You
are the auditor of Beaton and Gunter Inc., the Canadian subsidiary of a
multinational engineering company that offers a defined benefit pension plan to
its eligible employees. Employees are permitted to join the plan after two years
of employment, and benefits vest two years after joining the plan. You have
received the following information from the fund trustee for the year ended
December 31, 2011:
Discount
rate ……………………………………………………. 5%
Expected
long-term rate of return on plan assets ……………….. 6.5%
Rate
of compensation increase …………………………………. 3.5%
Accrued
Benefit Obligation
Accrued
benefit obligation at Jan. 1, 2011 ……………………$11,375,000
Current
service cost ………………………………………………..425,000
Interest
cost ………………………………………………………..568,750
Benefits
paid ………………………………………………………756,250
Actuarial
loss for the period………………………………………..631,250
Plan
Assets
Market
value of plan assets at Jan. 1, 2011………………………9,062,500
Actual
return on plan assets, net of expenses……………………1,125,000
Employer
contributions……………………………………………493,750
Employee
contributions…………………………………………….81,250
Benefits
paid………………………………………………………756,250
Other
relevant information:
1.
The accrued pension liability on January 1, 2011, is $1,601,875.
2.
There is an unrecognized past service cost of $1,991,875 on January 1, 2011.
3.
There is an unrecognized net actuarial gain of $1,281,250 on January 1, 2011.
4.
Employee contributions to the plan are withheld as payroll deductions, and are
remitted to the pension trustee along with the employer contributions.
5.
The average vesting period for all employees whose pension has not vested is 20
years.
6.
The EARSL is 20 years.
Instructions
(a)
Prepare a pension work sheet for the company.
(b)
Prepare the employer’s journal entries to reflect the accounting for the
pension plan for the year ended December 31, 2011.
(c)
Prepare a schedule reconciling the plan’s funded status with the pension
amounts reported on the December 31, 2011 balance sheet.
(d)
Assume that interest rates are falling. Explain what effect this is likely to
have on the funded status of the plan.
(e)
Discuss any options available to Beaton and Gunter Inc. in accounting for the
actuarial gains or losses.
(a) The pension work sheet for Beaton and Gunter
Inc. for the year ended December 31, 2011 is presented on the following page.
It is assumed that the company is following IFRS because it is a subsidiary of
a multinational company that is likely a public company.
(b) The journal entries required to reflect the
accounting for Beaton and Gunter Inc.’s pension plan for the year ended
December 31, 2011, are as follows:
Pension
Expense........................ 415,843
Accrued
Pension Asset/Liability.... 415,843
Accrued
Pension Asset/Liability*....... 493,750
Employee
Pension Contributions Payable* 81,250
Cash............................... 575,000
* When the
payroll deductions were made, the company paid out a lower amount of cash to
the employees as it withheld the amounts for the employee contributions to the
pension plan. It is assumed that the payroll entry, therefore, resulted in a
previous net debit to Cash of $81,250 and a credit to Employee Pension
Contributions Payable of $81,250.
(c) Pension
Reconciliation Schedule—2011
Accrued
benefit obligation $(12,243,750)
Plan assets
at fair value 10,006,250
Accrued
benefit obligation in excess of plan
assets (funded status) (2,237,500)
Unrecognized
past service cost ( 1,892,281
Unrecognized
net (gain) or loss (1,178,749)
Accrued
pension liability $(1,523,968)
(d) If interest rates in the economy are falling
this will translate to a lower discount rate being used to calculate the ABO.
This will increase the ABO and therefore also increase the amount by which the
pension fund is underfunded.
(e) The Company can elect to recognize more than
the corridor amount of amortization, as long as the approach is used
consistently and is rational. The company may also recognize 100% of the
actuarial gains and losses as they are incurred. If this alternative is selected, the company
has the choice of recognizing the actuarial gains or losses as a determinant of
OCI.
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Beaton
and Gunter 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
Past Service
Cost
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Unreco-gnized Net
Gain
or Loss
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A
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Balance, Jan. 1, 2011
(a) Service cost
(b) Interest cost
(c) Expected return
(d) Amortization of PSC
(e) Amort. of act. gain
(f) Funding
(g) Employee contr.
(h) Benefits
(i) Act. gain on assets
(j) Liability loss
Expense entry, 12/31/11
Funding entry
Balance, Dec. 31, 2011
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425,000 Dr.
568,750 Dr.
589,063 Cr.
99,594 Dr.
7,188 Cr.
81,250 Cr.
415,843 Dr.
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575,000 Cr.
81,250 Dr.
00,000 Dr.
493,750 Cr.
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1,601,875 Cr.
415,843 Cr.
493,750 Dr.
1,523,968 Cr.
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11,375,000 Cr.
425,000 Cr.
568,750 Cr.
756,250 Dr.
631,250 Cr.
0 Cr.
12,243,750 Cr.
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9,062,500 Dr.
589,063 Dr.
575,000 Dr.
756,250 Cr.
535,937 Dr.
10,006,250 Dr.
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1,991,875 Dr.
99,594 Cr.
0,
1,892,281 Dr.
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1,281,250 Cr.
7,188 Dr.
535,937 Cr.
631,250 Dr.
1,178,749 Cr.
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(c) $9,062,500 X 6.5% = $589,063
(d) $1,991,875 / 20 years = $99,594
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(e)
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Year
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1/1 ABO
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1/1 Plan Assets
(Market)
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10%
Corridor
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Unrecognized Net
Loss, 1/1
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Min.Amort. of
Loss for 2011
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2011
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$11,375,000
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$9,062,500
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$1,137,500
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$1,281,250
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*$7,188*
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*$1,281,250 –
$1,137,500 = $143,750; $143,750 ÷ 20 = $7,188.
(f) $493,750 + $81,250 = $575,000
(i) $1,125,000 – $589,063 = $535,937
