Beale Management has a noncontributory, defined benefit pension plan. The compan
ID: 2777689 • Letter: B
Question
Beale Management has a noncontributory, defined benefit pension plan. The company provided the following information regarding its pension accounts for the fiscal year ended on December 31, 2015.
$ in millions
PBO Balance, January 1
$590
Service cost
70
Prior service cost
27
Plan Assets Balance, January 1
500
Actual return on plan assets
18
- There were no OCI balances related to pensions on January 1, 2015. At the end of 2015, Beale amended the pension formula creating a prior service cost of $27 million.
- Beale prepares its financial statements according to IFRS. The interest rate on high quality corporate bonds is 4%.
1/ Determine the net pension cost for 2015.
2/ Prepare the journal entry to record Beale’s pension expense, gains or losses, and prior service cost.
$ in millions
PBO Balance, January 1
$590
Service cost
70
Prior service cost
27
Plan Assets Balance, January 1
500
Actual return on plan assets
18
Explanation / Answer
Answer:
Under IFRS the amount of net pension cost to be recognized on the Income Statement is calculated as under
Net pension cost to be recognized on the Income Statement = Current service cost + Past service cost + Discount rate * (Beginning pension obligation - Beginning plan assets) - Actual return on plan assets
Net pension cost to be recognized on the Income Statement (in millions) = $ 70 + $ 27 + 4% ($ 590 - $ 500) - $ 18
Net pension cost to be recognized on the Income Statement (in millions) = $ 82.60 million
Journal Entries:
To record pension expense
Dr. Pension Expense Total $ 82.60 million
Dr. Plan Assets (expected return on plan assets) $ 18.00 million
Cr. PBO (Service Cost + Interest Cost) $ 73.60 million ($ 70 + $ 3.60) Cr. Prior Service Cost $ 27.00 million
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