,000	$450,000
Add: Interest cost ($300,000 × 10%)	$0	$30,000
Deduct: Expected return on plan assets ($240,000 × 10%)	$0	($24,000)
Pension expense	$300,000	$456,000
Deduct: Amount Funded	$240,000	$390,000
Credit entry to accrue pension cost	$60,000	$66,000