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Chapter 20: P20-1 (page 1169)

On January 1, 2017, Harrington Company has the following defined benefit pension plan balances. Projected benefi t obligation \(4,500,000 Fair value of plan assets 4,200,000 The interest (settlement) rate applicable to the plan is 10%. On January 1, 2018, the company amends its pension agreement so that prior service costs of \)500,000 are created. Other data related to the pension plan are as follows. Insert Page Layout Formulas Data Review View A P18 fx BCD E F G Postretirement Benefit Worksheet—Holder Inc.xls Home 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Postretirement Asset/Liability Other Comprehensive Income—PSC APBO Memo Record Items Plan Assets General Journal Entries Annual Expense Cash (1) (2) (3) 3,000 (6) 410,000 56,000 36,900 5,000 497,900 Cr. 120,000 2,000 (4) 5,000 183,000 Dr. Balance, Jan. 1, 2017 Service cost Interest cost Actual/Expected return Contributions Benefits Amortization of PSC Journal entry for 2017 Accumulated OCI, Dec. 31, 2016 Balance, Dec. 31, 2017 66,000 (7) (5) (8) 30,000 Dr. 27,000 Dr. 290,000 (9) 314,900 Cr. 2017 2018 Service cost \(150,000 \)180,000 Prior service cost amortization –0– 90,000 Contributions (funding) to the plan 240,000 285,000 Benefi ts paid 200,000 280,000 Actual return on plan assets 252,000 260,000 Expected rate of return on assets 6% 8% Instructions (a) Prepare a pension worksheet for the pension plan for 2017 and 2018. (b) For 2018, prepare the journal entry to record pension-related amounts.

Short Answer

Expert verified

Service costis the type of expenditure an organization incurs for rendering a service to its respective clients after the product has been sold. It is recorded under the profit and loss account ofthe organization.

Step by step solution

01

(a) Preparation of a pension worksheet for the pension plan for 2017 and 2018.

Harrington Company
Pension Worksheet for the years 2017 and 2018
General journal entries
Memo record

Particulars

Annual pension expense

Cash

Prior service cost-OCI

OCI-Gain/Loss

Pension asset/liability

Projected benefit obligation

Plan assets

Balance Jan 1, 2017

$300,000 Cr.

$4,500,000 Cr.

$4,200,000 Dr.

Service cost

$150,000 Dr.

$150,000 Cr.

Interest cost

$450,000 Dr.

$450,000 Cr.

Actual return

$252,000 Cr.

$252,000 Dr.

Contributions

$240,000 Cr.

$240,000 Dr.

Benefits

$200,000 Dr.

$200,000 Cr.

Journal entry for 2017

$348,000 Dr.

$240,000 Cr.

0

0

$108,000 Cr.

Accumulated OCI Dec 31, 2016

Balance Dec 31, 2017

$408,000 Cr.

$4,900,000 Cr.

$4,492,000 Dr.

Additional PSC Jan 1, 2018

$500,000 Dr.

$500,000Cr.

Balance Jan 1, 2018

$5,400,000 Cr.

Service cost

$180,000 Dr.

$180,000 Cr.

Interest cost

$540,000 Dr.

$540,000 Cr.

Actual return

$260,000 Cr.

$260,000 Dr.

Unexpected loss

$99,360 Cr.

$99,360 Dr.

Amortization of PSC

$90,000 Dr,

$90,000 Cr.

Contributions

$285,000 Cr.

$285,000 Dr.

Benefits

$280,000 Dr.

$280,000 Cr.

Journal entry for 2018

$450,640 Dr.

$285,000 Cr,

$410,000 Dr.

$99,360 Dr.

$675,000 Cr.

Accumulated OCI Dec 31, 2017

0

0

Balance Dec 31, 2018

$410,000 Dr.

$99,360 Dr.

$1,083,000 Cr.

$5,840,000 Cr.

$4,757,000 Dr.

02

(b) Preparation of the journal entry to record pension-related amounts for the year 2018.

Harrington Company
Journal Entry

Date

Particulars

Debit

Credit

2018

Pension Expense

$450,640

Other comprehensive Income (PSC)

$410,000

Other comprehensive Income (Gain/Loss)

$99,360

Cash

$285,000

Pension asset/liability

$675,000

(To record the pension expense)

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Most popular questions from this chapter

Shin Corporation had a projected benefit obligation of \(3,100,000 and plan assets of \)3,300,000 at January 1, 2017. Shin also had a net actuarial loss of $465,000 in accumulated OCI at January 1, 2017. The average remaining service period of Shin’s employees is 7.5 years. Compute Shin’s minimum amortization of the actuarial loss.

If pension expense recognized in a period exceeds the current amount funded by the employer, what kind of account arises, and how should it be reported in the financial statements? If the reverse occurs—that is, current funding by the employer exceeds the amount recognized as pension expense—what kind of account arises, and how should it be reported?

Davis Corporation is a medium-sized manufacturer of paperboard containers and boxes. The corporation sponsors a noncontributory, defined benefit pension plan that covers its 250 employees. Sid Cole has recently been hired as president of Davis Corporation. While reviewing last year’s financial statements with Carol Dilbeck, controller, Cole expressed confusion about several of the items in the footnote to the financial statements relating to the pension plan. In part, the footnote reads as follows. Note J. The company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee’s compensation during the last four years of employment. The company’s funding policy is to contribute annually the maximum amount allowed under the federal tax code. Contributions are intended to provide for benefi ts expected to be earned in the future as well as those earned to date. The net periodic pension expense on Davis Corporation’s comparative income statement was \(72,000 in 2017 and \)57,680 in 2016. The following are selected figures from the plan’s funded status and amounts recognized in the Davis Corporation’s Statement of Financial Position at December 31, 2017 (\(000 omitted). Actuarial present value of benefi t obligations: Accumulated benefi t obligation (including vested benefi ts of \)636) \( (870) Projected benefi t obligation \)(1,200) Plan assets at fair value 1,050 Projected benefi t obligation in excess of plan assets $ (150) Given that Davis Corporation’s work force has been stable for the last 6 years, Cole could not understand the increase in the net periodic pension expense. Dilbeck explained that the net periodic pension expense consists of several elements, some of which may increase or decrease the net expense. Instructions (a) The determination of the net periodic pension expense is a function of five elements. List and briefly describe each of the elements. (b) Describe the major difference and the major similarity between the accumulated benefit obligation and the projected benefit obligation. (c) (1) Explain why pension gains and losses are not recognized on the income statement in the period in which they arise. (2) Briefly describe how pension gains and losses are recognized.

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.

Question: What is service cost, and what is the basis of its measurement?
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