Chapter 19: Post-Employment Benefits
Suggested Time
Case
19-1
19-2
19-3
Propulsion XT Limited
Candida Limited
Solace Limited .................................................
Technical Review
TR19-1 Defined Contribution Plan ..........................….
TR19-2 Defined Benefit Plan:
Assets and Defined Benefit Obligation ......................
TR19-3 Defined Benefit Plan; Element 1 .....................
TR19-4 Defined Benefit Plan; Element 2 .....................
TR19-5 Defined Benefit Plan; Element 3 .....................
TR19-6 Defined Benefit Plan; Reporting ......................
TR19-7 Impact of ceiling asset test ...............................
TR19-8 Net interest with asset ceiling amount .............
TR19-9 Net interest when contribution made during the year
TR19-10 ASPE – calculation of pension expense ...............
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Assignment A19-1 Pension Terms ........................................................................
A19-2 Defined Contribution Plan .....................................................
A19-3 Defined Contribution Plan .....................................................
A19-4 Defined Contribution Plan ..................................................
A19-5 Defined Benefit Plan; Variables ............................................
A19-6 Defined Benefit Plan; Actuarial Cost Methods......................
A19-7 Defined Benefit Plan; Actuarial Cost Methods (*W) ............
A19-8 Defined Benefit Plan; Three Elements ..................................
A19-9 Defined Benefit Plan; Three Elements...................................
A19-10 Defined Benefit Plan; Three Elements...................................
A19-11 Defined Benefit Plan; Three Elements (*W) .........................
A19-12 Defined Benefit Plan; Three Elements...................................
A19-13 Defined Benefit Plan; Three Elements ..................................
A19-14 Defined Benefit Plan; Three Elements ..................................
A19-15 Defined Benefit Plan; Three Elements; Asset Ceiling ...........
A19-16 Pension Spreadsheet...............................................................
A19-17 Pension Spreadsheet ..............................................................
A19-18 Pension Spreadsheet ..............................................................
A19-19 Pension Spreadsheet ..............................................................
A19-20 Pension Spreadsheet (*W) .....................................................
A19-21 Other Post-Employment Benefits ..........................................
A19-22 Other Post-Employment Benefits ..........................................
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-1
A19-23 Other Post-Employment Benefits; Spreadsheet .....................
A19-24 Defined Benefit Plan; Disclosure...........................................
A19-25 ASPE; Defined Benefit Plan ..................................................
A19-26 ASPE; Defined Benefit Plan .................................................
A19-27 ASPE; Defined Benefit Plan ................................................
A19-28 ASPE; Defined Benefit Plan (*W) ........................................
A19-29 ASPE; Defined Benefit Plan .................................................
A19-30 Comprehensive; Chapters 12, 13, 14, 15, 18, 19 ...................
19-A1 to 19-A5 Actuarial cost methods; material posted on Connect
19-A1 Pension funding calculation (Connect) ............
19-A2 Actuarial cost methods (Connect) ...................
19-A3 Actuarial cost methods (Connect) ...................
19-A4 Explain, pension calculations (Connect)..........
19-A5 Actuarial cost methods (Connect) ....................
*W
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The solution to this assignment is on the text website, Connect.
This solution is marked WEB.
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19-2
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Cases
Case 19-1 Propulsion XT Limited
Overview
Propulsion XT (PXTL) is a large private company that complies with ASPE, but is
evaluating the reporting implications of IFRS. The company has a covenant with respect
to total debt-to-equity, as well as a covenant limiting common dividends. The company
has a defined benefit pension plan that is underfunded by $1,743 (million). Alternatives,
including re-examination of major assumptions and replacing the pension fund with a
defined contribution plan, are being considered.
Issues
1. Implications of IFRS
2. Assumptions associated with defined benefit plan
3. Implications of move to a defined contribution plan.
Analysis and Conclusions
1. Implications of IFRS
The major difference between IFRS and ASPE in financial reporting for defined
benefit plans is that under ASPE actuarial and experience losses are recorded in
earnings, and then retained earnings, but under IFRS are part of other
comprehensive income and then accumulated other comprehensive income. On
the balance sheet, this would represent a transfer of the cumulative $2,011
actuarial losses from retained earnings to AOCI. See the highlighted accounts in
Exhibit 1. The shift improves the retained earnings balance, but does not change
overall equity and would not alter ratios in any way.
There are a myriad of other differences in the details between ASPE and IFRS
with respect to pensions. A detailed review would be required to see if there are
any other implications of a switch to IFRS. Additional disclosure would be needed
under IFRS.
In general, IFRS has a broader range of liabilities to be recognized, because
constructive liabilities must be included on the SFP. This would be a concern for
the debt-to-equity ratio and should be carefully evaluated in any decision about a
switch to IFRS.
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19-3
2. Assumptions associated with defined benefit plan.
The two major classifications of assumptions associated with defined benefit
plans are demographic (turnover, mortality) and financial (interest rates, salary
increases). The assumptions must be best estimates, and must be internally
consistent. For example, if interest/inflation is high, compensation increases
should also be on the high end.
Demographic assumptions can be reviewed with the actuary. If turnover, mortality
or retention rates are expected to be different than the current estimates suggest,
then the estimates must be changed so that best estimates are used. Manipulation
is not permitted, and facts must be gathered to support any estimates used. If
mortality or turnover was higher, or retention lower, then the overall cost of the
defined benefit plan would be lower and the unfunded position reduced.
In terms of financial assumptions, the discount rate used is critical. It is linked to
the interest rate for AA corporate bonds with a 30-year term. This rate must be
carefully examined. If it were to be increased by 0.25%, then the overall pension
obligation would decrease by 3.4% and pension expense would decrease by 7.5%.
This is material. If a higher interest rate were used, this might be accompanied by
higher expected future compensation increases, in order to keep the assumptions
internally consistent. However, a 0.25% increase in compensation costs would
only increase pension expense by 1%, and the obligation would increase by 0.2%.
Therefore, the overall impact of an increase in this rate would be positive for the
company.
The rates cannot be changed for their impact on financial statements. Interest rates
for the correct term, currency and risk rating must be carefully examined. If rates
decline, the impact on pension obligation and expense would be negative. The
company holds the risk in a defined benefit plan.
3. Implications of move to a defined contribution plan.
A defined contribution plan would have two ongoing benefits to the company.
First, annual cash payments would decrease. Currently, the company is paying $51
million, plus another $100 million to address the funding shortfall. It has been
suggested that a defined contribution plan would involve payments of $61 (120%
of $51). (This result may change based on negotiations with affected labour
groups, and the estimate can only be considered tentative at this point.) In
addition, the company’s risk profile would improve, because they would not be
responsible for funding a defined benefit plan.
If the plan were wound up, it has been suggested that the assets of the plan,
$5,020, plus $200 million, or $5,220, would be used to extinguish a liability of
$6,763. This would cause a gain of $1,543 to be recorded in earnings, because
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
liabilities of $1,743 would be extinguished. This is a significant number, and
would clearly improve the debt-to-equity ratio.
It is not clear that this scheme or these terms would be acceptable to labour
groups, who would be accepting the risk of a defined contribution plan. More
assets may have to be transferred to settle the plan, and so no conclusions should
be drawn until approval is obtained. The suggestion to settle the plan may cause
labour unrest, and that may have significant strategic implications for the
company and its operations. Senior management must assess this situation, refine
cost proposals, and assess the labour climate.
Some companies continue their existing defined benefit plans for current
employees, but enroll new employees in a defined contribution plan. This again
would have to be the result of labour negotiations, and is a far more long-term
solution to the cash flow and risk management challenges. It may, however, be
more acceptable (less unacceptable?) in labour talks. The approach taken should
rest on a strategic decision.
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19-5
EXHIBIT 1
Propulsion XT Limited
Revised Statement of Financial Position reflecting IFRS for Pension Amounts
31 December 20X5
(in millions)
Liabilities
Accounts payable and accrued liabilities
Unearned revenue
Long-term debt
Net defined benefit liability
Deferred income tax
Derivative financial instruments
$ 5,540
2,126
3,642
1,743
345
230
$13,626
Equity
Preferred shares
Common shares
Contributed surplus
Retained earnings ($1,810 + $2,011)
Accumulated OCI
350
1,235
116
3,821
(2,011)
3,511
$ 17,137
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Case 19-2 Candida Ltd.
Overview
Candida is a public company (i.e., complies with IFRS) and sponsors both defined benefit
and defined contribution pension plans. The nature of the plans must be analyzed, along
with related financial statement elements, and future cost increases.
Issues
1.
2.
3.
4.
Nature of defined benefit and defined contribution plans
Financial statement elements relating to pension plans
Projections for 20x6
Assumptions for review
Analysis
1.
Nature of plans
Candida has both defined benefit and defined contribution plans. Defined benefit
plans set out a pension entitlement for the retired employee, and Candida bears
the risk of providing funding for the earned entitlement. A defined contribution
plan establishes the employer obligation to provide resources to a pension trustee,
and the employee accepts risk as to the size of pension payments. Candida’s shift
to defined contribution plans (now $12 of $24 in pension expense) is consistent
with a program to reduce financial risk.
When plans are curtailed, pension obligations are eliminated. Some assets may be
used or allocated in exchange, depending on the terms of the curtailment. A gain
or loss on curtailment will be recognized, measured as the change in the pension
obligation as compared to the change in assets.
2.
Financial statement elements
For Candida’s defined contribution plans, the expense is equal to payments made
to the trustee. No other financial statement elements result.
For Candida’s defined benefit plans, pension accounting is comprised of:
a. An expense for current service cost (expected present value of pension benefits
earned during the year), past service cost granted on plan initiation or amendment
that are retrospectively based, and any gain or loss on plan curtailment.
b. An expense for net interest cost on the net defined benefit liability.
c. In accumulated OCI and comprehensive income, actuarial and experience
losses.
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19-7
Under a pension arrangement, an actuary determines the expected present value of
future benefits paid after retirement. This is called the defined benefit obligation,
and is $228 million for Candida. It is based on the terms of the plans, and
expected mortality rates and discount rates (interest rates on long-term debt). The
growth in this liability due to work performed in a given year is item (1) above,
current service cost. Interest on the obligation balance is part of item (2).
Pensions are based on many estimates: interest rates, salary growth, bond yield
rates, etc. When estimates are different than actual, experience gains or losses are
created, and these (losses to date for Candida) are excluded from earnings and
included in comprehensive income and accumulated OCI - item (3). The
cumulative amount is $53 for Candida in 20X5, increased significantly from $20
in 20X4. A likely cause is experience losses on fund earnings (but could also
represent changes in assumptions). Such amounts do not affect earnings, but do
affect the liability on the SFP.
Pension expense will not equal the amount paid. For example, Candida expensed
$12 for its defined benefit plans in 20x5, but paid $38 ($50 – $12 for defined
contribution).
The net liability position is the net of the defined benefit obligation and pension
plan assets:
Defined benefit obligation
$(228)
Fair value of plan assets
113
Underfunded position of plan
$ (115)
The pension plan assets and obligation ($228 and $113, respectively) are on
Candida’s SFP, but are NETTED.
The nature of the net defined benefit liability has already been described. Note
that for Candida, it also includes $14 of unfunded benefit obligations related to
the Company’s other post-employment benefits (health care, etc.)
Pension plan assets are funds placed with a pension trustee. They are only
available for pension plan obligations, and include contributions to the plan plus
fund earnings, less benefits paid, and less investment losses.
3.
Projections for 20x6
Candida has experienced sizeable actuarial losses caused by experience losses to
date in the plan. These are included in accumulated OCI and do not change
earnings.
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
20x6 pension expense for the defined contribution programs should be close to
20x5 expense, although increased to reflect compensation expense $12.6 ($12 x
1.05).
20x6 pension expenses for the defined benefit plans might be as follows:
1.
Pension expense - Service cost (20X5 - $7 x 1.05)
$ 7.4
2.
Net interest cost ($115 x 6%)
6.9
$14.3
Pension related expenses for the defined benefit plans is increased, to $14.3 from
$12 in 20x5.
Candida will also report actuarial gains and losses in comprehensive income and
accumulated OCI.
4.
Assumptions for review
To minimize pension expense in 20x6, the following assumptions should be
reviewed with the actuary:
1.
2.
Mortality and turnover. These assumptions dictate eventual pension
payout, and reduce current service and the defined benefit obligation.
This would reduce service cost, but also create experience gains to reduce
accumulated OCI.
Discount rate. This discount rate determines net interest in item 2;
lowering the yield rate will lower pension expense. The estimate must be
based on market yields for long-term debt with similar term, risk and
currency as the projected pension plan cash outflows.
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19-9
Case 19-3 SOLACE LIMITED
Report to CFO
You have requested that I examine the current accounting entries related to the company’s
pension plan and other post-retirement plan for 20X8. For any errors found, I have also
provided the correcting journal entries. The analysis is described in detail below.
I have started with a reconciliation of the opening and closing balances related to the net
defined benefit asset and the other post-employment benefit liability for the year ended 31
December 20X8. The related expenses in the net profit and the other comprehensive
income items are then calculated based on these reconciliations. The correcting journal
entries are then outlined at the end of this report to correct the related pension accounts.
Statement of Financial Position
The table below provides the reconciliation of the opening and closing balances to
determine the correct balance of the net defined benefit asset and the OPEB at 31
December 20X8.
Debit (credit)
Obligation
Opening balance
Current service cost
Interest expense (1)
Past service cost
amendment
Actuarial revaluation (2)
(plug)
Benefits paid
Closing balance of
obligation
Plan assets
Opening balance
Actual return on plan assets
(3)
Funding contribution Aug 1
Benefits paid
Closing balance
Net defined benefit
(liability) asset
Net Defined Benefit Asset
$
OPEB
$
(1,250,800)
(75,600)
(72,579)
(190,800)
(650,800)
(57,200)
(37,440)
(89,721)
66,740
82,300
(1,597,200)
53,600
(625,100)
1,684,300
94,215
0
12,700
(82,300)
1,708,915
53,600
(53,600)
0
111,715
(625,100)
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
(1) Interest on the obligation: (1,250,800 – (82,300 x 6/12)) x 6% = 1,209,650 x 6% =
72,579
Interest on the OPEB (650,800 – (53,600 x 6/12 ) x 6% = 37,440
(2) The “plug” to balance the obligation to the closing balance provided by the actuary.
(3) The plug to balance the plan assets to the fair value at the end of 20X8.
Net interest income: (1,684,300 + (12,700 x 5/12) - (82,300 x 6/12))) x 6% = (1,684,300
+ 5292 – 41,150) x 6% = 1,648,442 x 6% = 98,907
Amount recorded to OCI = Actual return on the plan – net interest income = 94,215 –
98,907 = (4,692)
The asset ceiling test recoverable amount is $116,900; the net defined benefit asset
balance is $111,715, so there is no adjustment required for the effect of the asset ceiling.
Statement of Comprehensive Income
Based on the above reconciliations, the following are the correct expenses to be
recognized in 20x8.
Pension expense = Current service cost + past service adjustment = 75,600 + 190,800 =
$266,400 dr
Post-retirement benefits expense = $57,200
Net interest expense = Net interest expense - Net interest income = +72,579 + 37,440 98,907 = 11,112 dr
Other Comprehensive income
Actuarial gains/losses 89,721 –66,740
Experience loss
22,981 dr
4,692 dr.
Correcting Journal Entries
Retained earnings
Pension Expense (266,400- 203,500)
Net defined benefit asset
Post-employment benefits expense (57,200-53,600)
OPEB
Net defined benefit asset
Net interest income
OPEB liability
190,800
62,900
253,700
3,600
3,600
26,328
11,112
37,440
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19-11
OCI – Pension
OPEB
Net defined benefit asset
22,981
66,740
OCI – Pension
Net defined benefit asset
4,692
89,721
4,692
Proof:
Net defined benefit asset: 433,500 – 253700 + 26,328 – 89,721 – 4,692 = 111,715
OPEB = -650,800 -37,440 +66,740 – 3,600 = -625,100
Conclusion
Once the adjusting journal entries are posted, all of the related pension accounts will be
measured and recognized at their correct amounts for 20X8.
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19-12
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Technical Review
Technical Review 19-1
The defined contribution expense for 20X4 is equal to:
Payment made in the year
Present value of the delayed payment, discounted at 5%
200,000 x (P/F, 5%, 2)
Total expense
To record the pension expense:
Pension expense
456,406
Defined contribution pension liability
Cash
275,000
181,406
456,406
181,406
275,000
Technical Review 19-2
Defined benefit obligation
Opening balance
Increase due to current service cost
Increase due to interest accrued (5% of opening balance)
Decrease due to new past service
Decrease due to change in actuarial assumptions
Decrease due to pension benefits paid to pensioners
Closing balance
$5,215,000 cr.
601,900 cr.
260,750 cr.
356,000 dr.
106,000 dr.
67,900 dr.
$5,547,750 cr.
Pension fund assets
Opening balance
Increase due to actual investment income earned
Decrease due to pension benefits paid to pensioners
Increase due to contributions during the year
Closing balance
Net defined benefit plan liability ($5,547,750 - $5,336,900)
$ 4,810,000 dr.
144,800 dr.
67,900 cr.
450,000 dr.
$ 5,336,900 dr.
$ 210,850 cr.
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19-13
Technical Review 19-3
Service cost:
1. Current service cost
$ 601,900
2. Past service cost (negative)
(356,000)
$245,900
To record service cost:
Pension expense……………………………………….
245,900
Net defined benefit liability…………………
245,900
To record the contribution to the fund:
Net defined benefit liability…………………
Cash………………………………………………..
450,000
450,000
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19-14
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Technical Review 19-4
Net interest:
Defined benefit obligation, beginning of the year
$ 5,215,000
Pension plan assets, fair value, beginning of the year
4,810,000
Net defined benefit liability
$405,000
Net interest, at 5%
$
20,250
The components are:
Interest on the obligation of
$260,750
($5,215,000 x 5%) and
Expected earnings of
$240,500
($4,810,000 x 5%)
To record interest:
Pension expense (or Interest expense)…………………… 20,250
Net defined benefit liability………………….
20,250
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19-15
Technical Review 19-5
Actuarial gain: change in assumptions:
Net defined benefit liability ……………………
106,000
OCI: pension……………………………………………
106,000
Experience loss, fund earnings:
OCI: pension ($240,500 - $144,800)………………….
Net defined benefit liability……………….
95,700
95,700
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Technical Review 19-6
On the SCI:
Earnings (given, excluding pension expense)
$ 4,200,000 cr.
Pension expense ($245,900 + $20,250)
266,150 dr.
Earnings
$ 3,933,850 cr.
OCI: Pension adjustments
10,300 cr.
($106,000 cr. and $95,700dr.)
Comprehensive income
$ 3,944,150 cr.
On the Statement of Changes in Equity:
Opening balance (given)
Comprehensive income
Closing balance
Retained
earnings
$ 8,601,400 cr.
Accumulated OCI,
Pension
$ 69,200 dr.
3,933,850 cr.
10,300 cr.
$ 12,535,250 cr.
$ 58,900 dr.
On the SFP:
Long-term liability:
Net defined benefit liability
$ 210,850 cr.
(see below)
Equity (not required):
Retained earnings
$ 12,535,250 cr.
Accumulated OCI, Pension
$
58,900 dr.
Net defined benefit liability:
Opening balance (given)
$405,000 cr.
Payment to pension fund trustee
450,000 dr.
Service cost
245,900 cr.
Net interest
20,250 cr.
Actuarial gains and losses
95,700 cr.
106,000 dr.
Closing balance
$210,850 cr.
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19-17
Proof, per TR 19-1:
Defined benefit obligation
Opening balance
Increase due to current service cost
Increase due to interest accrued (5% of opening balance)
Decrease due to new past service
Decrease due to change in actuarial assumptions
Decrease due to pension benefits paid to pensioners
Closing balance
$5,215,000 cr.
601,900 cr.
260,750 cr.
356,000 dr.
106,000 dr.
67,900 dr.
$5,547,750 cr.
Pension fund assets
Opening balance
Increase due to actual investment income earned
Decrease due to pension benefits paid to pensioners
Increase due to contributions during the year
Closing balance
Net defined benefit plan liability ($5,547,750 - $5,336,900)
$ 4,810,000 dr.
144,800 dr.
67,900 cr.
450,000 dr.
$ 5,336,900 dr.
$ 210,850 cr.
Technical Review 19-7
Currently, the net defined benefit asset is: 7,670,000 -7,250,000 = 420,000
The ceiling asset test indicates that the asset can be no higher than $315,000 as this is
the maximum amount available as a future benefit to the employer in the future.
Therefore an adjustment of $105,000 ( 420,000 – 315,000) is required as follows:
OCI pension
Net defined benefit asset
105,000
105,000
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19-18
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Technical Review 19-8
Interest expense:
Defined benefit obligation, beginning of the year
$7,250,000
Weighted average for the benefit payments ($230,000 x 6/12 )
(115,000)
$ 7,135,000
Weighted average balance outstanding
$
Interest expense, at 5.5% ($7,135,000)
392,425
Interest income on plan assets:
$7,670,000
Pension plan assets, fair value, end of 20X4 ($7,670,000)
Weighted average for the contributions ($560,000 x 9/12)
420,000
Weighted average for the benefit payments ($230,000 x 6/12)
(115,000)
$ 7,975,000
Weighted average balance outstanding
$
Interest income, at 5.5% ($7,975,000)
438,625
Interest income on effect of asset ceiling
$105,000
Effect of the asset ceiling (balance at the beginning of the year)
$
Interest income on effect of asset ceiling ($105,000 x 5.5%)
$
Net interest income ($438,625 - $5,775 - $392,425)
5,775
40,425
This is the same as ($315,000 + 420,000) * 5.5%
The journal entry is:
Net defined benefit asset
Interest income
40,425
40,425
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19-19
Technical Review 19-9
Interest expense:
Defined benefit obligation, beginning of the year
$5,215,000
Weighted average for the benefit payments ($67,900 x 6/12 )
(33,950)
$ 5,181,050
Weighted average balance outstanding
$
Interest expense, at 5.0% ($5,181,050)
259,053
Interest income on plan assets:
Pension plan assets, fair value, end of 20X7
$4,810,000
Weighted average for the contributions ($450,000 x 4/12)
150,000
Weighted average for the benefit payments ($67,900 x 6/12)
(33,950)
$ 4,926,050
Weighted average balance outstanding
$
Interest income, at 5.0% ($4,926,050)
Net interest expense (259,053 – 246,303)
246,303
12,750
The entry is made using the net amount:
Interest expense
Net defined benefit liability
12,750
12,750
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Technical Review 19-10
Defined benefit obligation
Opening balance
Increase due to current service cost
Increase due to interest accrued (5% of opening balance)
Decrease due to new past service
Decrease due to change in actuarial assumptions
Decrease due to pension benefits paid to pensioners
Closing balance
$5,215,000 cr.
601,900 cr.
260,750 cr.
356,000 dr.
106,000 dr.
67,900 dr.
$5,547,750 cr.
Pension fund assets
Opening balance
Increase due to actual investment income earned
Decrease due to pension benefits paid to pensioners
Increase due to contributions during the year
Closing balance
Net defined benefit plan liability ($5,547,750 - $5,336,900)
$ 4,810,000 dr.
144,800 dr.
67,900 cr.
450,000 dr.
$ 5,336,900 dr.
$ 210,850 cr.
Under ASPE, since there is no OCI, all costs and adjustments are recognized as pension
expense in the current year. Also, the net interest is calculated on the opening balance,
with no adjustments for contributions and payments made during the year.
1.
Current service cost
Past service adjustment
2.a Interest cost ($5,215,000 × 5% )
2.b Actual return
3.a Re-measurement:
$ 601,900
(356,000)
260,750
(144,800)
106,000
$467,850
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-21
Assignments
Assignment 19-1
1. The actuarial cost method that must be used to determine current service cost is the
projected unit credit method.
2. A pension plan where the risk of the level of eventual pension payments rests with the
employee is called a defined contribution plan.
3. A contributory pension plan is a plan in which employees are required to contribute
to the plan.
4. The asset ceiling is a limiting factor in pension accounting when plan assets are
higher than the defined benefit obligation but the surplus is not available to the
employer.
5. Pension plans are usually registered because registration allows contributions to be
tax deductible when contributed to the plan, rather than when paid out in
benefits.
6. The actuarial cost method that projects years of service, and final salary, is called the
level contribution method.
7. Past service cost will be a negative number (reduces the projected benefit liability)
when benefits are decreased with reference to cumulative service.
8. An experience gain or loss related to annual return on plan assets is the difference
between actual return and expected return.
9. The costs of pension benefit changes caused by settlement and curtailment are often
included in discontinued operations rather than pension expense.
10. The expected present value of future pension benefits, evaluated using present value
and actuarial expectations, including mortality, turnover, and the effects of current
and future compensation levels, is called the defined benefit obligation.
11. Two examples of demographic assumptions that must be made to project pension
variables are employee turnover and mortality. (Also acceptable: employee
disability and early retirement)
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19-22
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Assignment 19-2
Requirement 1
A defined contribution plan gives the employee a pension based on their assigned assets
at the retirement date. While the overall target might be 70% of final pay, the actual
pension assigned might be higher or lower than this amount. The employees take the risk.
In contrast, a defined benefit plan would assign 70% of final pay as a pension, along with
other specific terms agreed to in the plan, regardless of the actual assets in the plan. In a
defined benefit plan, the company takes the risk.
Requirement 2
If the targets were guaranteed, then this would be a defined benefit pension plan, and the
company would have to base pension expense on actuarially determined calculations.
Requirement 3
TGY expenses the amount paid to the plan for current service, or $375,000.
Requirement 4
The immediate beneficiary of higher rates of return on assets (8% versus 6%) is the
employee, since pensions are based on assets in the plan when the employee retires, and
the more assets, the higher the pension.
However, if the amount of the annual payment is re-evaluated every three years, the
employer’s required contribution to the plan might be scaled back, or at least not
increased as much, if plan earnings are robust. Much depends on the bargaining position
of the company and its employees with respect to plan contributions.
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-23
Assignment 19-3
Requirement 1
A defined benefit plan places financial risk with the sponsoring company, which is not
appealing to many companies. In particular, if investment portfolios perform poorly,
sponsoring companies have to address the asset shortfall. If workers live longer into
retirement, or if specified benefits such as health care coverage are more expensive than
the initial prediction, the sponsoring company again is responsible. Additional funding
requirements may come at a time when the company is in challenging financial times in
relation to its core operations.
Note, though, that the company has some potential for upside benefit. If pension asset
portfolios perform well, or mortality and cost estimates swing the other way, the
employer benefits. In particular, when stock markets provide healthy returns, it is the
company that sees the benefit through lower required contributions.
Requirement 2
The employee group carries financial risk under defined contribution plans. The risk is
that employees will not have accumulated sufficient assets during their working lives to
support themselves in retirement, especially if mortality rates decline and retirement lasts
longer. Higher than expected medical care costs may also be a factor. In addition to being
an individual issue, this may be a social issue as governments attempt to cope with the
challenges of elderly poor.
Some employees, though, would prefer to make their own investment decisions, prefer
the flexibility of having access to retirement savings, and expect that they will not stay
with one employer long enough to make a significant claim on pension fund assets. These
individuals may prefer a defined contribution program. For others, it is not an attractive
form of compensation and may affect an employer’s ability to recruit if there are
alternatives.
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19-24
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Assignment 19-4
Requirement 1
Pension expense could be $219,000 for the year, based on the amount paid.
It could also be $195,000 ($6,500,000 x 3%), which is 3% of actual salaries, and is the
amount that the company should have paid.
The correct answer depends on the disposition of the $24,000 difference. If this amount
has irrevocably passed to the plan, then the expense is $219,000. If the company can get a
refund, or apply the overpayment to the contribution for the following year, that is the
amount is considered a prepayment towards next year’s payment for example, then
pension expense is $195,000 and a prepaid pension asset is set up for the $24,000.
Requirement 2
Zio would have pension expense of $130,000, the net amount to be contributed to the
fund. Cash paid is $165,000 less the $35,000 forfeited assets.
Requirement 3
Year
20X9
Expense
Cash paid
$144,500 =
$100,000
($100,000 + ($50,000 (P/F 6%,2)) =
($100,000 + $44,500))
20X10
20X11
$150,000 + ($44,500 x .06) = $152,670
$150,000 + ($47,170 x .06) = $152,830
$150,000
$200,000 = $150,000 +
$50,000
(the
deferred
amount from 20X9)
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-25
Assignment 19-5
Requirement 1
Pension plan assets:
31 December.............................................................................................. $425,700
1 January ................................................................................................... 439,800
Decrease in pension plan assets ........................................................... ($14,100)
Three causes of changes in pension plan assets:
1. Increase or decrease: Actual return on plan assets
2. Increase: Cash received from employer or employees (latter for contributory plan)
3. Decrease: Pension benefits paid to retirees
Requirement 2
Defined benefit obligation:
31 December .................................................................................................... $720,500
1 January .......................................................................................................... 601,790
Increase ...................................................................................................... $118,710
Five causes of changes:
1. Increase: Current service cost
2. Decrease: Pension benefits paid to retirees
3. Increase or decrease: Losses or gains on changes in actuarial assumptions
4. Increase: Interest cost
5. Increase or decrease: New past service cost (decrease if benefits decline)
(Also acceptable: plan settlement or curtailment: decrease in obligation)
Requirement 3
Beginning
Defined benefit obligation ............................. $601,790
Plan assets at fair value ..................................
439,800
Underfunded ................................................. $161,990
End
$720,500
425,700
$294,800
This is the balance of the net defined benefit liability on the SFP. The underfunded
pension status is the cash shortage that would exist if all of the pension benefits (at
actuarial present value, including the effects of future salary adjustments) were to be paid
on each of the measurement dates. (Note that there is no intention of doing so.) In this
case, however, the increasingly-underfunded trend is of some concern. The fact that asset
growth was negative during the year implies that returns in the plan assets were an issue,
or, less likely, contributions to the plan were minimal.
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19-26
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Assignment 19-6
Requirement 1
Three funding approaches and the projections:
a) The accumulated benefit method: No projections are made.
b) The projected unit credit method: Salaries are projected, but not years of service.
c) The level contribution method: Salaries and years of service are projected.
Requirement 2
The company’s defined benefit pension plan is only five years old. At this stage, the most
likely pairing is:
a) The accumulated benefit method: lowest value, $2,500; low because no
projections are made.
b) The projected unit credit method: mid-range value $3,900; salaries are projected,
but not years of service.
c) The level contribution method: highest value, $5,000; salaries and years of
service are projected.
(Note: Later in the life of the plan, the accumulated benefit method requires the highest
funding, the level contribution method the lowest, and the projected unit credit method is
still mid-range.)
Requirement 3
The projected unit credit method must be used for external reporting. The company is not
required to use this method for funding, but if they do not, a second set of calculations
must be done by the actuary, which can be expensive. If the projected unit credit method
is not used for funding, a deferred pension asset or liability will be recorded on the SFP.
Requirement 4
The most appealing funding method to:
a) Conserve current cash balances—The accumulated benefit method ($2,500).
Since it involves no projections, it has the lowest initial funding requirement.
b) Equal cash requirements each year—The level contribution method ($5,000) is
the only method that produces this pattern.
c) Same method as for accounting—The projected unit credit method ($3,900) must
be used to measure the accounting expense for external reporting.
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-27
Assignment 19-7 (WEB)
PENSION
EXPENSE
FUNDED
STATUS
OF PLAN
Liability
element
increases
ACC’D EXPLANATION
OCI
Lower
mortality
rates
Increase
Create
loss
Higher
turnover
Decrease
Liability
element
decreases
Create
gain
Wage rollback
Decrease
Liability
element
decreases
Create
gain
Workers live longer in
retirement and are paid
pension longer; pension
expense higher. Retrospective
element increases cumulative
liability; re-measurement is a
loss in OCI.
Workers do not stay long
enough to be retirees. Nonvested pension amounts
released to general use.
Therefore, pension expense
lower. Retrospective element
decreases cumulative
liability; re-measurement is a
gain in OCI.
Workers make less money
and pension lower on
retirement (as long as based
on pay and not flat benefit.)
Therefore, pension expense
lower.
Retrospective element
decreases cumulative
liability; re-measurement is a
gain in OCI.
……….Continued
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19-28
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Higher
borrowing
rates
Depends on
Liability
interactions… element
See expl.
decreases…
But see
expl.
May
create
gain…
But see
expl.
Higher discount rate.
This should cause current
service cost to increase, net
interest to increase and there
should be a gain on the
change interest rate
assumption, which will
reduce the overall defined
benefit obligation.
The direction of the change in
pension expense depends on
the size of the change to
current service cost versus net
interest. Retrospective
element decreases cumulative
liability; re-measurement is a
gain in OCI.
May also cause an increase in
expected wage assumptions;
will have opposite effect as
above and cancel out some of
the change.
May also cause higher actual
earnings for pension assets.
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-29
Assignment 19-8
Requirement 1
Net defined benefit liability, 31 December 20X8
Defined benefit obligation, 31 December 20X8
Pension plan assets, 31 December 20X8
Net defined benefit liability, 31 December 20X8
$6,499,000 cr.
5,398,000 dr.
$ 1,101,000 cr.
Requirement 2
Defined benefit obligation, 31 December 20X9
Obligation, 1 January 20X9
Current service cost, 20X9
Interest (1)
PSC
Actuarial revaluation
Benefits paid
Fair value of plan assets, 31 December 20X9
Value at 1 January 20X9
Actual earnings on plan assets
Funding contributions
Benefits paid
Net defined benefit liability, 31 December 20X9
($6,224,290 – $5,804,100)
$6,499,000
250,400
386,790
(203,200)
(603,700)
(105,000)
$6,224,290 cr.
$5,398,000
61,100
450,000
(105,000)
$5,804,100dr.
$ 420,190 cr.
(1) Interest expense on obligation:
6% x (6,499,000 – (105,000 x 6/12)) = 386,790
(2) Interest income:
6% x (5,398,000 – (105,000 x 6/12)) = 320,730
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19-30
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Requirement 3
Entries for three elements, and fund contribution
Service cost:
Pension expense ($250,400 less $203,200)……………….
Net defined benefit asset/liability………………
47,200
Net interest:
Interest expense (see below)……………
Net defined benefit asset/liability………………
66,060
47,200
66,060
Interest expense on obligation:
6% x (6,499,000 – (105,000 x 6/12)) = 386,790
Interest income:
6% x (5,398,000 – (105,000 x 6/12)) = 320,730
Net interest expense = 386,790 – 320,730 = 66,060
Remeasurements:
Accumulated OCI
(Experience loss on assets: $320,730 less $61,100)…..
Net defined benefit asset/liability…………….
259,630
259,630
Net defined benefit asset/liability ………………..
603,700
OCI (Revaluation)……………………………………….
Contribution:
Net defined benefit asset/liability………………..
450,000
Cash…………………………………………………….
603,700
450,000
Requirement 4
Net defined benefit liability, 31 December 20X9
($1,101,000 cr. Op. balance + $47,200 cr. + $66,060 cr. + $259,630 cr. - $603,700
dr. – $450,000 dr.) = $ 420,190 cr.
Proof: equal to the net defined benefit as calculated in requirement 2
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-31
Assignment 19-9
Requirement 1
Net defined benefit liability, 31 December 20X1
Defined benefit obligation, 31 December 20X1
Pension plan assets, 31 December 20X1
Net defined benefit liability, 31 December 20X1
$2,870,000 cr.
1,936,000 dr.
$ 934,000 cr.
Requirement 2
Defined benefit obligation, 31 December 20X2
Obligation, 1 January 20X2
Current service cost, 20X2
Interest (1)
PSC
Actuarial revaluation
Benefits paid
Fair value of plan assets, 31 December 20X2
Value at 1 January 20X2
Actual earnings (loss) on plan assets
Funding contributions 1 Feb
Benefits paid
Net defined benefit liability, 31 December 20X2
($3,207,628 – $2,006,300)
$2,870,000
175,200
138,128
(116,500)
355,700
(214,900)
$3,207,628 cr.
$1,936,000
(104,800)
390,000
(214,900)
$2,006,300 dr.
$ 1,201,328 cr.
(1) Interest expense on obligation:
5% x (2,870,000 – (214,900 x 6/12)) = 138,128
Interest income:
5% x (1,936,000 – (214,000 x 6/12) + (390,000 x 11/12) ) = 5 % x ( 1,936,000 –
107,450 + 357,500) = 109,303
Requirement 3
Entries for three elements, and fund contribution
Service cost:
Pension expense ($175,200 less $116,500)……………….
Net defined benefit asset/liability………………
58,700
58,700
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19-32
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Net interest:
Interest expense (see below) …………… 28,825
Net defined benefit asset/liability………………
28,825
Interest expense on obligation:
5% x (2,870,000 – (214,900 x 6/12)) = 138,128
Interest income:
5% x (1,936,000 – (214,000 x 6/12) + (390,000 x 11/12) ) = 5 % x ( 1,936,000 –
107,450 + 357,500) = 109,303
Total net interest cost = 138,128 – 109,303 = 28 825
Remeasurements:
OCI (Experience loss on assets: $109,303 plus $104,800)….. 214,103
Net defined benefit asset/liability………………
214,103
OCI (Revaluation) …………………………………………… 355,700
Net defined benefit asset/liability …………………
355,700
Contribution:
Net defined benefit asset/liability………………..
Cash…………………………………………………….
390,000
390,000
Requirement 4
Net defined benefit liability, 31 December 20X2
($934,000 cr. Op. balance + $58,700 cr. + $28,825 cr. + $214,103 cr. + $355,700 cr.
– $390,000 dr.) = $ 1,201,328 cr.
Proof: equal to the net defined benefit liability per requirement 2
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-33
Assignment 19-10
Requirement 1
Net defined benefit liability, 31 December 20X1
Defined benefit obligation, 31 December 20X1
Pension plan assets, 31 December 20X1
Net defined benefit liability, 31 December 20X1
$106,000 cr.
78,000 dr.
$ 28,000 cr.
Requirement 2
Defined benefit obligation, 31 December 20X2
Obligation, 1 January 20X2
Current service cost, 20X2
Interest (1)
PSC
Actuarial revaluation
Benefits paid
Fair value of plan assets, 31 December 20X2
Value at 1 January 20X2
Actual earnings on plan assets
Funding contributions
Benefits paid
Net defined benefit liability, 31 December 20X2
($106,830 - $74,200) (proof for requirement 4)
$106,000
6,700
6,930
3,700
(2,500)
(14,000)
$106,830 cr.
$78,000
3,200
7,000
(14,000)
$74,200 dr.
$32,630 cr.
(1) Interest expense on obligation:
7% x (106,000 – (14,000 x 6/12)) = 6,930
Interest income:
7% x (78,000 – (14,000 x 6/12) + (7,000 x 1/12) ) = 7 % x ( 78,000 – 7,000 + 583) =
5,011
Total net interest cost = 6,930 – 5,011 = 1,919
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Requirement 3
Entries for three elements, and fund contribution
Service cost:
Pension expense ($6,700 plus $3,700)…………………………….
Net defined benefit liability ..………………………….
Net interest:
Interest expense - see below……………….
Net defined benefit liability .…………………………
10,400
10,400
1,919
1,919
Interest expense on obligation:
7% x (106,000 – (14,000 x 6/12)) = 6,930
Interest income:
7% x (78,000 – (14,000 x 6/12) + (7,000 x 1/12) )
= 7 % x (78,000 – 7,000 + 583) = 5,011
Total net interest cost = 6,930 – 5,011 = 1,919
Remeasurements:
OCI (Experience loss on assets: $5,011 expected less $3,200
actual)……………………………………………………………….
Net defined benefit liability…………………………….
Net defined benefit liability ……………………………….
OCI -pension………………………………..
Contribution:
Net defined benefit liability……………………………..
Cash……………………………………………………………..
1,811
1,811
2,500
2,500
7,000
7,000
Requirement 4
Net defined benefit liability, 31 December 20X2
($28,000 cr. Op. balance + $10,400 cr. + $1,919 cr. + $1,811 cr. $2,500 dr. - $7,000 dr.))
Proof; equal to the net defined benefit as calculated in
requirement 2
$32,630 cr.
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-35
Assignment 19-11 (WEB)
Requirement 1
Net defined benefit liability/asset, 31 December 20X8
Pension plan assets, 31 December 20X8
Defined benefit obligation, 31 December 20X8
Net defined benefit asset, 31 December 20X8
Asset ceiling maximum
Difference to OCI
$702,000 dr.
496,000 cr.
$206,000 dr.
120,000
86,000
Note: Since the defined benefit obligation is less than the pension
plan assets, the asset ceiling test must be performed
Requirement 2
Defined benefit obligation, 31 December 20X8
Obligation, 1 January 20X9
Current service cost, 20X9
Interest (1)
PSC
Actuarial revaluation
Benefits paid
Fair value of plan assets, 31 December 20X8
Value at 1 January 20X9
Actual earnings (loss) on plan assets
Funding contributions
Benefits paid
Net defined benefit liability, 31 December 20X9
($683,300 - $319,850) (Proof for requirement 4)
$496,000
9,100
24,620
56,000
(12,000)
(7,200)
$566,520 cr.
$702,000
(17,500)
6,000
(7,200)
$683,300 dr.
$116,780 dr.
Note that the maximum surplus recoverable is $125,000, so there is no reduction required
for the net surplus balance at Dec 20X9 and the effect of the ceiling recorded in 20X8 in
addition to the interest cost must be reversed.
(1) Interest cost: (496,000 – (7,200 x 6/12) ) x 5% = 492,400 x 5% = 24,620
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Interest income: 702,000 – (7,200 x 6/12) + (6,000 x 8/12)) x 5%
= (702,000– 3,600 + 4,000) x 5% = 35,120
Interest on effect of ceiling cap 86,000 x 5% = 4,300
Total net interest income = 35,120 - 4,300 – 24,620 = 6,200
Proof: (120,000 + (6,000 x 8/12)) x 5% = 6,200
Requirement 3
Entries for three elements, and fund contribution
Service cost:
Pension expense ($9,100 plus $56,000)…………………………..
Net defined benefit asset/liability………………………
Net interest:
Net defined benefit asset/liability ……………………….
Interest income
65,100
65,100
6,200
6,200
Same as above in requirement 2
(1) Interest cost: (496,000 – (7,200 x 6/12) ) x 5% = 492,400 x
5% = 24,620
Interest income: 702,000 – (7,200 x 6/12) + (6,000 x 8/12)) x 5%
= (702,000– 3,600 + 4,000) x 5% = 35,120
Interest on effect of ceiling cap 86,000 x 5% = 4,300
Total net interest income = 35,120 - 4,300 – 24,620 = 6,200
Proof: (120,000 + (6,000 x 8/12)) x 5% = 6,200
Remeasurements:
OCI …………………………………………………
Net defined benefit asset/liability (Experience loss on assets:
$35,120 expected and $17,500 loss actual)……………
The adjustment for the difference expected return and actual return.
Net defined benefit asset/liability ……………………..
52,620
52,620
12,000
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-37
OCI (Revaluation)……………………………………………
The adjustment for the actuarial revaluation
Effect of ceiling adjustment
Net defined benefit asset/liability ……………………..
OCI (Revaluation) (86,000 + 4,300) ……………………………..
The original ceiling effect plus relate interest
Contribution:
Net defined benefit asset/liability ……………………….
Cash……………………………………………………………..
12,000
90,300
90,300
6,000
6,000
Requirement 4
Net defined benefit liability, 31 December 20X9
($120,000 dr. Op. balance - $65,100cr. + $6,200 dr. - $52,620 cr.
+ $12,000 dr. + 90,300 dr. + $6,000 dr.))
Proof; equal to the net defined benefit as calculated in
requirement 2
$116,780 cr.
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19-38
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Assignment 19-12
Requirement 1
Defined benefit obligation, 31 December 20X1
Obligation, 1 January 20X1 ($793,500 SFP after a $344,000
asset)
Current service cost, 20X1
Interest (1)
Actuarial revaluation
Benefits paid
$1,137,500
219,200
49,894
115,000
(57,500)
$1,464,094cr.
Fair value of plan assets, 31 December 20X1
Value at 1 January 20X1
Actual earnings on plan assets
Funding contributions
Benefits paid
$344,000
12,000
424,000
(57,500)
$722,500 dr.
Net defined benefit liability, 31 December 20X1
($1,464,094 - $722,500)
$741,594 cr.
Interest cost: (1,137,500 – (57,500 x 6/12) ) x 4.5% = 49,894
Interest income:
344,000– (57,500 x 6/12) + (424,000 x 10/12) ) x 4.5%
= (344,000 – 28,750 + 353,333) x 4.5% = 30,086
Total net interest expense = 49,894 – 30,086 = 19,808
Requirement 2
Entries for three elements, and fund contribution
Service cost:
Pension expense ………………………………………………….
Net defined benefit liability ……….…………………
Net interest:
Interest expense…………………………………………………
Net defined benefit liability …........................................
219,200
219,200
19,808
19,808
Revaluation:
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-39
OCI ………………………………………………………………
Net defined benefit liability (Experience loss on assets: $30,086
expected less $12,000 actual income)……………………..
OCI (Revaluation) ………………………………………………..
Net defined benefit liability …………………………...
Contribution:
Net defined benefit liability……………………………
Cash……………………………………………………………..
18,086
18,086
115,000
115,000
424,000
424,000
Proof: Net defined benefit liability, 31 December 20X1
($793,500 cr. Op. balance + $219,200cr. + $19,808 cr. +
$18,086cr. + $115,000 cr. - $424,000 dr.)) = 741,594
Proof; equal to the net defined benefit as calculated in
requirement 1
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19-40
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Requirement 3
On the SCI:
Earnings (given, excluding pension expense)
$ 4,000,000 cr.
Pension expense
219,200 dr.
Interest expense
19,808 dr.
Earnings
$ 3,760,992 cr.
Other comprehensive income:
Pension adjustments ($18,086 dr. and $115,000
dr.)
Comprehensive income
133,086 dr.
$ 3,627,906 cr.
On the Statement of Changes in Equity:
Opening balance (given)
Comprehensive income
Closing balance
Retained
earnings
$ 5,500,000 cr.
Accumulated
OCI, Pension
$ 80,400 dr.
3,760,992 cr.
133,086 dr.
$ 9,260,992 cr.
$ 213,486 dr.
On the SFP:
Long-term liability:
Net defined benefit liability
(see below)
Equity:
$ 741,594 cr.
Retained earnings
$ 9,260,992 cr.
Accumulated OCI, pension
$
213,486 dr.
Net defined benefit liability, 31 December 20X1
$741,594 cr.
Proof: Net defined benefit liability, 31 December 20X1
($793,500 cr. Op. balance + $219,200cr. + $19,808 cr. +
$18,086cr. + $115,000 cr. - $424,000 dr.)) = 741,594
Proof; equal to the net defined benefit as calculated in
requirement 1
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-41
Assignment 19-13
Requirement 1
Entries for three elements, and fund contribution
Service cost:
Pension expense……………………………………………………..
Net defined benefit liability .……………………………
Net interest:
Pension expense (($1,400,200 - $1,075,790) = $324,410 × 6%)
$19,465 (components are $84,012 ($1,400,200 × 6%) less expected
earnings of $64,547 ($1,075,790 × 6%)……………………………
Net defined benefit liability ...........................................
Revaluation:
Net defined benefit liability (Experience gain on assets: $151,685
actual
and
$64,547 (1,075,790 x 6%) expected income)
……………………..
OCI………………………………………………………………..
Net defined benefit liability …………………..…………..
OCI (Revaluation gain) …………………………………………
Contribution:
Net defined benefit liability………………………………
Cash……………………………………………………………….
85,375
85,375
19,465
19,465
87,138
87,138
70,000
70,000
54,228
54,228
Requirement 2
On the SCI:
Earnings (given, excluding pension expense)
Pension expense ($85,375 + $19,465)
Earnings
$ 5,850,000 cr.
104,840 dr.
$ 5,745,160 cr.
Other comprehensive income:
Pension adjustments ($87,138 cr. and $70,000 cr.)
Comprehensive income
157,138 cr.
$ 5,902,298 cr.
© 2017 McGraw-Hill Education Ltd. All Rights Reserved.
19-42
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
On the Statement of Changes in Equity:
Opening balance (given)
Comprehensive income
Closing balance
Retained
earnings
$ 7,800,000 cr.
Accumulated
OCI, Pension
$ 100,900 dr.
5,745,160 cr.
157,138 cr.
$ 13,545,160cr.
$
56,238 cr.
Net defined benefit liability
(see below)
Equity:
$
217,884 cr.
Retained earnings
$ 13,545,160 cr.
Accumulated OCI, pension
$
On the SFP:
Long-term liability:
56,238 cr.
Net defined benefit liability, 31 December 20X8
($324,410 cr. Op. balance + $85,375 cr. + $19,465 cr. - $87,138
dr. - $70,000 cr. - $54,228 dr.)
Proof; equal to the net defined benefit as calculated by (PBO $1,281,703 fund assets) (PBO = $1,400,200 + $85,375 - $70,000
+ $84,012 interest = $1,499,587) ($1,499,587 - $1,281,703) =
$217,884
$217,884 cr.
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-43
Assignment 19-14
Pension expense:
Element 1: Current service cost ........................................................................ $ 87,500
Element 1: Less gain on curtailment ($75,000 - $45,000) ................................ (30,000)
Element 2: Net interest on net defined benefit liability (see below) .................
32,238
Pension expense for 20x4 ................................................................................. $ 89,738
Change to accumulated OCI in 20X4:
Element 3: Experience gain on defined benefit obligation, 20x4 ..................... (21,870)cr
Element 3: Experience gain on fund earnings ($85,900 - $42,750 (See below)) (43,150)cr
Total .................................................................................................................. $(65,020) cr
Net Interest: (All funding is made at the end of the year and no benefits made.)
Beginning of 20X4:
Defined benefit obligation ..........................................................................$1,249,800
Fund assets .................................................................................................. 712,500
Balance ........................................................................................................($ 537,300)
Interest on balance @ 6% ........................................................................... $ 32,238
Interest expense: 1,249,800 x 6% = 74,988
Interest income: 712,500 x 6% = 42,750
Net amount: 74,988 – 42,750 = 32,238
© 2017 McGraw-Hill Education Ltd. All Rights Reserved.
19-44
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Assignment 19-15
Requirement 1
20x5
Pension expense …………………………………………………..
Net defined benefit asset/liability……………………
Net interest:
Pension expense (all interest expense; no plan assets)
Net defined benefit asset/liability ..…………………..
Contribution:
Net defined benefit asset/liability ……………………….
Cash……………………………………………………………..
150,000
150,000
15,000
15,000
200,000
200,000
20x6
Pension expense …………………………………………………..
Net defined benefit asset/liability………………………
145,000
145,000
Net interest:
Pension expense ………………………………………………….
Net defined benefit asset/liability ..…………………..
11,000
Contribution:
Net defined benefit asset/liability ……………………….
Cash……………………………………………………………..
185,000
11,000
185,000
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-45
Requirement 2
Net defined pension asset ($200,000 + $185,000 - $150,000 –
$15,000 - $145,000 - $11,000)
This is equal to:
Defined benefit obligation
($150,000 + $145,000+ $15,000 + $31,000*)
Compared to: Fund assets ($200,000 + $185,000 + $20,000*)
$64,000
$341,000
$405,000
$64,000
*Note: the net interest of $11,000 is made up of:
Interest expense: (150,000 + 15,000 + 145,000) x 10% = 31,000
Interest income: 200,000 x 10% = 20,000
Net interest expense = 11,000
Requirement 3
The limit on net defined benefit assets is the amount that can be recovered in the future.
Future benefits might be a pension payment holiday in an over-funded plan, or a refund to
the employer.
Requirement 4
To record an asset ceiling of $51,500 for the net defined benefit asset:
OCI pension .................................................................................. 12,500*
Net defined benefit asset .........................................................
12,500
*Note: the adjustment is computed as the difference between the asset ceiling of $51,500
and the net defined benefit asset of $64,000 (before the asset ceiling is recognized) per
requirement 2.
On the SFP:
Net defined pension asset ($64,000 - $12,500)
$51,500
© 2017 McGraw-Hill Education Ltd. All Rights Reserved.
19-46
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Assignment 19-16
Pension
Obligation
20x7
Beginning
- PSC
CSC
Net Interest
4% * ($1,640
- $0)
Pension
Expense
$ (1,640,000)
$ 1,640,000
(117,000)
(65,600)
117,000
65,600
Funding
$(1,822,600)
20x8
CSC
Net interest
(4% of
$1,822.6)
and (4% of
$317)
Plan Assets
(157,000)
(72,904)
200,000
117,000
$317,000
12,680
(5,880)
37,000
41,400
Funding
$(1,974,104)
AOCI
1,822,600 (1,822,600)
317,000
$(1,505,600)
157,000
60,224
217,224
Actual return
versus
expected
($12.68 $6.8)
Revaluation
Benefits paid
Net defined
benefit Asset
(Liab)
(217,224)
(5,880)
5,880 dr
37,000
37,000 cr
(41,400)
200,000
157,000
$ 639,400
357,000
$(1,334,704)
$31,120
© 2017 McGraw-Hill Education Ltd. All Rights Reserved.
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-47
Assignment 19-17
Pension
Obligation
20x7
Opening
CSC
Net Interest (6%
of $4,975,000)
and (6% of
$3,705,000)
Actual return
versus expected
($222,300 $276,000)
Revaluation
($4,975,000)
(430,000)
(298,500)
Plan Assets
Pension Expense
$3,705,000
222,300
53,700
(406,000)
235,000
($5,874,500)
(235,000)
510,000
$4,256,000
Accumulated
OCI
$(1,270,000) (1)
787,000dr.
53,700
(53,700)cr.
(406,000)
(506,200)
406,000dr.
510,000
($1,618,500)
______
$1,139,300 dr.
$430,000
76,200
$506,200
Benefits paid
Funding
Net defined
benefit Asset
(Liab)
(1) $4,975,000 - $3,705,000
© 2017 McGraw-Hill Education Ltd. All Rights Reserved.
19-48
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Pension
Obligation
20x8
Opening
CSC
Net Interest (6%
of $5,874,500)
and (6% of
$4,256,000)
Actual return
versus expected
($255,360 $80,000)
PSC – reduction
in liability and
expense
($5,874,500)
(488,000)
(352,470)
Plan Assets
Pension Expense
$4,256,000
255,360
295,000
($6,374,970)
($1,618,500)
$1,139,300 dr.
(175,360)
175,360 dr.
(45,000)
$540,110
Benefits paid
Funding
Accumulated
OCI
$488,000
97,110
(175,360)
45,000
Net defined
benefit Asset
(Liab)
(295,000)
525,000
$4,566,000
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
(540,110)
525,000
($ 1,808,970)
$1,314,660 dr.
© 2017 McGraw-Hill EducationLtd. All Rights Reserved.
19-49
Assignment 19-18
Requirement 1
Pension
Obligation
20x5
Beginning
- PSC
CSC
Interest
– 5%
Plan Assets
($200,000)
0
(67,000)
(10,000)
Funding
($277,000)
Pension
Expense
Net defined
benefit
Asset
(Liab)
Accumulated
OCI
$200,000
67,000
10,000
99,500
$99,500
$277,000 ($277,000)
99,500
($177,500)
0
Requirement 2
Pension
Obligation
20x6
Opening
CSC
Net Interest
($277,000 x
.05)
and
($99,500 x
5%)
PSC (new)
Actual
return
versus
expected
($4,975 $8,900)
Revaluation
($277,000)
(96,000)
(13,850)
Plan Assets
Pension
Expense
$99,500
4,975
(40,000)
($177,500)
Accumulated
OCI
0
$96,000
8,875
40,000
3,925
3,925
(3,925) cr.
35,000 dr.
118,000
(35,000)
(144,875)
118,000
(35,000)
$144,875
Funding
Net
defined
benefit
Asset
(Liab)
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19-50
Solutions Manual to accompany Intermedia
($461,850)
$226,400
$31,075 dr.
($235,450)
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Solutions Manual to accompany Intermediate Accounting,Volume 2, 7th edition
19-51
Assignment 19-19
Pension
Obligation
20x3
Opening balance
CSC
Net interest*
Actual return versus
expected
($17,815 + $17,000)
Assumptions
Funding
Benefits paid
20x4
CSC
Net Interest **
Actual versus
expected return
($17,940 - $21,000)
Assumptions
Funding
Benefits paid
($509,100)
(49,000)
(25,455)
Plan Assets
$356,300
17,815
(34,815)
(86,000)
45,500
(624,055)
(42,000)
(31,203)
Pension Expense
65,000
( 45,500)
358,800
82,000
(106,000)
$55,263
*
($625,258)
$355,800
($509,100 x 5%) and ($356,300 x 5%)
© 2017 McGraw-Hill Education Ltd. All Rights Reserved.
19-52
$(152,800)
72,700 dr.
(34,815)
34,815 dr.
(86,000)
(56,640)
65,000
86,000dr.
(265,255)
______
193,515 dr.
3,060
(3,060) cr.
(34,000)
82,000
34,000 dr.
$42,000
13,263
(34,000)
106,000
Accumulated
OCI
$49,000
7,640
_______
$56,640
17,940
3,060
Net defined
benefit Asset
(Liab)
( 55,263)
($269,458)
$224,455 dr.
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
** ($624,055 x 5%) and ($358,800 x 5%)
Solutions Manual to accompany Intermediate Accounting,Volume 2, 7th edition
19-53
© 2017 McGraw-Hill Education Ltd. All Rights Reserved.
19-53
Assignment 19-20 (WEB)
Pension
Obligation
20x4 – Opening
CSC
Fund–1 Jan.
Net Interest (5% x $416,000);
(5% of $90,000)
Expected versus actual earnings
($4,500 - $1,000)
Fund 31 Dec $51,000 + $90,000
20X5
CSC
Net Interest (5% of $487,800)
and (5% of $232,000)
Fund - 31 Dec $57,000 + $90,000
+$16,000
Expected versus actual earnings
($11,600 - $16,800)
Actuarial Assumptions
($416,000)
(51,000)
(20,800)
Plan Assets
0
90,000
4,500*
Pension Expense
$416,000
51,000
(57,000)
(24,390)
11,600
(3,500)
$3,500 dr.
(483,300)
141,000
(255,800)
_____
3,500 dr.
$57,000
12,790
163,000
163,000
5,200
5,200
_______
$69,790
( 16,000)
($585,190)
0
16,300
_______
$483,300
141,000
232,000
Accumulated
OCI
90,000
(3,500)
_______
(487,800)
Net defined
benefit Asset
(Liab)
0
$411,800
*$90,000 invested 1 January and earning interest in 20x4
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19-54
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
(69,790)
(16,000)
($173,390)
(5,200) cr.
16,000 dr.
$14,300 dr.
Assignment 19- 21
Requirements 1-3
Requested information is in bold below
Projected
obligation
dr./(cr.)
Beginning balances
Current service cost
Interest on net obl. (see
below)
Actual return on assets
versus expected
($4,113-$350)
Benefit payments
Funding contribution
$(69,000)
(16,000)
(4,410)
Plan
assets
dr./(cr.)
OPEB
expense
dr./(cr.)
$58,000
4,113
Accumulated
OCI
OPEBs
$23,000dr.
$16,000
297
(3,763)
(3,763)
______
(R2)16,297
(12,000)
9,000
(R1)$(77,410)(R1) $55,350
Net
OPEB
asset
(liability)
$(11,000)
3,763dr.
(16,297)
12,000
9,000
(R3)(22,060)
______
(R3)
$26,763dr.
Net Interest expense
Interest expense: 69,000 – (12,000 benefit payment x 6/12) x 7% = 4,410
Interest income: (58,000 – (12,000 benefit payment x 6/12) + (9,000 x 9/12)) x 7%
= (58,000 – 6,000 + 6,750) x 7% = 4,113
Net interest = 4,410 – 4,113 = 297
© 2017 McGraw-Hill Education Ltd. All Rights Reserved.
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-55
Assignment 19-22
Requirements 1-3
Requested information is in bold below
Beginning balances
Current service cost
Interest on net obl.
See below:
Actual return on assets
versus expected **
($0-0)
Actuarial revaluation –
reduction to liability
and gain
Projected
Plan
OPEB
obligation
dr./(cr.)
assets
dr./(cr.)
expense
dr./(cr.)
$(1,282,000)
(211,000)
(59,675)
$
0
300,000
177,000
(R1)
$(1,075,675)
Accumulat
ed
OCI
OPEBs
OPEB
asset
(liability)
$(1,282,000)* $186,000dr
$211,000
59,675
300,000 (300,000)cr
(R2)$270,675
Benefit payments
Funding contribution
Accrued
(177,000)
178,000
(R1)
$1,000
(270,675)
178,000
______
(R3)
(R3)
($1,074,675) $(114,000)
cr
* Column 1 less column 2
** Line can be omitted; included here only for demonstration purposes
Interest cost: (5% x ($1,282,000 – (177,000 benefit payment x 6/12))) = 59,675
© 2017 McGraw-Hill Education Ltd. All Rights Reserved.
19-56
Solutions Manual to accompany Intermediate Accounting, Volume2, 7th edition
Assignment 19-23
Beginning balances
Current service cost
Interest on obl. and assets
(5%) Note 2 and Note 3
Actual return on assets
versus expected
($1,075-$600)
Actuarial loss
Benefit payments
Funding contribution
Projected
Plan
OPEB
Net
obligation
dr./(cr.)
assets
dr./(cr.)
expense
dr./(cr.)
OPEB
asset
(liability)
$(544,800)(1)
$(566,300)
(67,800)
(28,315)
$21,500
1,075
43,900
$(653,515)
______
$95,040
(43,900)
46,400
$24,600
$45,000
$67,800
27,240
(475)
(35,000)
Accumulated
OCI
OPEB
(475)
475
(35,000)
(95,040)
35,000
46,400
$(628,915)
_______
$80,475
(1) $566,300 - $21,500 = $544,800
(2) Interest expense = 566,300 x 5% = 28,315
(3) Interest income = 21,500 x 5% = 1,075
© 2017 McGraw-Hill Education Ltd. All Rights Reserved.
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-57
Assignment 19-24
Requirement 1
The discount rate for the defined benefit pension obligation is based on interest rates for
long-term debt in corporate bond markets. Long-term interest rates for a similar term as
cash flows expected for the pension plan are used. The rate has declined, which means
that there is less interest cost for pension expense, but the discounted present value of
benefits is higher. The interplay of these two factors will dictate the exact change to
pension expense.
The weighted average rate of compensation increase would be set with reference to future
salary levels, which are based in part on the inflation rate. Other factors are labour force
composition, industry trends, and overall trends in the economy. Salary rate increases are
lower this year, which means that future benefits are lower and pension expense should
decline.
The retention rate would be estimated with reference to past retention rates, and
conditions on the labour market. Factors might include wage rate increases, and (again)
labour force composition, industry trends, and overall trends in the economy. Retention
rates are lower this year, which means that future benefits are lower and pension expense
should decline.
Note that “best estimates” must be used for all assumptions; these estimates must be
consistent.
Requirement 2
In 20X2, the pension fund has obligations of $612 and assets of $545. It is therefore
underfunded in the amount of $67 by accounting measures. This is an improvement from
the underfunded position of $91 in the prior year.
The net position of the fund is reported on the SFP and thus a liability of $67 ($91 in
20x1) appears on the SFP.
Requirement 3
Actuarial amounts are recorded in OCI. These include retrospective and prospective remeasurement of the projected benefit obligation for changes in assumptions such as
interest rate, salary rate changes, retention and other demographics. The OCI amounts
also include the difference between actual fund earnings, which may be volatile, and
expected earnings on fund assets, measured using a stable rate based on long-term bond
yields with similar term, risk and currency as the cash flows expected for the pension
plan.
OCI amounts are not recycled to earnings, but are a permanent element of equity. OCI
amounts may be transferred to another equity account, such as retained earnings.
© 2017 McGraw-Hill Education Ltd. All Rights Reserved.
19-58
Solutions Manual to accompany Intermediate Accounting, Volume2, 7th edition
Assignment 19-25
Requirement 1
Pension expense:
Current service
Finance cost (1)
Re-measurements:
Experience loss on assets (2)
Past service
Revaluation
Pension expense (recovery) (3)
$ 250,400
66,060
262,780
(203,200)
(603,700)
$(227,660)
(Recovery):
Net defined benefit asset/liability ……………. 227,660
Pension expense (recovery)…………………………………….
Contribution:
Net defined benefit asset/liability………………..
450,000
Cash…………………………………………………….
227,600
450,000
(1) ($1,101,000* × 6%)
Interest expense 6,499,000 x 6% = 389,940
Interest income: 5,398,000 x 6% = 323,880
Net interest = 389,940 – 323,880 = 66,060
* Net defined benefit liability, 31 December 20X8
Defined benefit obligation, 31 December 20X8
Pension plan assets, 31 December 20X8
Net defined benefit liability, 31 December 20X8
$6,499,000 cr.
5,398,000 dr.
$ 1,101,000 cr.
(2) Experience loss on assets: $323,880 less $61,100 = 262,780
(3) Alternate calculation based on finance cost for liability only, and actual return;
also acceptable and provides the same end result: $250,400 +$389,940 - $61,100 $203,200 - $603,700 = ($227,660)
Note: Students may prepare a series of entries, or do an overall calculation of the
expense and record it in a summary entry. Either approach is acceptable, but the
assignment specified one summary entry.
© 2017 McGraw-Hill Education Ltd. All Rights Reserved.
Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-59
Requirement 2
Net defined benefit liability, 31 December 20X9
($1,101,000 cr. Op. balance - $227,660 dr. – $450,000 dr.) = $ 423,340 cr.
Proof: equal to the net defined benefit as calculated in A19-8 or below
Defined benefit obligation, 31 December 20X9
Obligation, 1 January 20X9
Current service cost, 20X9
Interest (6% of opening balance)
PSC
Actuarial revaluation
Benefits paid
Fair value of plan assets, 31 December 20X9
Value at 1 January 20X9
Actual earnings on plan assets
Funding contributions
Benefits paid
Net defined benefit, 31 December 20X9
($6,227,440 – $5,804,100)
$6,499,000
250,400
389,940
(203,200)
(603,700)
(105,000)
$6,227,440 cr.
$5,398,000
61,100
450,000
(105,000)
$5,804,100 dr.
$ 423,340 cr.
© 2017 McGraw-Hill Education Ltd. All Rights Reserved.
19-60
Solutions Manual to accompany Intermediate Accounting, Volume2, 7th edition
Assignment 19-26
Requirement 1
Pension expense:
Current service
Finance cost (1) interest only
Actual return
Re-measurements:
Past service
Revaluation
Pension expense (3)
$ 175,200
143,500
104,800
(116,500)
355,700
$ 662,700
Expense:
Pension expense ……………. ………………………… 662,700
Net defined benefit asset/liability..………….
662,700
Contribution:
Net defined benefit asset/liability………………..
390,000
Cash…………………………………………………….
390,000
(1) ($2,870,000* × 5%) = 143,500
Interest expense: ($2,870,000* × 5%) = 143,500
Interest income: 1936,000 x 5% = 96,800
Net interest expense: 143,500 – 96,800 = 46,700
Net defined benefit liability, 31 December 20X1
Defined benefit obligation, 31 December 20X1
Pension plan assets, 31 December 20X1
Net defined benefit liability, 31 December 20X1
$2,870,000 cr.
1,936,000 dr.
$ 934,000 cr.
Note: Students may prepare a series of entries, or do an overall calculation of the
expense and record it in a summary entry. Either approach is acceptable, but the
assignment specified one summary entry.
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-61
Requirement 2
Net defined benefit liability, 31 December 20X2
($934,000 cr. Op. balance + $662,700 cr. – $390,000 dr.) = $ 1,206,700 cr.
Proof: equal to the net defined benefit as calculated in A19-9 or below
Defined benefit obligation, 31 December 20X2
Obligation, 1 January 20X2
Current service cost, 20X2
Interest (5% of opening balance)
PSC
Actuarial revaluation
Benefits paid
Fair value of plan assets, 31 December 20X2
Value at 1 January 20X2
Actual earnings (loss) on plan assets
Funding contributions
Benefits paid
Net defined benefit, 31 December 20X2
($3,213,000 – $2,006,300)
$2,870,000
175,200
143,500
(116,500)
355,700
(214,900)
$3,213,000cr.
$1,936,000
(104,800)
390,000
(214,900)
$2,006,300 dr.
$ 1,206,700 cr.
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19-62
Solutions Manual to accompany Intermediate Accounting, Volume2, 7th edition
Assignment 19-27
Requirement 1
Pension expense:
Current service
Finance cost (1)
Re-measurements:
Experience loss on assets (2)
Past service
Revaluation
Pension expense (3)
Expense:
Pension expense ……………. …………………………
Net defined benefit asset/liability..………….
Contribution:
Net defined benefit asset/liability………………..
Cash…………………………………………………..
$ 6,700
1,960
2,260
3,700
(2,500)
$12,120
12,120
12,120
7,000
7,000
(1) ($28,000* × 7%) = 1,960
Interest expense 106,000 x 7% = 7,420
Interest income 78,000 x 7% = 5,460
Net interest = 7,420 – 5,460 = 1,960
* Net defined benefit liability, 31 December 20X1
Defined benefit obligation, 31 December 20X1
Pension plan assets, 31 December 20X1
Net defined benefit liability, 31 December 20X1
$106,000 cr.
78,000 dr.
$ 28,000 cr.
(2) Experience loss on assets: $5,460 less $3,200
(3) Alternate calculation based on finance cost for liability only, and actual return;
also acceptable and provides the same end result: $6,700 +$7,420 - $3,200 +$3,700
- $2,500 = $12,120
Note: Students may prepare a series of entries, or do an overall calculation of the
expense and record it in a summary entry. Either approach is acceptable, but the
assignment specified one summary entry.
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-63
Requirement 2
Net defined benefit liability, 31 December 20X2
($28,000 cr. Op. balance + $12,120 cr. – $7,000 dr.) = $ 33,120 cr.
Proof: equal to the net defined benefit as calculated in A19-10 or below:
Defined benefit obligation, 31 December 20X2
Obligation, 1 January 20X2
Current service cost, 20X2
Interest (7% of opening balance)
PSC
Actuarial revaluation
Benefits paid
Fair value of plan assets, 31 December 20X2
Value at 1 January 20X2
Actual earnings on plan assets
Funding contributions
Benefits paid
Net defined benefit, 31 December 20X2
($107,320 - $74,200)
$106,000
6,700
7,420
3,700
(2,500)
(14,000)
$107,320 cr.
$78,000
3,200
7,000
(14,000)
$74,200 dr.
$33,120 cr.
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Solutions Manual to accompany Intermediate Accounting, Volume2, 7th edition
Assignment 19-28 (WEB)
Requirement 1 and Requirement 2
Pension expense:
Current service
Finance cost (revenue)(1)
Re-measurements:
Experience loss on assets (2)
Past service
Revaluation
Change in valuation allowance (3)
Pension expense (4)
$ 9,100
(6,000)
52,600
56,000
(12,000)
(90,300)
$9,400
Expense:
Pension expense ……………. ………………………… 9,400
Net defined benefit asset/liability..………….
9,400
Contribution:
Net defined benefit asset/liability………………..
6,000
Cash…………………………………………………….
6,000
(1) Net interest income
Interest expense on the obligation 496,000 x 5% = 24,800
Interest income on the plan asset less the valuation allowance
= (702,000) x 5% = 35,100
Interest on the valuation allowance = 86,000 x 5% = 4,300
Total net interest income: -24,800 + 35,100 - 4,300 = 6,000
Proof = $120,000 x 5% = $6,000
* Net defined benefit asset, 31 December 20X8
Defined benefit obligation, 31 December 20X8
Pension plan assets, 31 December 20X8
Net defined benefit asset, 31 December 20X8
Since the maximum surplus recoverable is $120,000
Valuation allowance
Net defined benefit asset balance 31 December 20X8
$496,000 cr.
702,000 dr.
$ 206,000 dr.
(86,000)
120,000
(2) Experience loss on assets: $35,100 plus $17,500 = 52,600
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-65
(3) The change in the valuation allowance:
To determine the change in the valuation allowance, the closing balance of the net
defined benefit asset needs to be compared to the asset ceiling limit. The
calculations of the closing net defined benefit obligation and plan assets are shown
below.
Valuation allowance -- opening
Add interest on effect of asset ceiling
Net balance before adjustment
Change in valuation allowance for 20X9
Closing balance – valuation allowance
86,000
4,300
90,300
(90,300)
0
(4) Alternate calculation based on finance cost for liability only, and actual return;
also acceptable and provides the same end result:
$9,100 +$24,800 + 17,500 + $56,000 - $12,000 - 86,000= $9,400
Note: Students may prepare a series of entries, or do an overall calculation of the
expense and record it in a summary entry. Either approach is acceptable, but the
assignment specified “all entries.”
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Solutions Manual to accompany Intermediate Accounting, Volume2, 7th edition
Requirement 2
Net defined benefit liability, 31 December 20X9
($120,000 dr. Op. balance - $9,400 cr. + $6,000 dr.) = $ 116,600 dr.
Proof: equal to the net defined benefit as calculated in A19-10 or below
Defined benefit obligation, 31 December 20X9
Obligation, 1 January 20X9
Current service cost, 20X9
Interest (5% of opening balance)
PSC
Actuarial revaluation
Benefits paid
Fair value of plan assets, 31 December 20X9
Value at 1 January 20X9
Actual earnings (loss) on plan assets
Funding contributions
Benefits paid
Net defined benefit liability, 31 December 20X9
($683,300 dr. – 566,700 cr)
$496,000
9,100
24,800
56,000
(12,000)
(7,200)
$566,700 cr.
$702,000
(17,500)
6,000
(7,200)
$683,300 dr.
$116,600 dr.
The asset ceiling maximum is $120,000, and therefore there is no valuation allowance
required as at December 31, 20X9. Therefore, the valuation allowance from the previous
year is now reversed.
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-67
Assignment 19-29
Pension
Obligation
20x7
Beginning
- PSC
CSC
Net Interest
4% * ($1,640
- $0)
Pension
Expense
$ (1,640,000)
$ 1,640,000
(117,000)
(65,600)
117,000
65,600
Funding
$(1,822,600)
20x8
CSC
Net interest
(4% of
$1,822.6)
and (4% of
$317)
Actual return
versus
expected
($12.68 $6.8)
Revaluation
Benefits paid
Plan Assets
(157,000)
(72,904)
317,000
$317,000
12,680
(5,880)
37,000
41,400
1,822,600 (1,822,600)
317,000
$(1,505,600)
157,000
60,224
5,880
(37,000)
(41,400)
186,104
Funding
$(1,974,104)
Net pension
Asset (Liab)
357,000
$ 639,400
(186,104)
357,000
$(1,334,704)
Note: 20X7 is no different between IFRS and ASPE. In 20X8, note the absence of AOCI;
items are expensed instead. The net pension liability on the balance sheet at the end of the
year is identical; it is still the net position of the fund.
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Solutions Manual to accompany Intermediate Accounting, Volume2, 7th edition
Assignment 19-30
Requirement 1
Preferred dividends declared ($51 x $6) ..................................
Preferred dividends payable .........................................
306
Common shares ($11,050 / 6,621) x 865 .................................
Contributed capital, common share retirement (balance) ........
Retained earnings .....................................................................
Suspense .......................................................................
1,540
788
3,912
Premium on bond payable........................................................
Interest expense ............................................................
83
Compensation expense (administrative) ..................................
Stock options outstanding ............................................
$900 / 4 = $225
225
306
6,240
83
225
Pension expense (operating) ($1,848 x .85).............................
1,571
Pension expense (administrative) ...........................................
277
Defined benefit obligation ($1,603 - $2,098) ..........................
250
Suspense .......................................................................
2,098
Pension expense = $1,700 + ($9,716 – $9,096) x 6%) + ($435 vs. ($9,096 x 6%)) =
$1,848
Or, $1,700 + ($9,716 x 6%) – $435 = $1,848
Stock dividend .........................................................................
Common shares outstanding ........................................
(6,210 – 865) x .10 x $8
4,276
Interest expense ($3,985 x 7%) ................................................
Lease liability ...............................................................
279
Lease liability ...........................................................................
Current bank loan .........................................................
612
4,276
279
612
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-69
Solution
Exhibit 1
Oilfield Multiservices Ltd
Draft Financial Statements
for the year ended December 31, 20X7
(in thousands)
Balance Sheet
Assets
Cash
Accounts receivable
Inventory
Prepaid expenses and deposits
Current assets
$
Capital assets, net
Intangible assets
Suspense
Liabilities
Accounts payable and
accrued liabilities
Income tax payable
Current bank loan
Current liabilities
14,960
30,497
1,958
930
48,345
78,441
890
890
-2,098 - 6,240
-
$
136,014
$
19,511
1,600
12,100
33,211
306
3,985
+279 - 612
3,652
31,210
-83
31,127
6,900
620
-250
6,900
370
30,000
1,210
Future income tax
Deferred pension obligation
Total Liabilities
Shareholders' Equity
Preferred shares
Common shares
Contributed capital
on common stock retirement
Stock options oustanding
Retained earnings
Total Shareholders' Equity
Total Liabilities & Shareholders' Equity
$
78,441
8,338
Total Assets
Lease liability
Long-term debt
Premium
14,960
30,497
1,958
930
48,345
$
127,676
$
19,817
1,600
12,712
34,129
612
75,926
76,178
5,100
11,050 -1,540 + 4,276
5,100
13,786
788
450
42,700
675
31,937
-788
225
60,088
$
136,014
51,498
$
127,676
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19-70
Solutions Manual to accompany Intermediate Accounting, Volume2, 7th edition
Solution
Exhibit 1
Oilfield Multiservices Ltd
Draft Financial Statements
for the year ended December 31, 20X7
(in thousands)
Statement of Income and Retained Earnings
Sales
$ 146,560
Expenses
Operating
Selling, general & admin
Interest
Depreciation
103,490
8,385
2,355
8,420
122,650
Income before tax
Income tax
Net Income
23,910
5,950
17,960
Opening retained earnings
Common share retirement
Dividends
Preferred
Common
Stock
27,965
Closing retained earnings
$ 146,560
1,571
+225 + 277
-83 + 279
21,641
5,950
15,691
3,912
3,225
$
105,061
8,887
2,551
8,420
124,919
306
4,276
42,700
27,965
3,912
306
3,225
4,276
$ 31,937
Requirement 3
Key financial targets:
Retained earnings
Debt/Equity
Before
After
$42,700
$31,937
1.26
1.47
Comment : Financial targets are met in the revised financial statements. Retained
earnings have been significantly reduced by the stock dividend and the common share
repurchase. The value of the stock dividend was at the discretion of the Board of
Directors and could have been recorded at a lower amount. The Board may be able to
change their resolution on this issue. Retained earnings levels are still above the $30
million target, but OML must be cautious in the coming year with any share transactions
that will decrease this account; leeway in the coming year depends on the level of income.
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
19-71
Debt-to-equity is acceptable but very close to the 1.5 target. Debt should be reduced, and
equity increased, over the coming year. The company has adequate current resources
(cash) to accomplish some debt repayment; there is a large current bank loan coming due,
and if this is repaid with available cash, the debt/equity ratio will improve.
(CGA-Canada, adapted)
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Solutions Manual to accompany Intermediate Accounting, Volume2, 7th edition
Actuarial cost methods;
Connect assignments
Assignment 19-A1
Mary’s final salary: $25,000 × (F/P, 5%, 24) = $25,000 × 3.225
Mary’s annual pension: 25 ×2% × $80,625
Value of pension at retirement:
$40,313 × (P/AD, 7%, 20) = $40,313 × 11.3356
Level annual contribution:
$456,972 ÷ (F/A, 7%, 25) = $456,972 × 67.676
[alternatively: $456,983 × (P/F, 7%, 25) ÷ (P/A, 7%, 25)]
$ 80,625
$ 40,313
$ 456,972
$
7,225
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19-73
Assignment 19-A2
Requirement 1
The accumulated benefit method calculates the contributions that an employer must make
in order to fund the pension to which the employee is currently entitled, based on the
years of service to date and on current salary.
Annual annuity earned = 2% x 1 year x $16,000 = $320.00
APV = $320 x (P/A, 6%, 20) = $320 x 11.46992 = $3,670.37
Funding = $3,670.37 x (P/F, 6%, 24) = $3,670.37 x .24698 = $906.51
The projected unit credit method calculates the required funding based on the years of
service to date but on a projected estimate of the employee’s salary at the retirement date.
Life annuity earned = $51,602 x 2% x 1 year = $1,032.04
APV = $1,032.04 x (P/A, 6%, 20) = $1,032.04 x 11.46992 = $11,837.42
Funding = $11,837.42 (P/F, 6%, 24) = $11,837.42 x .24698 = $2,923.61
The level contribution method projects both the final salary and the total years of service,
and then allocates the cost evenly over years of service.
Annual annuity = APV/(F/A, 6%,25 years) = ($11,837.42 x 25) ÷ (F/A, 6%, 25)
= $295,935 ÷ 54.865
= $5,393.88
Requirement 2
Jack would likely prefer the level contribution method, as it requires the largest up-front
funding of his pension, making the pension more secure in the event of corporate failure.
Excluding the risk of corporate failure, however, Jack should be indifferent, since his
defined benefit plan specifies his eventual pension irrespective of funding.
Requirement 3
The company, wishing to conserve current cash balances, would likely prefer the
accumulated benefit method, which has the lowest cash requirement in early years.
Requirement 4
The projected unit credit method must be used for accounting.
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Solutions Manual to accompany Intermediate Accounting, Volume2, 7th edition
Assignment 19-A3
Requirement 1
a)
Accumulated benefit method
First year
Annual pension annuity = 1.5% x 1 year x $30,000 = $450
PVretirement = $450 x (P/AD, 7%, 12) = $450 x 8.49867 = $3,824
PVnow = $3,824 x (P/F, 7%, 24) = $3,824 x .19715 = $754
Note that the pension is paid at the beginning of each retirement year.
Second year Annual pension annuity = 1.5% x 2 years x $31,800 = $954;
$954 - $450 = $504
PVretirement = $504 x (P/AD, 7%, 12) = $504 x 8.49867 = $4,283
PVnow = $4,283 x (P/F, 7%, 23) = $4,283 x .21095 = $904
b)
Projected unit credit method
First year
Salary in age 64 year:
$30,000 x (F/P, 6%, 24)
$30,000 x 4.049 = $121,470
Annual annuity: $121,470 x 1.5% x 1 year = $1,822
PVnow = $1,822 (P/AD, 7%, 12) x (P/F, 7%, 24)
= $1,822 (8.49867) (.19715)
= $3,053
Second year PVnow = $1,822 (P/AD, 7%, 12) x (P/F, 7%, 23)
= $1,822 (8.49867) (.21095)
= $3,266
Note that as long as the expected lifetime salary increase continues to be expected to
be 6%, the actual salary in year 2 is irrelevant.
c)
Level contribution method
First and second years:
Annual pension annuity:
1.5% x 25 x $121,470 = $45,551
Contribution annuity
= $45,551 (P/AD, 7%, 12)/(F/A, 7%, 24)
= $45,551 (8.49867)/58.177
= $6,654
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19-75
Assignment 19-A4
Requirement 1
The final funding requirement is calculated as follows:
a) Project the salary at retirement.
b) Calculate Calamari’s pension based on final salary (2% per year to a maximum of 60%.)
c) Determine Calamari’s life expectancy after retirement.
d) Calculate the present value of the salary entitlement at 7% for the years of life.
Requirement 2
Accumulated benefit method— Annuity = $40,000 x 2% = $800;
PV = $800 x (P/AD 7%,15) (9.74547) = $7,796;
Funding = $7,796 x (P/F, 7%,19) (.27651) = $2,156
Projected unit credit method—
Level funding method—
Annuity = $81,700 x 2% = $1,634;
PV = $1,634 x (P/AD 7%,15) (9.74547) = $15,924
Funding = $15,924 x (P/F, 7%,19) (.27651) = $4,403
Annuity = $81,700 x 2% x 20 = $32,680;
Funding = $32,680 (P/AD 7%,15) (9.74547)/ (F/A 7%,20)
(40.995)
= $7,769 or, $318,482 / 40.995 = $7,769
Requirement 3
Pension expense
Net defined pension asset
$4,403
$3,366
see requirement 2
($4,403 - $7,769)
Requirement 4
Assumptions:
•
the average compounded rate of salary increase
•
the long-term rate of earnings on plan assets
•
the life expectancy for the employee from retirement age
Requirement 5
Effect on funding requirement:
a)
Calamari lives longer
b)
Return on assets higher
c)
Salary increase, unexpected
d)
Salary freeze, unexpected
Funding increases
Funding decreases
Funding increases
Funding decreases
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Solutions Manual to accompany Intermediate Accounting, Volume2, 7th edition
Assignment 19-A5
Requirement 1
Accumulated benefit method
$35,000 x 1.75% x 1 year = $612.50
PV50 = $612.50 (P/AD, 5%, 18) = $612.50 x 12.27407 = $7,518
PV25 = $7,518 x (P/F, 5%, 24) = $7,518 x .31007 = $2,331
Projected unit credit method
Annual annuity = $35,000 (F/P, 4%, 24) = $89,716 x 1.75% = $1,570
PV50 = $1,570 (P/AD, 5%, 18) = $1,570 x 12.27407 = $19,272
PV25 = $19,272 (P/F, 5%, 24) = $19,272 x .31007 = $5,976
Level Contribution method
Annual annuity = $89,716 x (25 x 1.75%) = $39,251
PV50 = $39,251 x (P/AD, 5%, 18) = $39,251 x 12.27407 = $481,766
PV25 = $481,766/(F/A, 5%, 25) = $481,766/47.727 = $10,094
Requirement 2
Accumulated benefit method
PV50 = $612.50 x (P/AD, 8%, 18) = $612.50 x 10.12164 = $6,200
PV25 = $6,200 x (P/F, 8%, 24) = $6,200 x .15770 = $978
Projected unit credit method
Annual annuity = $35,000 (F/P, 6%, 24) = $141,713 x 1.75% = $2,480
PV50 = $2,480 (P/AD, 8%, 18) = $2,480 x 10.12164 = $25,102
PV25 = $25,102 (P/F, 8%, 24) = $25,102 x .15770 = $3,959
Level contribution method
Annual annuity = $141,713 x (1.75% x 25) = $61,999
PV50 = $61,999 x (P/AD, 8%, 18) = $61,999 x 10.12164 = $627,536
PV25 = $627,536/(F/A, 8%, 25) = $627,536/73.106 = $8,584
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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
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Requirement 3
Accumulated benefit method
PV50 = $612.50 (P/AD, 5%, 10) = $612.50 x 8.10782 = $4,966
PV25 = $4,966 x (P/F, 5%, 24) = $4,966 x .31007 = $1,540
Projected unit credit method
Annual annuity (see Requirement 1) = $1,570
PV50 = $1,570 (P/AD, 5%, 10) = $1,570 x 8.10782 = $12,729
PV25 = $12,729 (P/F, 5%, 24) = $12,729 x .31007 = $3,947
Level contribution method
Annual annuity = $39,251 (Requirement 1)
PV50 = $39,251 (P/AD, 5%, 10) = $39,251 x 8.10782 = $318,240
PV25 = $318,240/(F/A, 5%, 25) = $318,240/47.727 = $6,668
Requirement 4
The accumulated benefit method bases funding requirements on existing salary and
service years. No projections—of final pay or total years of service—are made.
The projected unit credits method bases funding requirements on projected final salary
but on existing years of service.
The level contribution method projects both salaries and years of service, then allocates
level funding to periods or salary dollars.
The variables to which the funding formula is particularly sensitive, as demonstrated in
requirements 1 and 2, include:
1. The discount rate (return on fund assets)
2. The rate of expected increase in salary (although 1 & 2 work in opposite
directions)
3. Turnover estimates
4. Mortality rates.
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Solutions Manual to accompany Intermediate Accounting, Volume2, 7th edition