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Chapter 20: E20-1 (page 1163)

The following information is available for the pension plan of Radcliffe Company for the year 2017. Actual and expected return on plan assets $ 15,000 Benefits paid to retirees 40,000 Contributions (funding) 90,000 Interest/discount rate 10% Prior service cost amortization 8,000 Projected benefit obligation, January 1, 2017 500,000 Service cost 60,000 Instructions (a) Compute pension expense for the year 2017. (b) Prepare the journal entry to record pension expense and the employer’s contribution to the pension plan in 2017.

Short Answer

Expert verified

A pension plan is the type of plan an organization offers to its employees to benefit them after their retirement age. These plans are made for employee welfare.

Step by step solution

01

(a) Computation of pension expense for the year 2017

Particulars

Amount

Service cost

$60,000

Add: Interest cost$500,000×10100

$50,000

Less: Expected return on plan assets

$15,000

Add: Prior service cost amortization

$8,000

Pension Expense for 2017

$103,000

02

(b) Journal entry for recording the pension expense and the employer’s contribution to the pension plan for the year 2017

Radcliffe Company
Journal Entry

Date

Particulars

Debit

Credit

2017

Pension Expense

$103,000

Cash

$90,000

Pension asset/liability

$5,000

Other comprehensive income

$8,000

(To record the pension expense)

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Most popular questions from this chapter

A headline in the Wall Street Journal stated, “Firms Increasingly Tap Their Pension Funds to Use Excess Assets.” What is the accounting issue related to the use of these “excess assets” through plan terminations?

What are postretirement benefits other than pensions?

Using the information in E20-2, prepare a pension worksheet inserting January 1, 2017, balances, showing December 31, 2017, balances, and the journal entry recording pension expense.

Many business organizations have been concerned with providing for the retirement of employees since the late 1800s. Increase in this concern resulted in the establishment of private pension plans in most large companies and in many medium- and small-sized ones. The substantial growth of these plans, both in numbers of employees covered and in amounts of retirement benefits, has increased the significance of pension costs in relation to the financial position, results of operations, and cash flows of many companies. In examining the costs of pension plans, a CPA encounters certain terms. The components of pension costs that the terms represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financial statements of entities with pension plans.

Instructions

(a) Define a private pension plan. How does a contributory pension plan differ from a noncontributory plan?

(b) Differentiate between “accounting for the employer” and “accounting for the pension fund.”

(c) Explain the terms “funded” and “pension liability” as they relate to: (1) The pension fund. (2) The employer.

(d) (1) Discuss the theoretical justification for accrual recognition of pension costs. (2) Discuss the relative objectivity of the measurement process of accrual versus cash (pay-as-you-go) accounting for annual pension costs.

(e) Distinguish among the following as they relate to pension plans. (1) Service cost. (2) Prior service costs. (3) Vested benefits.

Differentiate between “accounting for the employer” and “accounting for the pension fund.”
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