Aykroyd Inc. has sponsored a noncontributory, defined benefit pension plan for its employees since 1994. Prior to 2017, cumulative net pension expense recognized equaled cumulative contributions to the plan. Other relevant information about the pension plan on January 1, 2017, is as follows. 1. The company has 200 employees. All these employees are expected to receive benefits under the plan. The average remaining service life per employee is 12 years. 2. The projected benefit obligation amounted to \(5,000,000 and the fair value of pension plan assets was \)3,000,000. The market-related asset value was also \(3,000,000. Unrecognized prior service cost was \)2,000,000. On December 31, 2017, the projected benefit obligation and the accumulated benefit obligation were \(4,850,000 and \)4,025,000, respectively. The fair value of the pension plan assets amounted to \(4,100,000 at the end of the year. A 10% settlement rate and a 10% expected asset return rate were used in the actuarial present value computations in the pension plan. The present value of benefits attributed by the pension benefit formula to employee service in 2017 amounted to \)200,000. The employer’s contribution to the plan assets amounted to $775,000 in 2017. This problem assumes no payment of pension benefits. Instructions (Round all amounts to the nearest dollar.)

(a) Prepare a schedule, based on the average remaining life per employee, showing the prior service cost that would be amortized as a component of pension expense for 2017, 2018, and 2019.

(b) Compute pension expense for the year 2017.

(c) Compute the amount of the 2017 increase/decrease in net gains or losses and the amount to be amortized in 2017 and 2018.

(d) Prepare the journal entries required to report the accounting for the company’s pension plan for 2017

Step by step solution

01

(a) Preparation of a schedule, based on the average remaining life per employee to amortize the component of pension expense for the years 2017, 2018, and 2019

Use the formula below to ascertain the amount of prior service cost amortization

$\mathbf{Prior}\mathbf{}\mathbf{service}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{amortization}\mathbf{=}\frac{\mathbf{Un}\mathbf{}\mathbf{recognized}\mathbf{}\mathbf{prior}\mathbf{}\mathbf{service}\mathbf{}\mathbf{cost}}{\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{years}}$

Year	Calculation	Amount
2017	$\left(\frac{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}}{\mathbf{12}\mathbf{years}}\right)$	$166,667
2018	$\left(\frac{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}}{\mathbf{12}\mathbf{years}}\right)$	$166,667
2019	$\left(\frac{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}}{\mathbf{12}\mathbf{years}}\right)$	$166,667

02

(b) Computation of the pension expense for the year 2017

Particulars	Amount
Service cost	$200,000
Add: Interest on PBO $\left(\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\right)$	$500,000
Less: Actual return on plan assets $\left(\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{100}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{775}\mathbf{,}\mathbf{000}\right)$	$325,000
Add: Unexpected gain $\left(\mathbf{\$}\mathbf{325}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{300}\mathbf{,}\mathbf{000}\right)$	$25,000
Amortization of prior service cost	$166,667
Pension Expense	$566,667

03

(c) Computation of the net gain or loss for the years 2017 and 2018

Particulars			Amount
Fair value of plan assets Dec 31, 2017			$4,100,000
Less: Expected fair value of plan assets Jan 1, 2017	$3,000,000
Add: Interest $\left(\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\right)$	$300,000
Add: Contribution	$775,000		$4,075,000
Asset gain			$25,000 Dr.
Actuarially computed PBO Dec 31, 2017		$4,850,000
Less: PBO Jan 1, 2017	$5,000,000
Add: Interest cost $\left(\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\right)$	$500,000
Add: Service cost	$200,000	$5,700,000
Liability loss			$850,000
Net gain at Dec 31, 2017			$875,000

04

(d) Preparation of the journal entries required to report the accounting for the company’s pension plan for 2017

Aykroyd Inc.
Journal Entry
Date	Particulars	Debit	Credit
2017	Pension Expense	$566,667
	Pension asset/liability $\left(\left[\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\right]\mathbf{-}\left[\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{850}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{100}\mathbf{,}\mathbf{000}\right]\right)$	$1,250,000
	Other comprehensive income (Gain/Loss)		$875,000
	Other comprehensive Income (PSC)		$166,667
	Cash		$775,000
	(To record the pension expense)

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