Service cost $310
Interest cost (7% x 2,300) 161
Expected return (10% x 2,400) (240)
Amort. of prior service cost 25
Amort. Of net gain (6)
Pension Expense $250

E17-10

( $ in 000s)

Journal Entries:

Pension Expense / 25
OCI – prior service cost Amortization of PSC / 25
OCI – net gain /loss / 6
Pension Expense Amortization of net gain/loss / 6
Pension Expense (250-25+6) / 231
Pension liability / 14
Cash / 245

The above entries can also be recorded as:

Pension expense / 250
OCI- net gain/loss / 6
Pension liability / 14
OCI - Prior service cost / 25
Cash / 245

In addition, the following entry should be recorded to recognize the unexpected loss on pension assets arising in 2007 (actual return – expected return = $216 -$240= -24):

OCI – net gain/loss / 24
Pension liability / 24

Additional questions related to E17-10:

  1. What are the balances in the following accounts on 12/31/2007:
  1. Projected benefit obligation(disclosed in the footnotes only)
  2. Plan assets (fair value)(disclosed in the footnotes only)
  3. Pension liabilities(reported on the balance sheet statement)
  4. OCI- prior service cost(reported on the balance sheet statement)
  5. OCI-net gain/loss-pensions(reported on the balance sheet statement)
  1. What is the funded status of this pension plan on 12/31/2007?

Answers: ($ in 000s)

1.

  1. Projected benefit obligation =$ 2,300 + 310 +161 -270 = $2,501
  1. Plan assets = $2,400+ 216 +245-270 = $2,591

Actual return = 9% x 2,400 = 216

  1. Pension liability = 100 (dr.) +14 (dr.) – 24 (cr.) = 90 (dr.)

Note: The pension liabilities recognized on the balance sheet statementequals the funded status of the plan (i.e., 2,591 (plan assets) – 2,501 (projected pension obligations) = 90 overfunding. This result is consistent with the requirement of SFAS 158 (i.e., the funded level should be reported on the balance sheet).

Derivations:

100 (dr.) = beg. Bal. of Plan assets – beg. Bal. of projected benefit obligation

= 2,400 (dr.) – 2,300 (cr.)

14 (dr.) = from the entry to record pension expense and funding for 2007

24 (cr.)= from recording of the unexpected loss arising in 2007. The journal entry is as follows:

OCI –net gain/loss 24

Pension Liability 24

  1. The balance of OCI-PSC = beg. Balance – the amortized PSC =$325 (dr.)-25 (cr.) = $300 (dr.)
  1. The balance of OCI- net gain/loss

= beg. Balance of 07 – amortized net gain + OCI-net gain/loss recognized in 2007

= 330 (gain, cr.) – 6 (dr.) - 24 (loss, dr.) = 300 (cr.) –net gain

Note: This ending balance of 2007 will be the beg. Balance of 2008 and will be compared with 10% of the greater of (projected benefit obligation, $2,501, pension assets, $2,591)on 1/1/2008. Since 300 (cr.) is greater than $259, this unamortized net gain/loss should be amortized in 2008. Assuming the remaining service years of active employees in 2008 is 10 years, the calculation of the amortized amount for the net gain/loss for year 2008and journal entry are as follows:

Amortized net gain = ($300- $259) / 10 = $41/10 = $4.1

2008 OCI - net gain 4.1

Pension expense 4.1

Note: Amortization of net gain will reduce pension expense.

  1. The funded status of the pension plan on 12/31/2007:

2,591 (plan assets) – 2,501 (projected pension obligations) = $90 overfunding

1