Josit Ltd. initiated a one-person pension plan in January 2005 that promises the employee a pension on retirement

Josit Ltd. initiated a one-person pension plan in January 2005 that promises the employee a pension on retirement according to the following formula: pension benefit = 2.5% of final salary per year of service after the plan initiation. The employee began employment with Josit early in 2002 at age 33, and expects to retire at the end of 2028, the year in which he turns 60. His life expectancy at that time is 21 years. Assume that this employee earned an annual salary of $40,000 when he joined Josit, that his salary was expected to increase at a rate of 4% per year, and that this remains a reasonable assumption to date. Josit considers a discount rate of 6% to be appropriate.

Instructions

(a) What is the employee’s expected final salary?

(b) What amount of current service cost should Josit recognize in 2010 relative to this plan?

(c) What is the amount of the accrued benefit obligation at December 31, 2010?

(a) The employee’s expected final salary in 2028 would be calculated as follows:

    $40,000 X (1.04)²⁶ = $110,899

    (in 27 years there would be 26 raises)

(b)  Step 1:Calculate annual pension benefit on retirement from working in 2010:

    Annual pension benefits on retirement

    = 2.5% X $110,899 X 1 year

    = $2,772 per year of retirement

    Step 2:Discount the present value of the annuity of $2,772 for 21 years at 6% to December 31, 2028.

   

    Present value of an annuity of $2,772 discounted at 6% for      21 periods:

($2,772 X 11.76408) =	$32,610

Using a financial calculator:
PV	$  ?	Yields $32,610
I	6%
N	21
PMT	$    (2,772)
FV	$  0
Type	0

Excel formula: =PV(rate,nper,pmt,fv,type)

    Step 3: Discount the present value of the annuity in 2028 to its present value at 2010:

Present value of $32,610 discounted at 6% for 18 years
($32,610 X .35034) = $11,425
(18 years = 2010 to 2028)

Using a financial calculator:
PV	$  ?	Yields $11,425
I	6%
N	18
PMT	$    0
FV	$  (32,610                  )
Type	0

Excel formula: =PV(rate,nper,pmt,fv,type)

    The current service cost relative to this plan for 2010 would

    be $11,425.

(c)           Pension benefits earned to December 31, 2010

    = 2.5% X $110,899 X 6 years = $16,635 per year of retirement.

    Present value at December 31, 2028 of an annuity of $16,635 discounted at 6% for 21 periods:

($16,633 X 11.76408) =	$195,676

Using a financial calculator:
PV	$  ?	Yields $195,676
I	6%
N	21
PMT	$    (16,633)
FV	$  0
Type	0

Excel formula: =PV(rate,nper,pmt,fv,type)

The accrued benefit obligation represents the present value of this amount discounted at 6% for 18 years:

Present value of $195,676 discounted at 6% for 18 years
($195,676 X .35034) = $68,558

Using a financial calculator:
PV	$  ?	Yields $68,558
I	6%
N	18
PMT	$    0
FV	$  (195,676                  )
Type	0

Excel formula: =PV(rate,nper,pmt,fv,type)

The accrued benefit obligation at December 31, 2010 would be $68,558. 

Queensland Importers provides the following pension plan information:

Fair value of pension plan assets, Jan. 1, 2011 ………………..   $1,418,750

Fair value of pension plan assets, Dec. 31, 2011 ………………    1,596,875

Contributions to the plan in 2011 ………………………………  212,500

Benefits paid retirees in 2011 …………………………………..  218,750

Instructions

Calculate the actual return on the plan assets for 2011.

Calculation of Actual Return on Plan Assets

Fair value of plan assets at 12/31/11           $1,596,875

Fair value of plan assets at 1/1/11              1,418,750

Increase in fair value of plan assets              178,125

Deduct:  Contributions to plan during 2011        $212,500    

        Less: benefits paid during 2011  218,750    6,250  

Actual return on plan assets for 2011           $  184,375

Hunt Corporation had an accrued benefit obligation of $3.1 million and plan assets of $3.3 million at January 1, 2011

Hunt Corporation had an accrued benefit obligation of $3.1 million and plan assets of $3.3 million at January 1, 2011. Hunt’s unrecognized net actuarial loss was $475,000 at that time. The average remaining service period of Hunt’s employees is 7.5 years. Calculate Hunt’s minimum amortization of the unrecognized actuarial loss for 2011.

Unrecognized net actuarial loss                   $475,000    

Corridor (10% X $3,300,000)                        330,000    

Excess                                             145,000    

Average remaining service life                    ÷    7.5

Minimum amortization                              $ 19,333  

On January 1, 2011, Tuesbury Corporation amended its defined benefit pension plan, resulting in $1,125,000 in past service costs. Tuesbury Corporation expects to receive economic benefits, through increased employee productivity and morale, over the next 15 years, at which point the employees will be eligible for their full pension benefits. Currently, all employees who are affected by the plan amendment are already vested.

Calculate the past service costs included in the pension expense for the December 31, 2011 fiscal year under the deferral and amortization method under both PE GAAP and IFRS.

Under the PE GAAP deferral and amortization approach, the $1,125,000 of past service costs is amortized to expense over 15 years, which is the expected period of benefit from the time of adoption or amendment until the employees are eligible for the plan’s full benefits.  Therefore, the portion of past service costs included in the 2011 pension expense is $75,000 ($1,125,000 / 15).

Under the IFRS deferral and amortization approach, the $1,125,000 of past service costs would be amortized to expense on a straight-line basis over the average benefit period until the benefits become vested.  In this case, all employee benefits are already vested, therefore, IFRS requires the immediate recognition of the past service costs into expense.  Therefore, the entire $1,125,000 will be included in pension expense for 2011.

Refer to BE19-10. Ignoring any differences in the actuarial valuation basis for the ABO, calculate the pension expense for Uddin Corporation assuming that it elected to apply the immediate recognition approach.

Service cost                                       $27,500

Interest on ABO                                     25,000

Actual return on plan assets                      (30,000 )

Pension expense                                    $22,500

Saver Corporation amended its defined benefit pension plan at the beginning of its 2011 fiscal year, resulting in past service costs

Saver Corporation amended its defined benefit pension plan at the beginning of its 2011 fiscal year, resulting in past service costs of $775,000. The vesting period for Saver Corporation is seven years. The plan amendment is attributable to the following employees:

Employees with more than seven years’ service as at Jan. 1, 2011……..$475,000

Employees with less than seven years’ service as at Jan. 1, 2011………$300,000

The average period until vesting for the employees with less than seven years’ experience is 3.5 years. Calculate the past service cost that will be included in the fiscal 2011 pension expense.

Pension Expense for 2011 related to past service costs:

Immediate recognition for vested employees:	$475,000
Amortization of costs for non-vested employees*:	$85,714
Total 2011 pension expense for past service costs	$560,714

*

Past service costs - non-vested employees:         $300,000

Average years until vesting                        ÷  3.5

Amortization per year                                                                                                                   $85,714

Petey Ltd. has a policy of obtaining an actuarial pension valuation every three years. Based on the individual components of its annual pension expense, Petey Ltd.’s accrued benefit obligation as at December 31, 2011, was $356,700.

An actuarial valuation revealed that the accrued benefit obligation is actually $388,000. The difference is mostly the result of revised estimates given the recent stock market troubles. Discuss the options available under IFRS to account for the actuarial loss.

Based on the actuarial report, there is a $31,300 actuarial loss.  There are two options available under IFRS to account for this loss:

·         The $31,300 can remain unrecognized until the total unrecognized gain/(loss) exceeds the corridor amount (i.e., defer and amortize)

·         The entire $31,300 can be recognized immediately in other comprehensive income, rather than net income.  

Cotter Corp. reports the following information (in hundreds of thousands of dollars) to you about its defined benefit pension plan for 2011:

Cotter Corp. reports the following information (in hundreds of thousands of dollars) to you about its defined benefit pension plan for 2011:

Actual return on plan assets ………………………………   11

Current service cost ……………………………………..  21

Benefits paid to retirees …………………………………   8

Interest cost ……………………………………………..    9

Contributions from employer …………………………… 20

Opening balance, accrued benefit obligation (ABO) …… 92

Cost of plan amendment in year …………………………   13

Opening balance, fund assets ……………………………   100

Provide a continuity schedule for the ABO for the year.

Accrued benefit obligation, opening balance          $92

Interest cost                                          9 

Current service cost                                  21

Benefits paid to retirees                                    (8    )

Past cost of plan amendment in year                   13

Accrued benefit obligation, ending balance          $127

Unsure Corp. has recently decided to implement a pension plan for its employees; however, it is unsure if it would like to structure the pension as a defined contribution plan or a defined benefit plan. As requested by management, prepare a short memo outlining the nature of both plans, along with the accounting treatment of each plan.

A Defined Contribution Plan (DC)

A defined contribution (DC) plan is a post-employment benefit plan that specifies how the entity’s contributions or payments into the plan are determined, rather than identifying what benefits will be received by the employee or the method of determining those benefits.

For a DC pension plan, the amounts that are contributed are usually turned over to an independent third party or trustee who acts on behalf of the beneficiaries (the participating employees). The trustee assumes ownership of the pension assets and is responsible for their investment and distribution. The trust is separate and distinct from the employer.

The ultimate risk and reward of the DC pension rests with the employees as the employer’s involvement is essentially limited to making the annual contribution each year.

Therefore, the accounting for a DC pension is relatively straight-forward.  The employer’s obligation is dictated by the amounts to be contributed.  Therefore, a liability is reported on the employer’s balance sheet only if the required contributions have not been made in full, and an asset is reported if more than the required amount has been contributed.

The annual benefit cost (i.e., the pension expense) is simply the amount that the company is obligated to contribute to the plan.

A Defined Benefit (DB) Plan

A defined benefit (DB) plan is any benefit plan that is not a defined contribution plan. It is a plan that specifies either the benefits to be received by an employee or the method of determining those benefits.

Similar to a DC plan, for a DB pension plan, the amounts that are contributed are usually turned over to an independent third party or trustee who acts on behalf of the beneficiaries.

The ultimate risk and reward of the DB pension rests with the employer since the employer must guarantee that a set retirement benefit will be paid to the employees. The benefits typically are a function of an employee’s years of service and compensation level in the years approaching retirement.

To ensure that appropriate resources are available to pay the benefits at retirement, there is usually a requirement that funds be set aside during the service life of the employees.

Therefore, accounting for a DB is much more complex.  The pension cost and accrued benefit obligation depends on many factors such as employee turnover, mortality, length of service, and compensation levels, as well as investment returns that are earned on pension assets, inflation, and other economic conditions over long periods of time.

Because the cost to the company is affected by a wide range of uncertain future variables, it is not easy to measure the pension cost and liability that have to be recognized each period as employees provide services to earn their pension entitlement.

This is not intended to be a comprehensive discussion of all issues associated with the DB, but rather, to highlight some of the key differences between a DB and DC pension. 

For Castor Corporation, year-end plan assets were $1,750,000. At the beginning of the year, plan assets were $1,350,000

For Castor Corporation, year-end plan assets were $1,750,000. At the beginning of the year, plan assets were $1,350,000. During the year, contributions to the pension fund were $170,000, while benefits paid were $140,000.

Calculate Castor’s actual return on plan assets.

Ending plan assets                              $1,750,000    

Beginning plan assets                            1,350,000   

Increase in plan assets                            400,000

Deduct:  Contributions              $170,000                      

        Less: benefits paid        (140,000 )      (30,000 )

Actual return on plan assets                    $  370,000    

Refer to the information for Cotter Corp. in BE19–3, and provide a continuity schedule for the plan assets for the year. Is the plan overfunded or underfunded?

In BE Cotter Corp. reports the following information (in hundreds of thousands of dollars) to you about its defined benefit pension plan for 2011:

Actual return on plan assets ………………………………   11

Current service cost ……………………………………..  21

Benefits paid to retirees …………………………………   8

Interest cost ……………………………………………..    9

Contributions from employer …………………………… 20

Opening balance, accrued benefit obligation (ABO) …… 92

Cost of plan amendment in year …………………………   13

Opening balance, fund assets ……………………………   100

Provide a continuity schedule for the ABO for the year.

Fund assets, opening balance                          $100

Actual return on assets                                 11

Contributions from employer                             20

Benefits paid to retirees                               (8 )

Fund assets, ending balance                           $123

Accrued benefit obligation (BE 19-3)                 $(127 )

Plan assets at fair value                              123

Plan’s funded status                                $   (4 )

Since the accrued benefit obligation exceeds the plan assets, the plan is underfunded. 

Duster Corporation is a private enterprise and has a defined benefit pension plan that is accounted

Duster Corporation is a private enterprise and has a defined benefit pension plan that is accounted for under the immediate recognition approach. The following information is available for Duster Corporation for 2011:

Service cost ……………………………….  $58,000

Interest on ABO, funding basis ………….   23,000

Expected return on plan assets …………..  25,000

Actual return on plan assets ………………    27,000

Calculate Duster’s 2011 pension expense.

Service cost                                       $58,000

Interest on ABO                                     23,000

Actual return on plan assets                      (27,000 )

Pension expense                                    $54,000

Potter Corporation is a private enterprise and has elected to use the immediate recognition approach to account for its defined benefit pension plan. The following information (in hundreds of thousands of dollars) is available for Potter Corporation for 2011:

Actual return on plan assets …………………….. 9

Current service cost …………………………….  19

Benefits paid to retirees …………………………   10

Interest cost …………………………………….. 11

Contributions from employer ……………………   20

Opening balance, ABO, funding basis ………….   100

Opening balance, fund assets ……………………  100

At the end of the year, Potter Corporation revised the terms of its pension plan, which resulted in past service costs of $35.

Determine the pension expense that should be reported on Potter Corporation’s December 31, 2011 income statement.

Interest cost                                           11             

Current service cost                                    19    

Actual return on plan assets                           (9)

Past cost of plan amendment in year                     35

Pension expense                                        $56

Jabara Limited provides a defined contribution pension plan for its employees. The plan requires the company

Jabara Limited provides a defined contribution pension plan for its employees. The plan requires the company to deduct 5% of each employee’s gross pay for each payroll period as the employee contribution. The company then matches this amount by an equal contribution. Both amounts are remitted to the pension trustee within 10 days of the end of each month for the previous month’s payrolls. At November 30, 2011, Jabara reported $26,300 of combined withheld and matched contributions owing to the trustee. During December, Jabara reported gross salaries and wages of $276,100.

Instructions

(a) Prepare the entry to record the December payment to the plan trustee.

(b) What amount of pension expense will the company report for December 2011?

(c) Determine the appropriate pension account and its balance to be reported on the December 31, 2011 balance sheet.

(a) Pension Contributions Payable.......... 26,300

        Cash..............................         26,300

(b)Pension Expense for December 2011:

    $276,100 x 5% = $13,805

(c)Current liability: 

    Pension Contributions Payable ($13,805 x 2)   $ 27,610

This assumes amounts for previous months were remitted as required each month.  At December 31, 2011 all that remains payable is the amount withheld from employees in December and the required employer matching amount.

At December 31, 2011, Glover Corporation has the following balances:

Accrued benefit obligation ……………………..  $3,400,000

Plan assets at fair value …………………………     2,420,000

Unrecognized past service cost …………………      990,000

Determine the account and its balances that should be reported on Glover Corporation’s December 31, 2011 balance sheet if it is using the deferral and amortization approach.

Accrued benefit obligation                      $3,400,000        

Fair value of plan assets                        2,420,000        

Funded status – net liability                      980,000        

Unrecognized past service cost (debit)             990,000        

Accrued pension asset (debit)                  $    10,000    

The following information is available for Huntley Corporation’s pension plan for the year 2011:

The following information is available for Huntley Corporation’s pension plan for the year 2011:

Expected return on plan assets ………………………….. $ 15,000

Actual return on plan assets ………………………………   17,000

Benefits paid to retirees …………………………………..   40,000

Contributions (funding) ………………………………….. 95,000

Discount rate ………………………………………………        10%

Accrued benefit obligation, Jan. 1, 2011 …………………..  500,000

Service cost ………………………………………………..    65,000

Huntley uses the deferral and amortization approach under IFRS to account for its defined benefit plan.

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 Huntley accounts for its pension under the deferral and amortization approach.

(b) Calculate pension expense for the year 2011, and provide the entries to recognize the pension expense and funding for the year, assuming that Huntley accounts for its pension with the immediate recognition approach. Assume that the ABO provided at January 1, 2011, for accounting and funding purposes is the same.

(a) Calculation of pension expense using the deferral and amortization approach:

       Service cost                               $ 65,000

       Interest cost ($500,000 X .10)               50,000

       Expected return on plan assets             (15,000 )

       Pension expense for 2011                  $100,000

    Pension Expense....................... 100,000

        Accrued Pension Asset/Liability...        100,000

    Accrued Pension Asset/Liability....... 95,000

        Cash..............................         95,000

(b) Calculation of pension expense using the immediate recognition approach:

       Service cost                               $65,000

       Interest cost ($500,000 X .10)               50,000

       Actual return on plan assets              (17,000 )

       Pension expense for 2011                   $98,000

    Pension Expense....................... 98,000

        Accrued Pension Asset/Liability...         98,000

    Accrued Pension Asset/Liability....... 95,000

        Cash..............................         95,000