Question

Tucker, Inc. on January 1, 2017 initiated a noncontributory, defined-benefit pension plan that grants benefits to its 100 employees for services rendered in years prior to the adoption of the pension plan. The total expected service-years of the 100 employees who are expected to receive benefits under the plan is 1,200. An actuarial consulting firm has indicated that the present value of the prior service cost on January 1, 2017 was $5,040,000. On December 31, 2017 the following information was provided concerning the pension plan's operations for its first year. Employer's contribution at end of year $1,600,000 Service cost 600,000 Projected benefit obligation 6,000,000 Plan assets (at fair value) 1,600,000 Expected return on plan assets 9% Settlement rate 8%
Instructions:
(a) Compute the pension expense recognized in 2017. Assume the prior service cost is amortized over the average remaining service life of the employees.
(b) Prepare the journal entries to reflect accounting for the company's pension plan for the year ended December 31, 2017.
(c) Indicate the amounts that are reported on the income statement and the balance sheet for 2017.

Answer 1

Answer:

a. Computation of Pension Expenses

Particulars                                                        Amount

Service cost                                                     $600,000

Interest on projected benefit obligation        $480,000

($6,000,000 * 8%)

Expected Return on plan assets                   -$144,000

($1,600,000 * 9%)

Amortized of prior service costs                     $0            

Pension Expense                                             $936,000

b. Account Titles and Explanation                 Debit        Credit

    Pension Expenses                                    $936,000

    Pension Asset/Liability                             $664,000

                Cash                                                                    $1,600,000

                 Other Comprehensive Income                          $0

c.                             Tucker Inc.

                   Income Statement (Partial)

           For the year ended December 31, 2017

Expenses:

Pension Expenses                     $936,000

                             Tucker Inc.

                       Balance sheet (Partial)

           For the year ended December 31, 2017

Long term Liabilities:

Pension Liability                      $3,736,000

Stockholders' Equity

Accumulated Other                 $5,040,000

Comprehensive Income

($5,040,000 - $0)

Workings

Projected benefit obligation, before adjustment   $6,000,000

Add: Service cost                                                      $600,000

Add: Interest on projected benefit obligation         $480,000

($6,000,000 * 8%)

Projected benefit obligation                                    $7,080,000

Fair value of pension assets               $1,000,000

Add: Expected return on plan assets $144,000

Add: Cash contribution                        $1,600,000        

Plan assets                                                                  $3,344,000

Pension Liability                                                          $3,736,000