Lacy Construction has a noncontributory, defined benefit pension plan. At Decemb
ID: 2471190 • Letter: L
Question
Lacy Construction has a noncontributory, defined benefit pension plan. At December 31, 2013, Lacy received the following information: Projected Benefit Obligation ($ in millions) Balance, January 1 $ 720 Service cost 96 Interest cost (5%) 36 Benefits paid (92 ) Balance, December 31 $ 760 Plan Assets ($ in millions) Balance, January 1 $ 590 Actual return on plan assets 61 Contributions 2013 96 Benefits paid (92 ) Balance, December 31 $ 655 The expected long-term rate of return on plan assets was 10%. There were no AOCI balances related to pensions on January 1, 2013. At the end of 2013, Lacy amended the pension formula creating a prior service cost of $48 million.
1. Determine Lacy's pension expense for 2013.
2. Record the pension expense.
3. Record the gain on plan assets.
4. Record the prior service cost.
5. Record the funding.
6. Record the payment of benefits.
Explanation / Answer
ANSWER:
The term pension expense refers to costs associated with pension plans that are reported on company's financial statement. Expenses associated with defined contribution plans are equal to contirbution made by the company in the current period.
Net Pension Expense = Interest cost + Service Cost - Expected return on Plan Assets + Amortisation of prior service costs + or - Amortisation of Acturial gains or losses
1.Lacy's Pension Expense of 2013 = $36 + $96 - ($590*10%)
= $36 + $96 - $59
= $73
2.Pension Expense:
Pension Expense a/c Dr $73
Plan Assets (Expected Return on Assets) a/c Dr $59
To Projected Benefit Obligation a/c $132
3. Gain on Plan Assets :
Plan Assets a/c Dr $2
To Gain - Other Comprehensive Income a/c $2
(Actual return on assets ($61) - Expected return ($59))
4. Prior Service Cost:
Prior Service Cost - Other Comprehensive Income a/c Dr $48
To Projected Benefit Obligation a/c $48
5. Funding:
Plan Assets a/c Dr $96
To Cash a/c $96
6. Payment of Benefits:
Projected Benefit Obligation a/c Dr $92
To Plan Assets (Retiree benefits) a/c $92
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