Question

Stanley-Morgan Industries adopted a defined benefit pension plan on April 12, 2021. The provisions of the plan were not made retroactive to prior years. A local bank, engaged as trustee for the plan assets, expects plan assets to earn a 10% rate of return. The actual return was also 10% in 2021 and 2022\.\* A consulting firm, engaged as actuary, recommends 5% as the appropriate discount rate. The service cost is $300,000 for 2021 and $390,000 for 2022. Year-end funding is $310,000 for 2021 and $320,000 for 2022. No assumptions or estimates were revised during 2021\.\* We assume the estimated return was based on the actual return on similar investments at the inception of the plan and that, since the estimate didn't change, that also was the actual rate in 2022.Required:Calculate each of the following amounts as of both December 31, 2021, and December 31, 20221. Projected benefit obligation2. Plan assets3. Pension expense4. Net pension asset liability

Answer 1

Answer:

1. Balance, December 31, 2022 $705,000

2. Balance, December 31, 2022 $661,000

3. Pension expense 2021 $300,000

Pension expense 2022 $374,000

4. Net pension asset, Dec. 31, 2021 $ 10,000

Net pension liability, Dec. 31, 2022 $ 44,000

Explanation:

1. Calculation for the Projected benefit obligation

Projected Benefit Obligation

($)

Balance, January 1, 2021 $ 0

Service cost 300,000

Interest cost (5% x $0) 0

Benefits paid (0)

Balance, December 31, 2021 $300,000

Service cost 390,000

Interest cost (5% x $300,000) 15,000

Benefits paid (0)

Balance, December 31, 2022 $705,000

(300,000+390,000+15,000)

 

2. Preparation of Plan assets

Plan Assets

Balance, January 1, 2021 $ 0

Actual return on plan assets (10% x $0) 0

Contributions, 2021 310,000

Benefits paid (0)

Balance, December 31, 2021 $310,000

Actual return on plan assets 31,000

(10% x $310,000)

Contribution, 2022 320,000

Benefits paid (0)

Balance, December 31, 2022 $661,000

(310,000+31,000+320,000)

3. Preparation of Pension expense

Pension expense – 2021

Service cost $300,000

Interest cost (5% x $0)0

Expected return on the plan assets (10% x $0) 0

Pension expense $300,000

Pension Expense – 2022

Service cost $390,000

Interest cost 15,000

(5% x $300,000)

Expected return on the plan assets (31,000)

(10% x $310,000)

Pension expense $374,000

4. Preparation of the Net pension asset liability

PBO $300,000

Plan assets 310,000

Net pension asset, Dec. 31, 2021 $ 10,000

PBO$705,000

Plan assets 661,000

Net pension liability, Dec. 31, 2022 $ 44,000