Wolverine Company maintains a defined benefit pension with First Hartford Trust.
ID: 2508968 • Letter: W
Question
Wolverine Company maintains a defined benefit pension with First Hartford Trust. Below are the balances reported by First Hartford on January 1, 2017:
Plan Benefit Obligation $520,000
Plan Assets $650,000
At the beginning of 2017, First Hartford informed Wolverine that its assumptions for the last five years have been off slightly, and they need to deposit an additional $150,000. Other matters for 2017 are:
The settlement rate is 10%.
The current service cost is $40,000.
Expected earnings are 8%.
Actual earnings are $62,000.
Prior service cost amortization is $25,000.
First Hartford Trust paid retirement benefits of $35,000.
Wolverine funded the plan $80,000.
Prepare the pension expense entry for 2017.
Determine the balance in the Pension Asset/Liability account stating if it is an asset or a liability.
Explanation / Answer
Solution: Requirement 1 Date Account title Debit Credit Pension expense $ 48,000.00 Pension Asset $ 32,000.00 (80,000-48,000) Cash $ 80,000.00 Calculation of pension expense Service cost $ 40,000.00 Add: Interest cost $ 52,000.00 ($520,000*10%) Less: Return on plan asset $ (52,000.00) Add: Prior service cost amortization $ 25,000.00 Less: Acturial loss to be recognised (Due to assumption of acturial) $ (17,000.00) (150,000-65,000)/5 Pension expense $ 48,000.00 Note: 1 Amortization of acturial loss would be as follows (corridor method) 10% of Projected benefit obligation Or 10% of Plan asset whichever is higher $ 52,000.00 $ 65,000.00 $ 65,000.00 Acturial loss to be recognised (Due to assumption of acturial) =(150000-65000)/5 $ 17,000.00 Requirement 2 Balance of pension asset $ 32,000.00
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