Mila
Enterprises Ltd. provides the following information about its defined benefit
pension plan:
Balances
or Values at December ………………………………… 31,
2011
Accrued
benefit obligation, accounting purposes ………………..$2,737,000
Accrued
benefit obligation, funding purposes …………………….1,980,000
Vested
benefit obligation ………………………………………… 1,645,852
Fair
value of plan assets ………………………………………… 2,278,329
Unrecognized
past service cost ………………………………… 205,000
Unrecognized
net actuarial loss (1/1/11 balance, –0–) ………….. 45,680
Accrued
pension liability ………………………………………… 207,991
Other
pension plan data:
Service
cost for 2011 …………………………………………… 94,000
Past
service cost amortization for 2011 ………………………… 45,000
Actual
return on plan assets in 2011…………………………….. 130,000
Expected
return on plan assets in 2011 ………………………… 175,680
Interest
on Jan. 1, 2011 accrued benefit obligation ……………… 253,000
Funding
of plan in 2011 ………………………………………… 92,329
Benefits
paid …………………………………………………….. 140,000
Instructions
(a)
Prepare the required disclosures for Mila’s financial statements for the year
ended December 31, 2011, assuming the company is not a public company and does
not have broad public accountability.
(b)
Prepare the required disclosures that would be required if Mila’s common shares
were traded on the Toronto Stock Exchange.
(c)
Calculate the January 1, 2011 balances for the pension-related accounts.
(a) Note A: Significant
Accounting Policies
Employee
Benefit Plans
The
company accrues its obligations under employee benefit plans and the related
costs, net of plan assets. The company has adopted the following policies:
• The cost of pensions
earned by employees is actuarially determined using the accrued benefit method
prorated on service and management's best estimate of expected plan investment
performance, salary escalation, retirement ages of employees.
• For the purpose of
calculating the expected return on plan assets, those assets are valued at fair
value.
• Past service
costs from plan amendments are amortized on a straight-line basis over the
average remaining service period of employees active at the date of amendment.
• The excess of
the net actuarial gain (loss) over 10% of the greater of the benefit obligation
and the fair value of plan assets is amortized over the average remaining
service period of active employees. The average remaining service period of the
active employees covered by the pension plan is 16 (assumed) years (2010) and
15 (assumed) years (2011).
Note X: The company
sponsors a defined benefit pension plan covering the following group of
employees and providing the following benefits.
As of December 31,
2011, the net expense for the company’s pension plan is $216,320 ($94,000 +
$45,000 + $253,000 – $175,680). The present value of the accrued benefit
obligation at December 31, 2008, was $2,737,000 and the market related value of
the fund assets was $2,278,329 based on the fair market value of the assets on
that date. This results in an
underfunded obligation of $458,671.
Employer and employee contributions during 2011 amounted to $92,329 and
benefits paid amounted to $140,000. At December 31, 2008, the accrued pension
liability is $207,991.
Other information
to be disclosed: assumptions that
underlie the plan such as the discount rate, the rate of increase in
compensation levels, and the expected long-term rate of return on plan assets.
(b)
and (c)
Information about
the company’s defined benefit plan is as follows:
Accrued
benefit obligation:
Balance at beginning of year $2,530,000
Interest cost 253,000
Current service cost 94,000
Benefits paid
(140,000 )
Balance at end of year $2,737,000
Plan
assets:
Fair value at beginning of year $2,196,000
Actual return on plan assets 175,680
Employer contributions 92,329
Benefits paid (140,000 )
Fair value at end of year $2,324,009
Accrued pension liability:
Accrued benefit obligation $(2,737,000 )
Plan assets at fair value 2,324,009
Funded status – deficit (412,991)
Unrecognized past service cost ( 205,000
Unrecognized net actuarial loss 45,680
Accrued pension liability $ (162,311 )
The company’s net pension expense is as follows:
Current service cost $
94,000
Interest on accrued benefit obligation 253,000
Expected return on plan assets (175,680 )
Past service cost amortization 45,000
$ 216,320
(c) The beginning balances of
accrued benefit obligation, and pension assets are shown in part (b) on the
previous page.
Accrued pension liability:
Accrued benefit obligation, 1/1/11 $2,530,000
Plan assets at fair value, 1/1/11 2,196,000
Funded status liability, 1/1/11 334,000
Unrecognized past service cost, 1/1/11
250,000
Accrued pension liability, 1/1/11 $ 84,000
Alternatively,
Accrued pension liability, 12/31/11 $207,991
Pension expense (216,320 )
Employer contributions 92,329
Accrued pension liability, 1/1/11 $ 84,000
