Intermediate Accounting II, ACCT 3322
Solutions to Review Questions, Chapters 17 and 18
1. Spencer Company's defined benefit pension plan had a PBO of $500,000 on January 1,
2003. During 2003, pension benefits were $40,000. The actuarial discount rate for the
plan for this year was 8%. Service cost for 2003 was $100,000. Plan assets (fair value)
increased during the year by $65,000. Calculate the PBO as of December 31, 2003.
PBO, 1/1/03
Service cost
Interest cost
Benefits paid
PBO, 12/31/03
PBO, 12/31/03
(500,000)
(100,000)
(40,000)
40,000
Analysis of interest cost:
PBO, 1/1/03
Discount rate
Interest cost
(600,000)
(500,000)
8%
(40,000)
2. The following information is related to the defined benefit pension plan of Spencer
Company for 2003:
Service cost
Contributions to pension plan
Benefits paid to retirees
Plan assets (fair value), 1/1/03
Plan assets (fair value), 12/31/03
Actual return on plan assets
PBO, 1/1/03
PBO, 12/31/03
Discount rate
Expected rate of return on plan assets
90,000
125,000
185,000
600,000
705,000
165,000
900,000
999,000
7%
9%
Assuming no other relevant data exist, what is the pension expense for 2003?
1
Pension Expense
Service cost
Interest cost
Expected return on plan assets
Pension expense
$90,000
63,000
(54,000)
$99,000
Analysis of interest cost:
PBO, 1/1/03
Discount rate
Interest cost
$900,000
7%
Analysis of expected return on plan assets:
Plan assets, 1/1/03
Expected rate of return on plan assets
Expected return on plan assets
$600,000
9%
$63,000
$54,000
3. Spencer Company has a defined benefit pension plan. At the end of 2003, the following
data were available: beginning PBO, $100,000; service cost, $20,000; interest cost,
$15,000; benefits paid for the year, $15,000; ending PBO, $129,000; the expected return
on plan assets, $8,000; and cash deposited with pension trustee, $22,000. There were no
other pension related costs for 2003. What is the pension expense for the year and
prepare the journal entry to record pension expense and funding for the year.
Pension Expense
Service cost
Interest cost
Expected return on plan assets
Pension expense
20,000
15,000
(8,000)
ACCOUNT
DEBIT
Pension expense
27,000
Prepaid (accrued) pension cost
Cash
To record pension expense and funding for the year
27,000
CREDIT
5,000
22,000
2
4. The EPBO for a particular employee on January 1, 2003, was $100,000. The APBO at
the beginning of the year was $20,000. The appropriate discount rate for this
postretirement plan is 6%. The employee is expected to serve the company for a total of
twenty years with four of those years already served as of January 1, 2003. What is the
APBO at December 31, 2003?
APBO, 12/31/04
EPBO, 1/1/03
1 + discount rate
EPBO, 12/31/03
Ratio period served over required
APBO, 12/31/03
Alternative reconcilication:
Service cost:
EPBO, 12/31/03
Divided by total years of service
Service cost
Interest cost:
APBO, 1/1/103
Interest rate
Interest cost:
Total postretirement benefit cost
100,000
1.06
106,000
5/20
26,500
106,000
20
5,300
20,000
6%
1,200
6,500
5. Assume that at the beginning of the current year, Spencer Company has an
unrecognized net gain of $19,000. At the same time, assume the APBO and the plan
assets are $30,000 and $40,000, respectively. The average remaining service period for
the employees expected to receive benefits is 20 years. What is the amount of
amortization to postretirement benefit expense for the year?
Amortization of Unrecognized Net Gain
Unrecognized net gain
19,000
Greater of 10% of APBO or 10% of plan assets
10% of plan assets
4,000
Excess subject to amortization
15,000
Average remaining service period
20
Current year amortization
750
3
6. On January 1, 2003, Spencer Company's projected benefit obligation was $50,000.
During 2003, pension benefits paid by the trustee were $12,000. Service cost for 2003 is
$9,000. Pension plan assets increased during 2003 by $7,000 as expected. At the end of
2003, there were no unrecognized pension costs. The actuary's discount rate was 8%.
Determine the amount of the projected benefit obligation at December 31, 2003.
PBO, 12/31/03:
PBO, 1/1/03:
Service cost
Interest cost
Pension benefits paid
PBO, 12/31/03
50,000
9,000
4,000
(12,000)
51,000
Analysis of interest cost:
PBO, 1/1/03
Discount rate
Interest cost
50,000
8%
4,000
7. The following data is available pertaining to Spencer Corporation's retiree health plan
for 2003:
Number of employees covered
Years employed (each), 1/1/03
Attribution period (years)
EPBO, 1/1/03
EPBO, 12/31/03
Interest rate
Funding
10
7
25
500,000
540,000
8%
None
(a) Calculate the APBO as of January 1, 2003.
APBO, January 1, 2003
EPBO, 1/1/03
Completed/required service
APBO, 1/1/03
500,000
7/25
140,000
4
(b) Calculate interest cost for 2003.
Interest Cost
APBO, 1/1/03
Interest rate
Interest cost
140,000
8%
11,200
(c) Calculate service cost for 2003.
Service Cost
EPBO, 12/31/03
1 ÷ Attribution period
Service cost
540,000
1/25
21,600
(d) Prepare the journal entry to record the postretirement benefit expense for 2003.
ACCOUNT
Postretirement benefit expense
Accrued postretirement benefit cost
To record postretirment benefit expense for 2003
Analysis of postretirment benefit expense:
Service cost
Interest cost
Postretirement benefit expense
DEBIT
32,800
CREDIT
32,800
21,600
11,200
32,800
5
8. Spencer Company provided the following information about its defined benefit pension
plan for the year 2004.
Vested benefit obligation
Accumulated benefit obligation
Projected benefit obligation
Fair value of plan assets
Expected return on plan assets
Prepaid (accrued) pension cost
Prior service costs
Net loss (gain)
Service cost
Contributions to fund
Benefits paid
Discount rate
Average remaining service period per employee
1/1/04
$500,000
600,000
1,200,000
750,000
12/31/04
$700,000
1,000,000
1,600,000
825,000
8%
50,000
200,000
300,000
300,000
210,000
300,000
6%
20
(a) Enter the beginning balances and the service cost for 2004 on the pension spreadsheet
located at the end of this problem.
(b) In the space provided calculate interest cost and enter the amount on the pension
spreadsheet.
Interest Cost
PBO balance, 1/1/04
Discount/interest rate
Interest cost
$1,200,000
6%
$72,000
6
(c) In the space provided calculate the actual return on plan assets and enter the amount on
the pension spreadsheet.
Actual Return on Plan Assets
FV plan assets, 12/31/04
FV plan assets, 1/1/04
Increase in FV of plan assets during 2004
Contributions to fund
Payments to retirees
Excess payments (contributions) during 2004
Actual return on plan assets
$825,000
750,000
$75,000
210,000
300,000
90,000
$165,000
(d) In the space provided calculate the adjustment to net loss (gain) on plan assets and enter
the amount on the pension spreadsheet.
Loss (Gain) on Plan Assets
Expected return on plan assets:
FV of plan assets, January 1, 2004
Expected rate of return
Expected return
Actual return on plan assets
Loss (gain) on plan assets
$750,000
8%
$60,000
165,000
($105,000)
(e) In the space provided calculate the adjustment to net loss (gain) on plan assets and enter
the amount on the pension spreadsheet.
Loss (Gain) on PBO
PBO, December 31, 2004 (actuarially determined)
PBO, January 1, 2004
Service cost
Interest cost
Benefits paid
Computed PBO, December 31, 2004
Loss (gain) on PBO
$1,600,000
$1,200,000
300,000
72,000
(300,000)
1,272,000
$328,000
7
(f) In the space provided calculate the amortization of prior service costs and enter the
amount on the pension spreadsheet.
Amortization of Prior Service Cost
Prior service cost
Average remaining service life per employee
Amortization of prior service cost
$200,000
20
$10,000
(g) In the space provided calculate the amortization of net loss on PBO and enter the
amount on the pension spreadsheet.
Amortization of loss (gain) on PBO
Balance, January 1
PBO, January 1
$1,200,000
Plan assets, January 1
750,000
Greater of PBO or Plan assets:
PBO
1,200,000
Corridor percentage
10%
Excess, January 1
Average remaining service period
Amortization of loss
$300,000
120,000
180,000
20
$9,000
(h) In the space provided calculate pension expense. Foot the pension column on the
pension spreadsheet and make sure that the amounts are identical.
Pension Expense
Service cost
Interest cost
Actual return on plan assets
Gain (loss) on return on plan assets
Expected (gain) loss on plan assets
Amortization of prior service cost
Amortizatio of loss on PBO
Pension expense
$300,000
72,000
($165,000)
105,000
(60,000)
10,000
9,000
$331,000
8
(i) In the space provided prepare the adjusting journal entry to record pension expense,
prepaid (accrued) pension cost and the charge to cash. Enter the debit or credit to
prepaid (accrued) pension cost on the pension spreadsheet and foot the column for
prepaid (accrued) pension cost.
Account
Pension expense
Prepaid (accrued) pension cost
Cash
To record pension expense for the year
Debit
$331,000
Credit
$121,000
210,000
(j) Foot and cross-foot all of the columns on the pension spreadsheet. In the space
provided prepare the reconciliation of the informal records to prepaid (accrued) pension
cost using the ending numbers from the pension spreadsheet.
Reconciliation of Informal Records to Prepaid (Accrued) Pension
Projected benefit obligation
Fair value of plan assets
Funded status
Unrecognized prior service cost
Unrecognized net (gain) or loss
Prepaid (accrued) pension cost
($1,600,000)
825,000
(775,000)
190,000
514,000
($71,000)
9
Pension Spreadsheet
Informal Records
Balance, January 1, 2004
Service cost
Interest cost
Actual return on plan assets
Net Loss (gain) on plan assets
Net Loss (gain) on PBO
Change in prior service cost
Amortizaiton of:
Prior service cost
Net gain (loss)
Contributions to fund
Benefits paid
Minimum liability adjustment
2004 Journal entry
Balance, December 31, 2004
Prior Service
PBO
Plan Assets
Cost
($1,200,000)
$750,000
$200,000
(300,000)
(72,000)
165,000
Formal Records
Net Loss
(Gain)
$300,000
(105,000)
328,000
(328,000)
(10,000)
(9,000)
300,000
Pension
Expense
$300,000
72,000
(165,000)
105,000
10,000
9,000
210,000
(300,000)
($210,000)
$331,000
($1,600,000)
$825,000
Cash
Prepaid
(Accrued)
Cost
$50,000
$190,000
$514,000
($210,000)
(121,000)
($71,000)
9. Spencer Company has 500,000 shares of $20 par value common stock outstanding and
500 shares of $1,000 par value, 5% cumulative, nonparticipating preferred stock
outstanding. Dividends have not been paid for the past two years. This year, a $500,000
dividend will be paid. Calculate the allocation of dividends to preferred and common
shareholders.
Security
Preferred stock
Dividends in arrears:
Yr. 1 ($500,000 * 5%)
Yr. 2 ($500,000 * 5%)
Current year
Preferred
Common stock
Remainder
Allocation of dividends
Number of shares outstanding
Dividends per share
Common
$25,000
25,000
25,000
75,000
500
$150
Total
$25,000
25,000
25,000
$425,000
425,000
500,000
$0.85
425,000
$500,000
10. Spencer Company was organized on January 2, 2003.. The firm was authorized to issue
900,000 shares of $10 par value common stock. During 2003, Spencer Company had the
following transactions relating to shareholders' equity:
Issued 10,000 shares of common stock at $17 per share.
Issued 20,000 shares of common stock at $18 per share.
Reported a net income of $250,000.
Paid dividends of $50,000.
Purchased 5,000 shares of treasury stock at $25.
Prepare the equity section of the balance sheet at December 31, 2003.
Shareholders' Equity
Common stock
Paid in capital, excess of par
Retained earnings
Treasury stock
Total shareholders equity
$300,000
230,000
200,000
730,000
(125,000)
$605,000
Common Stock and Paid-In Capital:
Paid-in
Selling
Price
Capital
Total
Par
Shares
Issued
10,000
$17 $170,000 $100,000 $70,000
Issued
20,000
18 360,000 200,000 160,000
Total issued
30,000
$530,000 $300,000 $230,000
Retained Earnings:
Net income
Dividends paid
Retained earnings
$250,000
50,000
$200,000
Treasury Stock:
Purchased
Purchase
Price
Shares
Cost
5,000
$25 $125,000
11. Spencer Company declared a property dividend of a piece of land. The company
originally paid $50,000 for the land. A current appraisal indicates that the fair market
value at the beginning of the current year is $200,000. Prepare the appropriate journal
entries to record the dividend.
Account
Investment, land
Gain on appreciation of investment
To record gain on common stock
Debit
$150,000
Credit
$150,000
Retained earnings
$200,000
Property dividend payable
To record the declaration of a property dividend
$200,000
Property dividend payable
Investment, land
To record the distribution of property dividend
$200,000
$200,000
2
12. As of December 31, 2002, Warner Corporation reported the following:
Dividends payable
Common stock, $1 par value
Paid-in capital, excess of par
Paid-in capital, treasury stock
Retained earnings
Treasury stock
50,000
500,000
4,500,000
50,000
4,000,000
900,000
During 2003, one-third of the treasury stock was resold for $200,000; net income was
$900,000; cash dividends declared were $750,000; and 15% stock dividends declared
when the market value of the stock was $25 per share.
Prepare the equity section of the balance sheet for the year ended December 31, 2003.
Paid-In Capital
Common
Excess of Treasury Retained Treasury
Stock
Par
Stock
Earnings
Stock
Transaction
Total
Beginning balances ($500,000) ($4,500,000) ($50,000) ($4,000,000) $900,000 ($8,150,000)
Sale of treasury stock
50,000
50,000 (300,000)
(200,000)
Net income
(900,000)
(900,000)
Cash dividends
750,000
750,000
Stock dividends
(75,000) (1,800,000)
1,875,000
0
Ending balances
($575,000) ($6,300,000)
$0 ($2,225,000) $600,000 ($8,500,000)
Analysis of sale of treasury stock:
Original cost
$300,000
Selling price
200,000
Loss on sale
100,000
Allocated to paid-in capital
50,000
Remainder to retained earnings
$50,000
Analysis of stock dividends:
Shares issued and oustanding
Percentage stock dividend
Small stock dividend
Market price
Total dividend
Allocated to common stock
Allocated to paid-in capital
500,000
15%
75,000
$25.00
1,875,000
75,000
$1,800,000
3
13. Glandon and Company, provided 50 hours of accounting services to Spencer Company
in exchange for 500 shares of Spencer Company's $1 par value common stock. The
accounting firm's usual billing rate is $250 per hour, and Spencer Company's stock has a
book value of $50 per share. Prepare the appropriate journal entry to record the issuance
of the stock.
Account
Accounting services
Common stock
Paid-in capital, excess of par
Debit
$12,500
Analysis of paid-in capital, excess of par
Billing rate
$250
Hours
50
Total accounting fees
Par value of shares issued
Paid-in capital, excess of par
Credit
$500
12,000
$12,500
500
$12,000
14. At the beginning of 2003, Spencer Company has 500,000 shares of $5 par value
common stock issued and outstanding. The shares were originally sold for $25 per
share. During 2003 the company completed the following treasury stock transactions.
March 31: Reacquired 100,000 shares at $30.
May 1:
Sold 25,000 shares at $32.
August 30: Sold 40,000 shares at $27.
Prepare the journal entries to record the above transactions using the cost method.
Date
Account
Debit
3/31/03 Treasury stock
$3,000,000
Cash
To record the purchase of 100,000 shares of treasury stock
Analysis of treasury stock:
Purchase price
Shares purchased
Treasury stock
Credit
$3,000,000
$30
100,000
$3,000,000
4
Date
5/1/03
Account
Debit
Credit
Cash
$800,000
Treasury stock
$750,000
Paid-in capital, treasury stock
50,000
To record the sale of 25,000 shares of treasury stock for $32 per share
Analysis of cash:
Selling price
Shares sold
Cash
$32
25,000
Analysis of treasury stock:
Original pruchase price
Shares sold
Treasury stock
$30
25,000
$800,000
$750,000
Date
Account
Debit
Credit
8/30/03 Cash
$1,080,000
Paid-in capital, treasury stock
50,000
Retained earnings
70,000
Treasury stock
$1,200,000
To record the sale of 40,000 shares of treasury stock for $27 per share
Analysis of cash:
Selling price
Shares sold
Cash
$27
40,000
Analysis of treasury stock:
Original pruchase price
Shares sold
Treasury stock
$30
40,000
Analysis of paid-in capital, treasury stock:
Original cost of treasury stock
Selling price of treasury stock
Loss on sale of treasury stock
Balance in paid-in capital, treasury stock
Remainder to retained earnings
$1,080,000
$1,200,000
$1,200,000
1,080,000
120,000
50,000
$70,000
5