The
following facts apply to the pension plan of Yorke Inc. for the year 2011:
Plan
assets, Jan. 1, 2011 ………………………………………………..
$490,000
Accrued
benefit obligation, funding basis, Jan. 1, 2011 ………………. 389,000
Accrued
benefit obligation, accounting basis, Jan. 1, 2011 ………….. 490,000
Interest
and expected earnings rate …………………………………… 8.5%
Annual
pension service cost …………………………………………. 40,000
Contributions
(funding) ………………………………………………. 30,000
Actual
return on plan assets …………………………………………… 49,700
Benefits
paid to retirees ……………………………………………….. 33,400
Instructions
(a)
Calculate pension expense for the year 2011, and provide the entries to
recognize the pension expense and funding for the year assuming that the
deferral and amortization approach is adopted.
(b)
Discuss what adjustments would need to be made to your calculation in part (a)
if the immediate recognition approach were adopted instead. Provide
calculations wherever possible.
(a)
Yorke Inc.
Pension Work Sheet—2011
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General Journal Entries
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Memo Record
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Items
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Annual
Pension
Expense
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Cash
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Accrued Pension
Liability
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Accrued
Benefit
Obligation
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Plan
Assets
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Unreco-gnized
Gain (Loss)
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Balance,
January 1, 2011
(a) Service cost
(b) Interest cost
(c) Expected return
(d) Gain on plan assets
(e) Contributions
(f) Benefits
Journal
entry, December 31
Balance,
Dec. 31, 2011
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40,000 Dr.
41,650 Dr.
41,650 Cr.
00,000 Dr.
40,000 Dr.
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30,000 Cr.
00,000 Dr.
30,000 Cr.
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10,000 Cr.
10,000 Cr.
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490,000 Cr.
40,000 Cr.
41,650 Cr.
33,400 Dr.
000,000 Dr.
538,250 Cr.
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490,000 Dr.
41,650 Dr.
8,050 Dr.
30,000 Dr.
33,400 Cr.
000,000 Dr.
536,300 Dr.
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8,050 Cr.
0,000 8,050 Cr.
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(b) $41,650 = $490,000 X .085.
(c) $41,650 = $490,000 X .085.
(d) $8,050 = $49,700 – $41,650.
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Yorke Inc.
Pension Work Sheet—2008
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General Journal Entries
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Memo Record
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1.1.1.1
Items
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Annual
Pension
Expense
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Cash
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Actuarial Gain in OCI
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Pension Funded
Status
Liability
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Accrued
Benefit
Obligation
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Plan
Assets
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Balance,
January 1, 2008
(a) Service cost
(b) Interest cost
(c) Expected return
(d) Gain on plan assets
(e) Contributions
(f) Benefits
Expense
entry,
Contribution
entry
Entry
for change in OCI
Balance,
Dec. 31, 2008
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40,000 Dr.
41,650 Dr.
41,650 Cr.
00,000 Dr.
40,000 Dr.
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30,000 Cr.
00,000 Dr.
30,000 Cr.
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8,050 Cr.
8,050 Cr.
8,050 Cr.
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40,000 Cr.
30,000 Dr.
8,050 Dr.
1,950 Cr.
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490,000 Cr.
40,000 Cr.
41,650 Cr.
33,400 Dr.
000,000 Dr.
538,250 Cr.
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490,000 Dr.
41,650 Dr.
8,050 Dr.
30,000 Dr.
33,400 Cr.
000,
000 Dr.
536,300 Dr.
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(b) $41,650 = $490,000 X .085.
(c) $41,650 = $490,000 X .085.
(d) $8,050 = $49,700 - $41,650.
Pension expense
2011:
Service cost $
40,000
Interest on accrued benefit obligation
(8.5%
X $490,000) 41,650
Expected return on plan assets (8.5% X
$490,000) (41,650)
$ 40,000
Pension Expense.......................... 40,000
Accrued
Pension Asset/Liability...... 40,000
Accrued Pension Asset/Liability.......... 30,000
Cash................................. 30,000
These
calculations could be completed through a worksheet as shown on the previous
page.
(b) If the immediate
recognition approach was adopted, the following changes to the calculation part
would be required:
1.
The accrued benefit obligation beginning balance
would be $389,000 as opposed to $490,000.
2.
The change in the ABO beginning balance would result
in a change in the interest expense from $41,650 to $33,065 ($389,000 x 8.5%)
3.
The pension expense and plan assets would reflect
the actual return on plan assets of $49,700 as opposed to the expected return
of $41,650.
