The following facts apply to the pension plan of Yorke Inc. for the year 2011:

The following facts apply to the pension plan of Yorke Inc. for the year 2011:

Plan assets, Jan. 1, 2011 ………………………………………………..    $490,000

Accrued benefit obligation, funding basis, Jan. 1, 2011 ……………….    389,000

Accrued benefit obligation, accounting basis, Jan. 1, 2011 …………..    490,000

Interest and expected earnings rate ……………………………………      8.5%

Annual pension service cost ………………………………………….     40,000

Contributions (funding) ……………………………………………….   30,000

Actual return on plan assets ……………………………………………    49,700

Benefits paid to retirees ………………………………………………..    33,400

Instructions

(a) Calculate pension expense for the year 2011, and provide the entries to recognize the pension expense and funding for the year assuming that the deferral and amortization approach is adopted.

(b) Discuss what adjustments would need to be made to your calculation in part (a) if the immediate recognition approach were adopted instead. Provide calculations wherever possible.

(a)

Yorke Inc.

Pension Work Sheet—2011

General Journal Entries

Memo Record

Items

Annual Pension Expense

Cash

Accrued Pension Liability

Accrued Benefit Obligation

Plan Assets

Unreco-gnized Gain (Loss)

Balance, January 1, 2011 (a) Service cost (b) Interest cost (c) Expected return (d) Gain on plan assets (e) Contributions (f) Benefits Journal entry, December 31 Balance, Dec. 31, 2011

40,000 Dr. 41,650 Dr. 41,650 Cr. 00,000 Dr. 40,000 Dr.

30,000 Cr. 00,000 Dr. 30,000 Cr.

10,000 Cr. 10,000 Cr.

490,000 Cr.  40,000 Cr.  41,650 Cr.  33,400 Dr. 000,000 Dr. 538,250 Cr.

490,000 Dr.  41,650 Dr.     8,050 Dr.  30,000 Dr.  33,400 Cr. 000,000 Dr. 536,300 Dr.

8,050 Cr.       0,000     8,050 Cr.

(b) $41,650 = $490,000 X .085.

(c) $41,650 = $490,000 X .085.

(d) $8,050 = $49,700 – $41,650.

Yorke Inc. Pension Work Sheet—2008

General Journal Entries

Memo Record

1.1.1.1      Items

Annual Pension Expense

Cash

Actuarial Gain in OCI

Pension Funded Status Liability

Accrued Benefit Obligation

Plan Assets

Balance, January 1, 2008 (a) Service cost (b) Interest cost (c) Expected return (d) Gain on plan assets (e) Contributions (f) Benefits Expense entry, Contribution entry Entry for change in OCI Balance, Dec. 31, 2008

40,000 Dr. 41,650 Dr. 41,650 Cr. 00,000 Dr. 40,000 Dr.

30,000 Cr. 00,000 Dr. 30,000 Cr.

8,050 Cr. 8,050 Cr. 8,050 Cr.

40,000 Cr.  30,000 Dr.    8,050 Dr.    1,950 Cr.

490,000 Cr.  40,000 Cr.  41,650 Cr.  33,400 Dr. 000,000 Dr. 538,250 Cr.

490,000 Dr.  41,650 Dr.     8,050 Dr.  30,000 Dr.  33,400 Cr. 000, 000 Dr. 536,300 Dr.

(b) $41,650 = $490,000 X .085.

(c) $41,650 = $490,000 X .085.

(d) $8,050 = $49,700 - $41,650.

Pension expense 2011:

Service cost                                    $ 40,000

Interest on accrued benefit obligation                 

    (8.5% X $490,000)                              41,650

Expected return on plan assets (8.5% X $490,000)                   (41,650)  

                                             $ 40,000

Pension Expense..........................         40,000

    Accrued Pension Asset/Liability......            40,000

Accrued Pension Asset/Liability..........   30,000

    Cash.................................            30,000

These calculations could be completed through a worksheet as shown on the previous page.

(b)  If the immediate recognition approach was adopted, the following changes to the calculation part would be required:

1.   The accrued benefit obligation beginning balance would be $389,000 as opposed to $490,000.

2.   The change in the ABO beginning balance would result in a change in the interest expense from $41,650 to $33,065 ($389,000 x 8.5%)

3.   The pension expense and plan assets would reflect the actual return on plan assets of $49,700 as opposed to the expected return of $41,650.