Pension data for Barry Financial Services Inc. include the following: ($ in 000s) Discount rate,...

Question:

Pension data for Barry Financial Services Inc. include the following: ($ in 000s)

Discount rate, 7%

Expected return on plan assets, 9%

Actual return on plan assets, 8%

Service cost, 2013 $ 330

January 1, 2013:

Projected benefit obligation 2,400

Accumulated benefit obligation 2,100

Plan assets (fair value) 2,500

Prior service cost--AOCI (2013 amortization, $35) 335

Net gain--AOCI (2013 amortization, $6) 350

There were no changes in actuarial assumptions.

December 31, 2013:

Cash contributions to pension fund, December 31, 2013 $265

Benefit payments to retirees, December 31, 2013 $290

Determine pension expense for 2013.

Prepare the journal entries to record pension expense, gains and losses (if any), funding, and retiree benefits for 2013.

Expense

Expense is the cost that is incurred through its operation by an organization for generating revenue over a period of time. A business can incur an expense that can be operating and non-operating, which is reported to profit and loss account.

Answer and Explanation:

1) Determine the amount of pension expense:

Particular Amount (?000)
Service cost $ 330
Add: Interest cost $168
Less: Expected return on plan assets ($250)
Add: Amortization prior service cost $35
Less: Amortization net gain ($6)
Pension expense $277

2) Determine the amount of plan asset:

Date Particular Debit Credit
XX Pension $277
Plan asset (Expected return) $250
Amortization net gain $6
To Amortization prior service cost $35
To Projected benefit obligation $498
( To Record pension expenses)

Note:

  • Pension is an expense and it is increased, therefore it is debited.
  • Plan asset is asset and it is increased, therefore it is debited.
  • Amortization net gain is a gain and it is increased, therefore it is debited.
  • Amortization prior service cost is an expense and it is decreased, therefore it is credited.
  • Projected benefit obligation is a liability and it is increased, therefore it is credited.

Date Particular Debit Credit
XX Loss -OCI $25
To Plan asset $25
( To Record loss-OCI)

Note

  • Loss - OCI is a loss and it is increased, therefore it is debited.
  • Plan asset is asset and it is decreased, therefore it is credited.

Date Particular Debit Credit
XX Plan asset $265
To Cash account $265
(To Record the plan asset)

Note

  • Plan asset is asset and it is increased, therefore it is debited.
  • Cash asset is asset and it is decreased, therefore it is credited.

Date Particular Debit Credit
XX To Projected benefit obligation $290
To Plan asset (Retire payment) $290
(To record the projected benefit obligation)

Note:

  • Projected benefit obligation is a liability and it is decreased, therefore it is debited.
  • Plan asset is asset and it is decreased, therefore it is credited.

Working note

1)

Calculating the interest cost

{eq}\begin{align*} \rm\text{Interest cost} &= \rm\text{Projected benefit obligation} \times \rm\text{Discount rate}\\ &= \$ 2,400 \times \dfrac{7}{100}\\ &= \$ 168 \end{align*} {/eq}

Calculating the Expected return on plan assets:

{eq}\begin{align*} \rm\text{Expected return} &= \rm\text{Plan asset} \times\rm\text{ Expected return on rate} + \rm\text{Loss}\\ &= \$ 2,500 \times \dfrac{9}{100}+ \$ 25\\ &= \$ 250 \end{align*} {/eq}

Calculating the loss:

{eq}\begin{align*} \rm\text{Loss} &=\rm\text { Plan assets} \times \rm\text{Expected return rate} - \rm\text{Plan assets } \times\rm\text{ Actual return rate}\\ &= \$ 2,500 \times \dfrac{9}{100} - \$ 2,500 \times \dfrac{8}{100}\\ &= \$ 25 \end{align*} {/eq}


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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