EXERCISE
20-8
Corridor and Minimum
Loss Amortization
|
Year |
Projected Benefit
Obligation (a) |
Plan Asset Value (a) |
10% Corridor |
Cumulative
Unrecognized Net Loss (a) |
Minimum Amortization
of Loss |
|
2003 |
$2,000,000 |
$1,900,000 |
$200,000 |
$ 0 |
$ 0 |
|
2004 |
2,400,000 |
2,500,000 |
250,000 |
280,000 |
3,000 (b) |
|
2005 |
2,900,000 |
2,600,000 |
290,000 |
367,000 (c) |
6,417 (d) |
|
2006 |
3,600,000 |
3,000,000 |
360,000 |
370,583 (e) |
882 (f) |
(a) As of the beginning of the year.
(b) ($280,000 – $250,000) ÷ 10 years = $3,000
(c) $280,000 – $3,000 + $90,000 = $367,000
(d) ($367,000 – $290,000) ÷ 12 years = $6,417
(e) $367,000 – $6,417 + $10,000 = $370,583
(f) $370,583 – $360,000) ÷ 12 years = $882
EXERCISE
20-9
(a) Note to financial statements disclosing
components of 2005 pension expense:
Note X: Net pension expense for 2005 is composed of
the following components of pension cost:
Service cost $ 94,000
Interest cost 253,000
Expected return on plan assets
(175,680)
Prior service cost amortization 45,000
Net pension expense $216,320
(b) The following schedule reconciles the
funded status of the plan with the amount reported in the balance sheet at
December 31, 2005:
Projected
benefit obligation $(2,737,000)
Plan assets at fair value 2,278,329
Projected benefit obligation in excess of plan
assets (funded status) (458,671)
Unrecognized prior service cost ( 205,000
Unrecognized net loss 45,680
Accrued
pension cost liability $ (207,991)
EXERCISE 20-11
(a) Additional
Liability Computations
|
|
December 31 |
|
|
|
2004 |
2005 |
|
Accumulated benefit
obligation |
$(260,000) |
$(370,000) |
|
Fair value plan of assets |
( 255,000 |
300,000 |
|
Minimum liability |
(5,000) |
(70,000) |
|
Prepaid (accrued) pension cost |
30,000 |
(45,000) |
|
Additional liability to report |
(35,000) |
(25,000) |
|
Less:
Beginning additional liability |
— |
(35,000) |
|
Additional liability to record |
$ (35,000) |
$ 10,000 |
(b) 2004
Intangible Asset—Deferred Pension Cost........................................................................................ 35,000
Additional Pension Liability................................................................................................................ 35,000
2005
Additional Pension Liability................................................................................................................. 10,000
Intangible Asset—Deferred Pension
Cost....................................................................................................................................................... 10,000
EXERCISE
20-14 (35-45 minutes)
(a) Actual Return = (Ending – Beginning) –
(Contributions – Benefits)
Fair value of plan assets,
December 31, 2005 $2,620
Deduct:
Fair value of plan assets,
January 1, 2005 1,700
Increase in fair value of plan assets 920
Deduct: Contributions $800
Less benefits
paid 200 600
Actual return on plan assets in 2005 $ 320
(b) Computation of pension liability gains
and losses and pension asset gains and losses.
1. Difference
between 12/31/05 actuarially computed PBO and 12/31/05 recorded projected
benefit obligation (PBO):
PBO at end of year $3,645
PBO per memo records:
1/1/05 PBO $2,800
Add interest (10%) 280
Add service cost 400
Less benefit payments (200) 3,280
Liability loss $365
2. Difference
between actual fair value of plan assets and expected fair value:
12/31/05 actual fair value
of plan assets 2,620
Expected fair value
1/1/05 fair value of plan assets 1,700
Add expected return
($1,700 X 10%) 170
Add contribution 800
Less benefits paid (200) 2,470
Asset gain
(150)
Unrecognized net (gain) or loss $215
(c) Because no unrecognized net gain or
loss existed at the beginning of the period, no amortization occurs.
Therefore, the corridor calculation is not needed. An example of how the
corridor would have been computed is illustrated below, assuming an unrecognized
net loss of $240.
Beginning-of-the-Year
|
|
Year |
PBO |
Plan Assets (FV) |
10% Corridor |
Unrecognized Net Loss |
Loss Amortization |
|
|
2005 |
$2,800 |
$1,700 |
$280 |
$240 |
–0– |
(d) Prior
service cost amortization: $1,100 X
1/20 = $55 per year.
(e) Minimum liability computation:
Accumulated benefit obligation, 12/31/05 $(2,730)
Plan assets at fair value 2,620
Minimum liability (110)
Prepaid pension cost, 12/31/05
($800 – $565) 235
Additional liability $ (345)
(f) Pension expense for 2005:
Service cost $400
Interest cost ($2,800 X 10%) 280
Actual return on plan assets [from (a)]
(320)
Unexpected gain [from (b)2.] 150
Amortization of prior service cost 55
Pension expense for 2005 $565
(g) Reconciliation schedule:
Projected benefit obligation $(3,645)
Fair value of plan assets 2,620
Funded status (1,025)
Unrecognized prior service cost
($1,100 – $55) (1,045
Unrecognized net (gain) or loss 215
Prepaid/accrued pension cost ( 235
Adjustment required to recognize
minimum liability (345)
Accrued pension cost
recognized in the balance sheet $ (110)
EXERCISE
20-15
Journal
entries 12/31/05
1. Pension Expense................................................................................................................................................. 565
Prepaid/Accrued Pension Cost........................................................................................................................ 235
Cash................................................................................................................................................................ 800
2. Pension Intangible Asset.................................................................................................................................. 345
Additional Pension Liability....................................................................................................................... 345
Reconciliation Schedule
Projected benefit obligation $(3,645)
Fair value of plan assets 2,620
Funded status (1,025)
Unrecognized prior service cost (1,045
Unrecognized net (gain) or loss 215
Prepaid pension cost ( 235
Additional liability (345)
Pension liability reported $ (110)
EXERCISE
20-20 (25-35 minutes)
The excess of the cumulative unrecognized 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:
= Average remaining
service life per employee
Average remaining service life per employee = 
= 14.
Amortization of
Unrecognized Net (Gain) or Loss
|
(Gain) or Loss For the
Year Ended December 31, |
Amount |
|
2004 |
(300,000 |
|
2005 |
(480,000 |
|
2006 |
(210,000) |
|
2007 |
(290,000) |
|
Year |
Projected
Benefit Obligation (a) |
Plan
Assets (a) |
Corridor
(b) |
Cumulative
Unrecognized (Gain) Loss (a) |
Minimum Amortization of (Gain) Loss |
|
2004 |
$4,000,000 |
$2,400,000 |
$400,000 |
$ 0 |
$ 0 |
|
2005 |
4,520,000 |
2,200,000 |
452,000 |
300,000 |
0 |
|
2006 |
4,980,000 |
2,600,000 |
498,000 |
780,000 |
20,143 (c) |
|
2007 |
4,250,000 |
3,040,000 |
425,000 |
549,857 (d) |
8,918 (e) |
(a) As of the beginning of the year.
(b) The corridor is 10 percent of the greater
of projected benefit obligation or plan assets.
(c) $780,000 – $498,000 = $282,000;
$282,000/14 = $20,143.
(d) $780,000 – $20,143 – $210,000 = $549,857.
(e) $549,857 – $425,000 = $124,857;
$124,857/14 = $8,918.
|
PROBLEM 20-2 |
Work
sheet computations:
(b) $20,000
= $200,000 X 10%
(d) $3,000 = ($200,000 X 10%) – $17,000;
expected return exceeds actual return.
(i) $38,200
= $382,000 X 10%
(j) Expected
return and actual return are the same.
(o) $42,280
= $422,800 X 10%
(q) $2,450 = ($264,500 X 10%) – $24,000;
expected return exceeds actual return.
(Note : Because the amount of unrecognized net gain
or loss does not exceed 10% of the larger of the projected benefit obligation
or the fair value of the plan assets at the beginning of any of the years, no
amortization is recorded. The minimum liability could not be computed in this
problem because no accumulated benefit obligation was given for any of the
years.)
(b) Journal
entries:
2005
Pension Expense.................................................................................................................................... 16,000
Cash........................................................................................................................................................ 16,000
2006
Pension Expense.................................................................................................................................... 89,700
Cash........................................................................................................................................................ 40,000
Accrued Pension Cost......................................................................................................................... 49,700
2007
Pension Expense.................................................................................................................................... 83,430
Cash........................................................................................................................................................ 48,000
Accrued Pension Cost......................................................................................................................... 35,430
(c) Reconciliation
Schedule 2005
Projected benefit obligation $(222,000)
Fair value of plan assets 219,000
Projected
benefit obligation in excess of plan assets
(funded status) (3,000)
Unrecognized net (gain) or loss 3,000
Prepaid/accrued pension cost $ 0
Reconciliation
Schedule 2006
Projected benefit obligation $(422,800)
Fair value of plan assets 264,500
Projected benefit obligation in excess of plan assets
(funded status) (158,300)
Unrecognized net (gain) or loss ( 3,000
Unrecognized prior service cost 105,600
Accrued
pension cost $ (49,700)
Reconciliation
Schedule 2007
Projected
benefit obligation $(520,000)
Fair value of plan assets 315,500
Projected benefit obligation in excess of plan assets
(funded status) (204,500)
Unrecognized net (gain) or loss ( 55,370
Unrecognized prior service cost 64,000
Accrued
pension cost $ (85,130)
|
PROBLEM 20-4 |
(a) Computation
of pension expense:
|
|
2004 |
2005 |
|
Service cost |
($ 60,000 |
$ 90,000 |
|
Interest cost ($600,000 X .09) and ($700,000 X
.09) |
54,000 |
63,000 |
|
Actual (expected) return on plan assets |
(24,000) |
(30,000) |
|
Amortization of prior service cost |
10,000 |
12,000 |
|
Pension expense |
($100,000 |
($135,000 |
|
(b) |
2004 |
2005 |
||
|
Pension Expense.......................................................................... |
100,000 |
|
135,000 |
|
|
Cash..................................................................................... |
|
110,000 |
|
120,000 |
|
Prepaid/Accrued Pension Cost....................................... |
10,000 |
|
|
15,000 |
(c) Minimum
liability computation:
|
|
2004 |
2005 |
|
Accumulated benefit obligation |
$(500,000) |
$(550,000) |
|
Fair value of plan assets |
380,000 |
465,000 |
|
Minimum liability |
(120,000) |
(85,000) |
|
Prepaid (accrued) pension cost ($40,000 – $10,000) and ($30,000 +
$15,000) |
(30,000) |
(45,000) |
|
Additional liability to report |
(90,000) |
(40,000) |
|
Less:
Beginning additional liability |
(50,000) |
(90,000) |
|
Additional liability to record |
$ (40,000) |
$
貞 50,000 |
(d) 2004
Intangible Asset—Deferred Pension Cost.......................................................................................... 40,000
Additional Pension Liability.................................................................................................................. 40,000
2005
Additional Pension Liability.................................................................................................................. 50,000
Intangible Asset—Deferred Pension
Cost........................................................................................................................................................ 50,000
|
PROBLEM 20-7 |
(i) Computation
of minimum liability
Accumulated benefit obligation 12/31/06 $(671,000)
Plan assets at fair value 12/31/06 621,000
Unfunded accumulated benefit
(minimum liability) (50,000)
Prepaid (accrued) pension cost
(balance 12/31/06) (40,100)
Additional liability required (9,900)
Unrecognized prior service cost 56,000
Contra equity charge $ 0
Farrey
Corp.
Pension
Work Sheet—2006
|
|
Memo
Entries |
|||
|
Item |
Projected Benefit Obligation |
Plan
Assets |
Unrecognized Prior Service Cost |
Unrecognized Net Gain or Loss |
|
Balance,
Jan. 1, 2006 |
725,000 Cr. |
520,000 Dr. |
81,000 Dr. |
91,000 Dr. |
|
(a) Service cost |
108,000
Cr. |
|
|
|
|
(b) Interest cost |
65,250
Cr. |
|
|
|
|
(c) Actual return |
|
48,000 Dr. |
|
|
|
(d) Unexpected loss |
|
|
|
7,000 Dr. |
|
(e) Amortization of PSC |
|
|
25,000 Cr. |
|
|
(f) Amortization of loss |
|
|
|
1,850 Cr. |
|
(g) Contributions |
|
138,000 Dr. |
|
|
|
(h) Benefits |
85,000
Dr. |
85,000 Cr. |
|
|
|
(i) Minimum liability adjustment |
|
|
|
|
|
Journal
entry |
__________ |
__________ |
________ |
________ |
|
Balance,
Dec. 31, 2006 |
813,250 Cr. |
621,000 Dr. |
56,000 Dr. |
96,150 Dr. |
|
PROBLEM 20-8 |
Work
sheet computations:
(b) $65,000
= $650,000 X 10%.
(d) $5,000 = ($410,000 X 10%) – $36,000;
expected return exceeds ac-tual return.
(i) (r) Minimum Liability Computation:
|
|
December 31 |
|
|
|
2005 |
2006 |
|
Accumulated benefit obligation |
$(721,800) |
$(789,000) |
|
Plan assets at fair value |
486,500 |
574,500 |
|
Unfunded accumulated benefit
obligation (minimum liability) |
(235,300) |
(214,500) |
|
Prepaid (accrued) pension cost |
(142,000) |
(207,948) |
|
Additional liability |
(93,300) |
(6,552) |
|
Unrecognized prior service cost |
90,000 |
35,000 |
|
Contra equity charge |
$ (3,300) |
$ 0 |
(k) $81,050
= $810,500 X 10%.
(m) $12,350 = ($486,500 X 10%) – $61,000;
actual return exceeds expected return.
(q) 2006
Corridor Test:
Unrecognized
net (gain) or loss at beginning of year $92,000
10%
of larger of PBO or fair value of plan assets 81,050
Amortizable
amount $10,950
2006
amortization ($10,950 ÷ 20 years) $548
(b) 2005
Pension Expense.................................................................................................................................... 134,000
Cash........................................................................................................................................................... 72,000
Prepaid/Accrued Pension Cost............................................................................................................. 62,000
Intangible Asset—Deferred Pension Cost........................................................................................
77,700
Excess of Additional Pension Liability Over
Unrecognized
Prior Service Cost..................................................................................................... 3,300
Additional Pension Liability.................................................................................................................. 81,000
2006
Pension Expense.................................................................................................................................. 146,948
Cash........................................................................................................................................................ 81,000
Prepaid/Accrued Pension Cost.......................................................................................................... 65,948
Additional Pension Liability..............................................................................................................
86,748
Intangible Asset—Deferred Pension Cost...................................................................................... 83,448
Excess of Additional Pension Liability
Over
Unrecognized Prior Service Cost.................................................................................................. 3,300*
*In 2005,
the charge for $3,300 would be reported as a reduction of Other Comprehensive
Income and also as a component of Accumulated Other Comprehensive Income. In
2006, Other Comprehensive Income would be increased $3,300 and the balance in
Accumulated Other Comprehensive Income would be zero related to this
component.
(c) Pension
Reconciliation Schedule—2006
Projected benefit obligation $(896,550)
Plan assets at fair value 574,500
Projected benefit obligation in excess of plan assets
(funded status) (322,050)
Unrecognized prior service cost ( 35,000
Unrecognized net (gain) or loss 79,102
Prepaid/accrued
pension cost (207,948)
Adjustment
required to recognize minimum liability (6,552)
Accrued pension cost liability recognized in the
balance sheet $(214,500)
|
*PROBLEM 20-10 |