Pension data for the Ben Franklin Company include the following for the current

Question

Pension data for the Ben Franklin Company include the following for the current calendar year: Discount rate, 8% Expected return on plan assets, 10% Actual return on plan assets, 9% Service cost, $200,000 January 1: PBO $1,400,000 ABO 1,000,000 Plan assets 1,500,000 Amortization of prior service cost 20,000 Amortization of net gain 4,000 December 31: Cash contributions to pension fund $220,000 Benefit payments to retirees 240,000.

Required: 1) Determine pension expense for the year.

2) Prepare the journal entries to record pension expense and funding for the year.

3) Describe the “corridor” approach to amortizing actuarial gains or losses.

Explanation / Answer

Answer: 1

Interest cost = Discount rate *PBO

= 8%*1400000 = $112000

Expected return = Expected return rate * Plan assets

= 10% * 1500000 = $150000

Calculation of pension expense:

Service cost......................................200000

Interest cost.....................................112000

Expected return................................ (150000)

Amortization of prior service cost.......20000

Amortization of net gain......................(4000)

Pension expense...............................178000

Answer:2

Journal entry:

Pension expense Dr. 178000

Prepaid (accrued) pension cost (220000 - 178000) Dr. 42000

To cash.......................................................................................220000

Answer:3

FASB invented the corridor approach for amortizing the accumulated net gain or loss balance when it gets too large. Too large in the sense 10% of the larger of the beginning balance of the PBO or the fair value of the plan assets.

Any accumulated net gain or loss above the 10% must be amortized. the amortization amount will be calculated by dividng the excess loss subject to amortization by the average remaining service.

Amount amortized = Excess loss subject to amortization/ average remaining service

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