Branfield Corporation sponsors a defined benefit plan for its 100 employees. On January 1, 2011, the company’s actuary provided the following information:
Unrecognized past service cost ……………….. $ 390,000
Pension plan assets (fair value) ……………….. 1,040,000
Accrued benefit obligation …………………… 1,430,000
The participating employees’ expected average remaining service life (EARSL) and average remaining service period to full eligibility is 8.5 years. All employees are expected to receive benefits under the plan. On December 31, 2011, the actuary calculated that the present value of future benefits earned for employee services rendered in the current year amounted to $213,200; the accrued benefit obligation was $1,825,200; the fair value of pension assets was $1,376,600; and the accumulated benefit obligation amounted to $1,729,000. The expected return on plan assets and the discount rate on the accrued benefit obligation were both 10%. The actual return on plan assets is $80,600. The company funded the current service cost as well as $106,600 of the past service costs in the current year. No benefits were paid during the year.
The company accounts for its pension plan with the deferral and amortization approach under PE GAAP.
Instructions
Round all answers to the nearest dollar.
(a) Determine the pension expense that the company will recognize in 2011, identifying each component clearly. (Do not prepare a work sheet.)
(b) Calculate the amount of any 2011 increase/decrease in unrecognized actuarial gains or losses, and the amount to be amortized in 2011 and 2012 under the corridor approach.
(c) Prepare the journal entries to record pension expense and the company’s funding of the pension plan in 2011.
(d) Prepare a schedule that reconciles the plan’s funded status with the accrued pension asset/liability reported on the December 31, 2011 balance sheet.
(e) Assume that the liability and asset losses on the accrued benefit obligation and plan assets arose because of the disposal of a segment of Branfield’s business. How should these losses be reported on the company’s 2012 financial
statements?
(a) Pension expense for 2011 comprises the following:
Service cost $213,200
Interest on accrued benefit obligation
(10% X $1,430,000) 143,000
Expected return on plan assets*(10% X $1,040,000) (104,000 )
Amortization of unrecognized gain or loss in 2011 0
Amortization of unrecognized past service cost 45,882 *
Pension expense $298,082
*Amortization: $390,000 ÷ 8.5 years = $45,882
(b) 2011 Increase/Decrease in Unrecognized Actuarial
Gains/Losses
(1) 12/31/11 new actuarially calculated ABO $1,825,200
Less: Accrued benefit obligation
per memo record:
1/1/11 ABO $1,430,000
Add interest (10% X $1,430,000) 143,000
Add service cost (given) 213,200
Less benefit payments 0 1,786,200
Liability loss $39,000
(2) Expected return on plan assets at 1/1/11 $104,000
(10% X $1,040,000)
Less: Actual return on plan assets 80,600
Asset loss $23,400
(3) 12/31/11 fair value of Plan Assets $1,376,600
Less: Plan Assets per memo record:
1/1/11 Plan Assets $1,040,000
Add actual return 80,600
Add funding
($213,200 + $106,600) 319,800
Less benefit payments 0 1,440,400
Asset loss 63,800
Net loss at 12/31/11 $126,200
No amortization occurs in 2011 because no balance existed in the Unrecognized Net Gain or Loss account at the beginning of 2011.
The $126,200 net loss in the Unrecognized Net Gain or Loss account becomes the beginning balance in 2012. The corridor at 1/1/12 is 10% of the greater of $1,825,200 (ABO) or $1,376,600 (market-related asset value). Since the amount of loss of $126,200 is less than the corridor amount of $182,520, there will be no amortization in 2012.
(c) Journal Entries—2011
Pension Expense....................... 298,082
Accrued Pension Asset/Liability... 298,082
Accrued Pension Asset/Liability....... 319,800
Cash.............................. 319,800
(d) Reconciliation of Pension-Related Amounts
| | | Dr (Cr) | |
| | | | |
Accrued benefit obligation $(1,825,200)
Fair value of plan assets 1,376,600
Accrued benefit obligation in excess of plan
assets (funded status) (448,600)
Unrecognized net (gain) or loss ( 126,200
Unrecognized past service cost
($390,000 – $45,882) 344,118
Accrued pension asset $ 21,718
Proof: Opening balance of balance sheet account of $0 + expense amount credited to account of $298,082 – contributions charged to the account of $319,800 = ending balance of $21,718 debit.
(e) The liability and asset losses that relate to the disposal of the business segment would be shown in the Discontinued Operations section of the income statement on a net of tax basis. The losses would not be amortized using the corridor approach. The credit side of the entry would increase the accrued pension liability.
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