Question

On January 1, 2021, Gillock Climbing Academy instituted a defined benefit pension plan for its employees. The annual service cost for each year of 2021 and 2022 was $600,000. The interest rate used to determine the projected benefit obligation is 10%. Both the actual and the expected return on plan assets are 8% for both years. Gillock funded the plan in the amount of $400,000 each January 1, beginning on January 1, 2021. What amount of pension expense should Gillock report in its income statement for the year ended December 31, 2022? A) $593,440. B) $600,000 C) $628,000. D) $726,560.

Answer 1

Answer:

A)$593,440

Explanation:

Calculation to determine What amount of pension expense should Gillock report in its income statement for the year ended December 31, 2022

First step is to calculate the Balance of plan assets on 31st December 2022

Funding on 1st January 2021 $400,000

Add actual return on 31 December 2021 $32,000($400,000×8% )

Add Current funding on 1st January 2022 $400,000

Balance of plan assets on 1st January 2022 $832,000

Balance of plan assets on 31st December 2022 $66,560 ($832,000×8% )

Now let calculate pension expense

Service cost$600,000

Less: Expected return on plan assets ($66,560)

Pension expense for the year 2022 $593,440

($600,000-$66,560)

Therefore What amount of pension expense should Gillock report in its income statement for the year ended December 31, 2022 will be $593,440