1166 Chapter 20 Accounting for Pensions and Postretirement Benefits E20-13 (LO1,

ID: 2574443 • Letter: 1

Question

1166 Chapter 20 Accounting for Pensions and Postretirement Benefits E20-13 (LO1,2,4) (Computation of Actual Return, Gains and Losses, Corridor Test, and Pension Expense) Erickson C pany sponsors a def ined benefit pension plan. The corporation's actuary provides the following information about the plan January 1, December 31 2017 $1,900 2,730 2017 Vested benefit obligation Accumulated benefit obligation Projected benefit obligation Plan assets (fair value) Settlement rate and expected rate of return Pension asset/liability Service cost for the year 2017 Contributions (funding in 2017) Benefits paid in 2017 $1,500 3,300 2,620 10% 2,500 1,700 800 400 700 200 Instructions (a) Compute the actual return on the plan assets in 2017. (b) Compute the amount of the other comprehensive income (G/L) as of December 31, 2017. (Assume the January 1,201 balance was zero.) Compute the amount of net gain or loss amortization for 2017 (corridor approach). (c) (d) Compute pension expense for 2017.

Explanation / Answer

(a) Actual Return = (Ending – Beginning fair value of assets) – (Contributions – Benefits)

Fair value of plan assets,

December 31, 2017......................................... $2,620

Deduct: Fair value of plan assets,

January 1, 2017............................................... 1,700

Increase in fair value of plan assets................ 920

Deduct: Contributions........................................ $700

Less benefits paid............................... 200 500

Actual return on plan assets in 2017.............. $ 420

(b) Computation of pension liability gains and losses and pension asset gains and losses.

1. Difference between 12/31/17 actuarially computed PBO and 12/31/17 recorded projected benefit obligation (PBO):

PBO at end of year.............................. $3,300

PBO per memo records:

1/1/17 PBO........................................ $2,500

Add interest (10%)........................... 250

Add service cost............................. 400

Less benefits paid.......................... 200 2,950

Liability loss..................................... $350

2. Difference between actual fair value of

plan assets and expected fair value:

12/31/17 actual fair value

of plan assets.............................. 2,620

Expected fair value

1/1/17 fair value of plan assets..... 1,700

Add expected return

($1,700 X 10%)............................. 170

Add contributions........................... 700

Less benefits paid.......................... 200 (2,370)

Asset gain......................................... 250

Net (gain) or loss................................. ($100)

(c) Because no net gain or loss existed at the beginning of the period, no amortization occurs. Therefore, the corridor calculation is not needed. An example of how the corridor would have been computed is illustrated on the next page, assuming a net loss of $240 at the beginning of the year.

Beginning-of-the-Year

Year

PBO

Plan

Assets (FV)

10%

Corridor

Accumulated

OCI (G/L)

Loss

Amortization

2017

$2,500

$1,700

$250

$240

–0–

(d) Pension expense for 2017:

Service cost..................................................................... $ 400

Interest cost ($2,500 X 10%)......................................... 250

Actual return on plan assets [from (a)]...................... (420)

Unexpected gain [from (b) 2.]...................................... 250

Pension expense........................................................... $ 480