Intermediate accounting 14e chapter 20 solution manual

Kieso, Intermediate Accounting, 14/e, Solutions Manual For Instructor Use Only 20-3 Level of Difficulty Time minutes E20-13 Computation of actual return, gains and losses, corridor test,

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Accounting for Pensions and Postretirement Benefits

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Brief

Concepts for Analysis

1 Basic definitions and

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ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Learning Objectives

Brief

1 Distinguish between accounting for the

employer’s pension plan and accounting

for the pension fund.

2 Identify types of pension plans and their

9 Describe the requirements for reporting pension

plans in financial statements.

8, 11, 12

*10 Identify the differences between pensions and

postretirement healthcare benefits.

22, 23, 24

13, 14

*11 Contrast accounting for pensions to accounting

for other postretirement benefits.

22, 23, 24

13, 14

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Level of Difficulty

Time (minutes)

E20-13 Computation of actual return, gains and losses, corridor test, and

pension expense.

E20-16 Amortization of accumulated OCI (G/L), corridor approach,

pension expense computation.

P20-5 Computation of pension expense, amortization of net gain or

loss-corridor approach, journal entries for 3 years.

P20-6 Computation of prior service cost amortization, pension

expense, journal entries, and net gain or loss.

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ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Level of Difficulty

Time (minutes)

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of life insurance) or benefit coverage to be provided (for example, up to $200 per day for hospitalization, or 80 percent of the cost of specified surgical procedures) Any postretirement benefit plan that is not a defined contribution postretirement plan is, for purposes of Subtopic 715–60, a defined benefit postretirement plan (Specified monetary amounts and benefit coverage are collectively referred to as benefits).

(c) The value, as of a specified date, of an amount or series of amounts payable or receivable thereafter, with each amount adjusted to reflect the time value of money (through discounts for interest) and the probability of payment (for example, by means of decrements for events such

as death, disability, or withdrawal) between the specified date and the expected date of payment (d) The cost of retroactive benefits granted in a plan amendment Retroactive benefits are benefits granted in a plan amendment (or initiation) that are attributed by the pension benefit formula to employee services rendered in periods before the amendment.

CE20-2

According to FASB ASC 715-30-35-43 (Defined-Benefit Plans – Pension – Discount Rates):

Assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled.

It is appropriate in estimating those rates to look to available information about rates implicit in current prices of annuity contracts that could be used to effect settlement of the obligation (including information about available annuity rates published by the Pension Benefit Guaranty Corporation) In making those estimates, employers may also look to rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits Assumed discount rates are used in measurements of the projected, accumulated, and vested benefit obligations and the service and interest cost components of net periodic pension cost.

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(c) Actual return on plan assets, if any

(d) Amortization of any prior service cost or credit included in accumulated other comprehensive income

(e) Gain or loss (including the effects of changes in assumptions), which includes, to the extent recognized (see paragraph 715-30-35-26), amortization of the net gain or loss included in accumulated other comprehensive income

(f) Amortization of any net transition asset or obligation existing at the date of initial application of this Subtopic and remaining in accumulated other comprehensive income.

2 The interest cost component

3 The expected return on plan assets for the period

4 The gain or loss component

5 The prior service cost or credit component

6 The transition asset or obligation component

7 The gain or loss recognized due to a settlement or curtailment.

(b) The total amount of the employer’s contributions paid, and expected to be paid, during the current fiscal year, if significantly different from amounts previously disclosed pursuant to paragraph 715- 20-50-1(g) Estimated contributions may be presented in the aggregate combining all of the following:

1 Contributions required by funding regulations or laws

2 Discretionary contributions

3 Noncash contributions.

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* *1 A private pension plan is an arrangement whereby a company undertakes to provide its retired

employees with benefits that can be determined or estimated in advance from the provisions of a document or from the company’s practices.

In a contributory pension plan the employees bear part of the cost of the stated benefits whereas

in a noncontributory plan the employer bears the entire cost.

* *2 A defined-contribution plan specifies the employer’s contribution to the plan usually based on a

formula, which may consider such factors as age, length of service, employer’s profit, or sation levels.

compen-A defined-benefit plan specifies a determinable pension benefit that the employee will receive at

a time in the future The employer must determine the amount that should be contributed now to provide for the future promised benefits.

In a defined-contribution plan, the employer’s obligation is simply to make a contribution to the

plan each year based on the plan formula The benefit of gain or risk of loss from assets

con-tributed to the plan is borne by the employee In a defined-benefit plan, the employer’s obligation

is to make sufficient contributions each year to provide for the promised future benefits Therefore, the employer is at risk to the extent that contributions will not be adequate to meet the promised benefits.

* *3 The employer is the organization sponsoring the pension plan The employer incurs the costs

and makes contributions to the pension fund Accounting for the employer involves: (1) allocating the cost of the pension plan to the proper accounting periods, (2) measuring the amount of pension obligation resulting from the plan, and (3) disclosing the status and effects of the plan in the financial statements.

The pension fund or plan is the entity which receives the contributions from the employer,

administers the pension assets, and makes the benefit payments to the pension recipients Accounting for the fund involves identifying receipts as contributions from the employer sponsor, income from fund investments, and computing the amounts due to individual pension recipients Accounting for the pension costs and obligations of the employer is the topic of this chapter; accounting for the pension fund is not.

* *4 When the term “fund” is used as a noun, it refers to assets accumulated in the hands of a

funding agency for the purpose of meeting pension benefits when they become due When the

term “fund” is used as a verb, it means to pay over to a funding agency (as to fund future pension

benefits or to fund pension cost).

* *5. An actuary’s role is to ensure that the company has established an appropriate funding pattern to meet its pension obligations, to make predictions and assumptions about future events and conditions that affect pension costs, and to assist the accountant in measuring facets of the pension plan that must be reported (costs, liabilities and assets) In order to determine the company’s pension obligation, the actuary must first determine the expected benefits that will be paid in the future To accomplish this requires the actuary to make actuarial assumptions, which are estimates

of the occurrence of future events affecting pension costs, such as mortality, withdrawals, ment and retirement, changes in compensation, and changes in discount rates to reflect the time value of money.

disable-* disable-* 6. In measuring the amount of pension benefits under a defined-benefit pension plan, an actuary must consider such factors as mortality rates, employee turnover, interest and earnings rates, early retirement frequency, and future salaries.

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Questions Chapter 20 (Continued)

* *7 One measure of the pension obligation is the vested benefit obligation This measure uses only

current salary levels and includes only vested benefits; that is, benefits the employee is already entitled to receive even if the employee renders no additional services under the plan.

A company’s accumulated benefit obligation is the actuarial present value of benefits attributed

by the pension benefit formula to service before a specified date and is based on employee service and compensation prior to that date The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels.

The projected benefit obligation is based on vested and nonvested services using future

salaries.

the employer to the pension fund in any period; pension funding serves as the basis for expense recognition under the cash basis.

Accrual-basis accounting recognizes pension cost as it is incurred and attempts to recognize

pension cost in the same period in which the company receives benefits from the services of its employees.

Frequently, the amount which an employer must fund for pension purposes during a particular period is unrelated to the economic benefits derived from the pension plan in that period Cash- basis accounting recognizes the amount funded as periodic pension cost and the amount funded may be discretionary and vary widely from year to year Funding is a matter of financial manage- ment, based on working capital availability, tax considerations, and other matters unrelated to accounting considerations.

* *9. The five components of pension expense are:

formula to employee service during the period.

time.

from plan assets and the change in the market value of plan assets.

amend-ment (including initiation of a plan).

plan assets resulting from experience different from that assumed or expected or from a change in an actuarial assumption.

Note to instructor: Regarding return on plan assets, the final component is expected rate of return We are assuming above that an adjustment is made to the actual return to determine expected return.

10 The service cost component of net periodic pension expense is determined as the actuarial

present value of benefits attributed by the pension benefit formula to employee service during the period The plan’s benefit formula provides a measure of how much benefit is earned and, therefore, how much cost is incurred in each individual period The FASB concluded that future compensation levels had to be considered in measuring the present obligation and periodic pension expense if the plan benefit formula incorporated them.

11 The interest component is the interest for the period on the projected benefit obligation outstanding

during the period The assumed discount rate should reflect the rates at which pension benefits could be effectively settled (settlement rates) Companies should look to rates of return on high- quality fixed-income investments currently available whose cash flows match the timing and amount of the expected benefit payments.

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employee service during the period Actuaries compute service cost at the present value of

the new benefits earned by employees during the year Prior service cost is the cost of retroactive

benefits granted in a plan amendment or initiation of a pension plan The cost of the retroactive benefits is the increase in the projected benefit obligation at the date of the amendment.

*13. When a defined-benefit plan is either initiated or amended, credit is often given to employees for years of service provided before the date of initiation or amendment The cost of these retroactive

benefits are referred to as prior service costs Employers grant retroactive benefits because they

expect to receive benefits in the future As a result, prior service cost should not be recognized as pension expense entirely in the year of amendment or initiation It is recognized as an adjustment

to other comprehensive income It should be recognized during the service periods of those employees who are expected to receive benefits under the plan Consequently, prior service cost is amortized over the service life of employees who will receive benefits and is a component of net periodic pension expense each period.

obligation Liability gains (resulting from unexpected decreases) and liability losses (resulting from unexpected increases) are recognized in other comprehensive income The accumulated gains and losses are then amortized, subject to complex amortization guidelines in other comprehensive income.

*15. If pension expense recognized in a period exceeds the current amount funded, a liability account

referred to as Pension Asset /Liability arises; the account would be reported either as a current or

long-term liability, depending on the ultimate date of payment.

If the current amount funded exceeds the amount recognized as pension expense, an asset

account referred to as Pension Asset /Liability arises; the account would be reported as a non-current

asset Because these assets are used to fund the pension obligation, noncurrent classification is appropriate.

*16. Computation of actual return on plan assets

Fair value of plan assets at end of period $10,150,000

Increase in fair value of assets 650,000 Deduct: Contributions to plan during the period $1,000,000

Add: Benefits paid during the period 1,400,000 400,000 Actual return on plan assets $ 1,050,000

*17 An asset gain occurs when the actual return on the plan assets is greater than the expected return on plan assets while an asset loss occurs when the actual return is less than the expected return on the plan assets A liability gain results from unexpected decreases in the pension obligation and a liability loss results from unexpected increases in the pension obligation.

or loss is too large when it exceeds the arbitrarily selected FASB criterion of 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets The excess gain or loss balance may be amortized using any systematic method but the amortization cannot be less than the amount computed using the straight-line method over the average remaining service-life of active employees expected to receive benefits.

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Questions Chapter 20 (Continued)

*19. The amount of the pension asset/liability to be reported on the company’s balance sheet is as follows:

Projected benefit obligation $(400,000) Pension plan assets 350,000 Pension liability $ (50,000)

In the financial statements, the company will report a pension liability of $50,000 This amount is also referred to as the funded status of the plan.

*20. The prior service cost arising in the year of the amendment (which increases the projected benefit obligation) is recognized by an offsetting debit to Other Comprehensive Income (PSC) In subsequent periods, the $9,150,000 will be amortized into periodic pension expense over the remaining service lives of the employees This approach is consistent with the treatment for actuarial gains and losses.

different than the actual return on plan assets) and (2) a liability gain or loss (when actuarial assumptions do not coincide with actual experiences related to computation of the projected benefit obligation.) In the period that they arise, these gains and losses are not recognized as part of pension expense, but are recognized as increases or decreases in other comprehensive income In subsequent periods, these amounts are amortized into periodic pension expense over the remaining service lives of the employees, using corridor amortization.

*22. (a) Other Comprehensive Income for 2013 is as follows:

Actuarial liability gain $10,000 Asset loss 14,000 Other comprehensive loss $ 4,000 (b) The computation of comprehensive income for 2013 is as follows:

Net income $25,000 Other comprehensive loss 4,000 Comprehensive income $21,000

*23. Multiple plans may be combined and shown as one amount on the balance sheet, only if they are

in the same under or overfunded position For example, if the company has two or more funded (overfunded) plans, the underfunded (overfunded) plans are combined and shown as one amount as a liability (asset) on the balance sheet The FASB rejected the alternative of combining all plans and representing the net amount as a single net asset or net liability The rationale: A company does not have the ability to offset the excess of one plan against underfunded obligations

under-of another plan Furthermore, netting all plans is inappropriate because under-offsetting assets and ties is not permitted under GAAP unless a right of offset exists.

liabili-*24. (a) A contributory plan is a pension plan under which employees contribute part of the cost.

In some contributory plans, employees wishing to be covered must contribute; in other contributory plans, employee contributions result in increased benefits.

pension benefit is no longer contingent on remaining in the service of the employer.

attributed by the pension benefit formula to employee services rendered in periods prior to the amendment.

(d) The years-of-service method is used to allocate prior service cost to the remaining years

of service of the affected employees Each year receives a fraction of the original cost with the fraction depicting the number of service-years received out of the total service-years to

be worked by the affected employees.

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by the corporation when these assets revert (often called asset reversion transactions) to the company The profession requires that these gains or losses be reported immediately in most situations.

provided to retirees, their spouses, dependents, and beneficiaries The other welfare benefits include life insurance offered outside a pension plan, dental care as well as medical care, eye care, legal and tax services, tuition assistance, day care, and housing activities.

*27. The FASB did not cover both pensions and healthcare benefits in the earlier pension accounting rules because of the significant differences between the two types of postretirement benefits These differences are listed in the following schedule:

Differences between Postretirement Healthcare Benefits and Pensions

Predictability Variables are reasonably predictable Utilization difficult to predict.

Level of cost varies geographically and fluctuates over time.

*28. The major differences between pension benefits and postretirement benefits are listed below: Differences between Postretirement Healthcare Benefits and Pensions

Predictability Variables are reasonably predictable Utilization difficult to predict.

Level of cost varies geographically and fluctuates over time.

Additionally, although healthcare benefits are generally covered by the fiduciary and reporting standards for employee benefit funds under ERISA, the stringent minimum vesting, participation, and funding standards that apply to pensions do not apply to healthcare benefits.

expected to be paid after retirement, while APBO (accumulated postretirement benefit obligation) is

the actuarial present value of future benefits attributed to employees’ services rendered to a particular date.

The components of postretirement expense are service cost, interest cost, expected return on plan assets, amortization of prior service cost, and gains and losses.

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 20-1

Service cost $ 333,000,000

Deduct: Contributions $120,000

Less: Benefits paid 200,000 (80,000)

Projected Benefit Obligation

Plan Assets

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Corridor (10% X $3,300,000) 330,000 Excess 135,000 Average remaining service life ÷ 7.5 Minimum amortization $ 18,000

Projected benefit obligation $2,600,000 Fair value of plan assets (2,000,000) Pension liability (classified short-term or

Prior service cost is reported as a component of accumulated other hensive income in stockholders’ equity.

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(a) Other Comprehensive Loss for 2012 is as follows:

Actuarial liability loss ($ 28,000) Unexpected asset gain 18,000

(b) The computation of comprehensive income for 2012 is as follows:

Pension Asset / Liability

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(b) Pension Expense 103,000

Cash 90,000

EXERCISE 20-2 (10–15 minutes)

Computation of pension expense:

Service cost $ 90,000

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Cost per service-year: $72,000 ÷ 24 = $3,000

Computation of Annual Prior Service Cost Amortization

Year

Total Service-Years

Cost Per Service-Year

Annual Amortization

Computation of Actual Return on Plan Assets

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Plan Assets

10%

Corridor

Accumulated OCI (G/L) (a)

Minimum Amortization

Pension expense $213,320 (b) Comprehensive income, 2012

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comprised of the following:

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General Journal Entries Memo Record Annual Pension Expense

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Service cost $ 56,000 Interest on projected benefit obligation

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(To record pension expense and

**$1,200,000 – $120,000

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Fair value of plan assets,

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

recorded projected benefit obligation (PBO):

PBO per memo records:

1/1/12 PBO $2,500

Add interest (10%) 250

Add service cost 400

plan assets and expected fair value:

12/31/12 actual fair value

Expected fair value

Add expected return

($1,700 X 10%) 170

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.

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EXERCISE 20-13 (Continued)

Beginning-of-the-Year

Plan Assets (FV)

10%

Corridor

Accumulated OCI (G/L)

Loss Amortization

-0-(d) Pension expense for 2012:

Service cost $ 400

Pension expense $ 480

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General Journal Entries

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The excess of the cumulative net gain or loss over the corridor amount is amortized by dividing the excess by the average remaining service period of employees The average remaining service period is computed as follows:

Expected future years of service

Amortization of Net (Gain) or Loss

(Gain) or Loss For the Year

Accumulated OCI (G/L) (a)

(a) As of the beginning of the year.

(b) The corridor is 10 percent of the greater of the projected benefit obligation or plan assets.

(c) $780,000 – $500,000 = $280,000; $280,000/14 = $20,000.

(d) $780,000 – $ 20,000 – $210,000 = $550,000.

(e) $550,000 – $424,000 = $126,000; $126,000/14 = $9,000.

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Amortization of Net (Gain) or Loss

(Gain) or Loss For the Year Ended

Plan Assets(a)

10%

Corridor(b)

Accumulated OCI (G/L)(a)

of (Gain) Loss

2012 $2,800,000 $1,700,000 $280,000 ( $ 0 $ –0–

2013 3,650,000 2,900,000 365,000 198,000 –0–(c)

(a) As of the beginning of the year.

(b) The corridor is 10 percent of the greater of the projected benefit obligation or plan assets.

(c) $365,000 is greater than $198,000; therefore, no amortization.

Service cost $ 400,000 Interest on projected benefit obligation

($2,800,000 X 9%) 252,000 Expected return on plan assets

($1,700,000 X 10%) (170,000)

Pension expense $ 602,000

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EXERCISE 20-17 (Continued)

Pension expense for 2013 is composed of the following:

Service cost $475,000 Interest on projected benefit obligation

($3,650,000 X 8%) 292,000 Expected return on plan assets

($2,900,000 X 10%) (290,000)

Pension expense $597,000

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General Journal Entries Memo Record

Annual Pension Expense

Pension Asset/ Liability

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(a) Below is the completed worksheet, indicating debit and credit entries.

General Journal Entries Memo Record Annual

Pension Expense Cash

OCI—Prior Service Cost

OCI—Gain/

Loss

Pension Asset/Liability

Plan Assets Balance, Jan 1, 2012 1,100 Cr 2,800 Cr 1,700 Dr Service cost 500 Dr 500 Cr.

Interest cost 280 Dr 280 Cr.

Actual return 220 Cr 220 Dr Unexpected gain 150 Dr 150 Cr.

Amortization of PSC 55 Dr 55 Cr.

Contributions 800 Cr 800 Dr Benefits 200 Dr 200 Cr Liability increase 365 Dr 365 Cr.

(c) Usher records no amortization of gain or loss in 2012, because there were

no gains or losses at the beginning of the year For 2013, the corridor is

$374.50 (10% of the PBO) Since the balance of the Other Comprehensive Income (G/L) at the beginning of 2013 ($215) is less than the corridor, there will be no gain or loss amortization in 2013 either.

*EXERCISE 20-19 (5–10 minutes)

Postretirement benefit expense is comprised of the following:

Service cost $45,000

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Annual Postretirement

Service cost $ 90,000 Interest on accumulated postretirement

See worksheet on next page.

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(a) Below is the completed worksheet, indicating debit and credit entries.

General Journal Entries Memo Record Entries Annual

Expense Cash

Other Comprehensive Income—PSC

Postretirement Asset/Liability APBO

Plan Assets Balance, Jan 1, 2012 290,000 Cr 410,000 Cr 120,000 Dr Service cost 56,000 Dr 56,000 Cr.

Interest cost 36,900 Dr 36,900 Cr.

Actual/Expected return 2,000 Cr 2,000 Dr Contributions 66,000 Cr 66,000 Dr Benefits 5,000 Dr 5,000 Cr Amortization of PSC 3,000 Dr 3,000 Cr

Journal entry for 2012 93,900 Dr 66,000 Cr 3,000 Cr 24,900 Cr.

Accumulated OCI, Dec 31, 2011 30,000 Dr Balance, Dec 31, 2012 27,000 Dr 314,900 Cr 497,900 Cr 183,000 Dr.

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TIME AND PURPOSE OF PROBLEMS

Problem 20-1 (Time 40–50 minutes)

Purpose—to provide a problem that requires preparation of a pension worksheet for two separate years’ pension transactions Included in the problem are an unexpected loss and prior service cost amortization.

Purpose—to provide a problem that requires preparation of a pension worksheet for three separate years’ pension transactions, three years of general journal entries for the pension plan, and reporting in financial statements for the third year.

Purpose—to provide a problem that requires computation of the annual pension expense, preparation of the pension journal entries, measurement of gains and losses and their amortization, and presentation in financial statements.

Purpose—to provide a problem that requires computation of pension expense and preparation of the pension journal entries.

Purpose—to provide a problem that requires computation of the pension expense for three separate years and the preparation of the pension journal entries for three years.

Purpose—to provide a problem that requires computation and amortization of prior service cost, computation of pension expense, and preparation of pension journal entries.

Purpose—to provide a problem that requires preparation of a worksheet.

Purpose—to provide a problem that requires preparation of a comprehensive worksheet for two years, covering all facets of pension accounting.

Purpose—to provide a problem that requires preparation of a worksheet for two years, journal entries, and indicates financial statement presentation.

Purpose—to provide a problem to understand elements of a pension worksheet.

Purpose—to provide a problem that requires preparation of a worksheet, journal entries, and indicates financial statement presentation (year 2 of P20-10).

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