Griseta Limited sponsors a defined benefit pension plan for its employees, which it accounts for using the deferral and amortization approach under PE GAAP. The following data relate to the operation of the plan for the year 2011:
1. The actuarial present value of future benefits earned by employees for services rendered in 2011 amounted to $56,000.
2. The company’s funding policy requires a contribution to the pension trustee of $145,000 for 2011.
3. As of January 1, 2011, the company had an accrued benefit obligation of $1 million and an unrecognized past service cost of $400,000. The fair value of pension plan assets amounted to $600,000 at the beginning of the year. The actual and expected return on plan assets was $54,000. The discount rate was 9%.
4. Amortization of past service costs was $40,000 in 2011.
5. No benefits were paid in 2011.
Instructions
(a) Determine the pension expense that should be recognized by the company in 2011.
(b) Prepare the journal entries to record pension expense and the employer’s payment to the pension trustee in 2011.
(c) Determine the plan’s funded status and reconcile this to the accrued pension asset/liability on the December 31, 2011 balance sheet.
(d) Assuming Griseta is not a public company and does not have broad public accountability, prepare the required disclosures for the 2011 financial statements.
(e) Calculate the January 1, 2011 balance in accrued pension asset/liability.
(a) Pension expense for 2011 comprised the following:
Service cost $ 56,000
Interest on accrued benefit obligation 90,000
(9% X $1,000,000)
Expected return on plan assets (54,000 )
Amortization of past service cost 40,000
Pension expense $132,000
(b) Pension Expense....................... 132,000
Accrued Pension Asset/Liability... 132,000
Accrued Pension Asset/Liability....... 145,000
Cash.............................. 145,000
(c) Accrued benefit obligation (credit) (1) $(1,146,000 )
Plan assets at fair value (debit) (2) 799,000
ABO in excess of plan assets (or funded status) (347,000 )
Unrecognized past service cost (debit):
Beginning balance, 1/1/11 $400,000
Less amortization 40,000 360,000
Accrued pension cost asset (credit) $ (13,000 )
(1) Accrued benefit obligation 31/12/11: $1,000,000 + $56,000 + $90,000 = $1,146,000
(2) Plan assets 31/12/11: $600,000 + $54,000 + $145,000
= $799,000
(d) Income Statement:
Pension expense $132,000
Balance Sheet:
Assets
Accrued pension cost $13,000
Note X: The company sponsors a defined benefit pension plan covering the following group of employees and providing the following benefits.
For the year ending December 31, 2011, the net expense for the company’s pension plan is $132,000. The present value of the accrued benefit obligation at December 31, 2011, is $1,146,000 and the market related value of the fund assets is $799,000 based on the fair market value of the assets on that date. This results in an underfunded obligation of $347,000. Employer and employee contributions during 2011 amounted to $145,000 and no benefits were paid out. At December 31, 2011, the accrued pension cost asset is $13,000.
Other information to be disclosed: assumptions that underlie the plan such as the discount rate, the rate of increase in compensation levels, and the expected long-term rate of return on plan assets, as well as significant accounting policies governing the pension plan.
(e) Accrued benefit obligation 1/1/11 (credit) $(1,000,000 )
Plan assets at fair value 1/1/11 (debit) 600,000
ABO in excess of plan assets (or funded status) (400,000 )
Unrecognized past service cost 1/1/11 (debit) 400,000
Accrued pension cost asset 1/1/11 $ 0
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