Keeton Company sponsors a defined benefit pension plan for its 600 employees. The company’s actuary provided the following information about the plan. January 1, December 31, 2017 2017 2018 Projected benefi t obligation \(2,800,000 \)3,650,000 \(4,195,000 Accumulated benefi t obligation 1,900,000 2,430,000 2,900,000 Plan assets (fair value and market-related asset value) 1,700,000 2,900,000 3,790,000 Accumulated net (gain) or loss (for purposes of the corridor calculation) –0– 198,000 (24,000) Discount rate (current settlement rate) 9% 8% Actual and expected asset return rate 10% 10% Contributions 1,030,000 600,000 The average remaining service life per employee is 10.5 years. The service cost component of net periodic pension expense for employee services rendered amounted to \)400,000 in 2017 and \(475,000 in 2018. The accumulated OCI (PSC) on January 1, 2017, was \)1,260,000. No benefits have been paid. Instructions (Round to the nearest dollar.)

(a) Compute the amount of accumulated OCI (PSC) to be amortized as a component of net periodic pension expense for each of the years 2017 and 2018.

(b) Prepare a schedule which reflects the amount of accumulated OCI (G/L) to be amortized as a component of pension expense for 2017 and 2018.

(c) Determine the total amount of pension expense to be recognized by Keeton Company in 2017 and 2018.

Step by step solution

01

(a) Computation of prior service cost amortized for 2017 and 2018.

$$\begin{gathered} \mathbf{Prior}\mathbf{}\mathbf{}\mathbf{service}\mathbf{}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{}{\mathbf{amortized}}_{\mathbf{2017}}\mathbf{=}\frac{\mathbf{Accumulated}\mathbf{}\mathbf{OCI}}{\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{years}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{260}\mathbf{,}\mathbf{000}}{\mathbf{10}\mathbf{.}\mathbf{5}\mathbf{years}} \\ \mathbf{=}\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000} \\ \mathbf{Prior}\mathbf{}\mathbf{}\mathbf{service}\mathbf{}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{}{\mathbf{amortized}}_{\mathbf{2018}}\mathbf{=}\frac{\mathbf{Accumulated}\mathbf{}\mathbf{OCI}}{\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{}\mathbf{years}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{260}\mathbf{,}\mathbf{000}}{\mathbf{10}\mathbf{.}\mathbf{5}\mathbf{years}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000} \end{gathered}$$

02

(b) Preparation of a schedule which reflects the amount of accumulated OCI (G/L) to be amortized as a component of pension expense for 2017 and 2018

Year	Projected benefit obligation	Plan assets	Corridor @10% of PBO	Accumulated OCI	Minimum amortization of gain/loss
2017	$2,800,000	$1,700,000	$280,000	0	0
2018	$3,650,000	$2,900,000	$365,000	$198,000	0

03

(c) Computation of the total amount of pension expense to be recognized by Keeton Company in 2017 and 2018

Particulars	Amount
Service cost	$400,000
Add: Interest on projected benefit obligation $\left(\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{800}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{9}\mathbf{\%}\right)$	$252,000
Less: Expected return on plan assets $\left(\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{700}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\right)$	$170,000
Add: Amortization of prior service cost	$120,000
Pension Expense in 2017	$602,000

Particulars	Amount
Service cost	$475,000
Add: Interest on projected benefit obligation $\left(\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{650}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{8}\mathbf{\%}\right)$	$292,000
Less: Expected return on plan assets $\left(\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{900}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\right)$	$290,000
Add: Amortization of prior service cost	$120,000
Pension Expense in 2018	$597,000

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