Chapter 17 Pensions and Other Postretirement Benefits
REPORTING ISSUES
The four off-balance-sheet asset and liability accounts (informal records) reconcile to the prepaid
(accrued) pension cost that is reported in the balance sheet. In this section we are going to look
at the utilization of the pension spreadsheet. To accomplish this we will use the following
example.
Example: Spencer Company provided you with the following pension spreadsheet for the year
ended March 31, 2002.
Informal Records
Formal Records
Prepaid
Prior
(Accrued)
Plan Service Net Loss Pension
Cost
(Gain) Expense Cash
PBO
Assets Cost
Balance, April 1, 2001
(20,000) 20,000
0
Service cost
(1,800)
1,800
Interest cost
(1,200)
1,200
Actual return
1,600
(1,600)
Loss (gain) on plan assets
0
0
Prior service cost
(2,000)
2,000
Amortizaiton of:
Prior service cost
0
0
Net gain (loss)
0
0
Contributions to fund
1,000
(1,000)
Benefits paid
900
(900)
2003 Journal entry
1,400 (1,000)
(400)
Balance, March 31, 2002 (24,100) 21,700 2,000
0
(400)
Information provided from the actuary’s report for the year ended March 31, 2003 is as follows:
Contribution
Service cost
Interest/discount reate
ABO, 3/31/02
ABO, 3/31/03
Actual return on plan assets
Expected return
Benefits paid
Average remaing service life
FV of plan assets, 3/31/02
FV of plan assets, 3/31/03
$425
3,000
6%
21,000
27,000
1,736
8%
500
10 years
21,700
23,361
F:\course\ACCT3322\200720\module3\c17\tnotes\c17d.doc 11/10/2006
1
Chapter 17 Pensions and Other Postretirement Benefits
The report indicated no actuarial gains or losses in the fiscal year ended March 31, 2003. Prior
service cost is to be amortized over the average remaining service life. In the current year, there
will be an initial adoption of minimum pension liability reporting.
The following is the pension spreadsheet for the year ended March 31, 2003.
Informal Records
Formal Records
Prepaid
Prior
(Accrued)
Plan Service Net Loss Pension
Cost
(Gain) Expense Cash
PBO
Assets Cost
Balance, April 1, 2002
(24,100) 21,700 2,000
(400)
Service cost
(3,000)
3,000
Interest cost
(1,446)
1,446
Actual return
1,736
(1,736)
Loss (gain) on plan assets
0
0
Prior service cost
Amortizaiton of:
Prior service cost
(200)
0
200
Net gain (loss)
0
0
Contributions to fund
425
(425)
Benefits paid
500
(500)
2003 Journal entry
2,910 (425)
(2,485)
Balance, March 31, 2003 (28,046) 23,361 1,800
0
(2,885)
Note that the informal records (off-balance-sheet) reconcile to the prepaid (accrued) pension cost
account.
PBO
Plan Assets
Prior Service Cost
Net Loss (Gain)
Accrued Cost
($28,046)
23,361
1,800
0
($2,885)
The journal entry to record pension expense for the fiscal year ended March 31, 2003 is as
follows:
Date
3/31/03
Account
Debit
$2,910
Credit
Pension expense
Cash
$425
Prepaid/Accrued Pension Cost
2,485
To record pension expene, pension contributions and accured pension cost for
the fiscal year ended March 31, 2003.
F:\course\ACCT3322\200720\module3\c17\tnotes\c17d.doc 11/10/2006
2
Chapter 17 Pensions and Other Postretirement Benefits
Minimum Liability
As a result of the above journal entry, the ending balance in the accrued pension liability account
is $2,885.
Date
4/1/02
3/31/03
3/31/03
T-Account: Accrued Pension Liability
Description
Debit
Beginning balance
Journal entry to record pension expense
Ending balance
Credit
$400
2,485
$2,885
The next step is to test minimum liability. The minimum pension liability that should be
presented in the financial statements is the excess of the ABO over the FV of the plan assets.
This test is as follows:
March 31, 2003
ABO
FV of Plan Assets
Excess of ABO over Plan Asset
$27,000
23,361
$3,639
Since $2,885 is currently the liability that would be reported in the balance sheet we need to
accrue an additional pension liability to reflect the excess of ABO over Plan Assets of $3,639.
This additional adjusting journal entry would be as follows:
Date
3/31/03
Account
Intangible asset, deferred pension cost
Additional pension liability
To record minimum pension liability for 2003
Debit
$754
Credit
$754
Assuming that there was not prior balance in the additional pension liability account, the taccount analysis would reflect the following:
Date
4/1/02
3/31/03
3/31/03
T-Account: Additional Pension Liability
Description
Debit
Beginning balance
Journal entry to record additioal liability
Balance at 3/31/03
Credit
$0
754
$754
The amount that will be reported in the balance sheet as a result of this additional journal will be
the excess of ABP over Plan Assets as required.
F:\course\ACCT3322\200720\module3\c17\tnotes\c17d.doc 11/10/2006
3
Chapter 17 Pensions and Other Postretirement Benefits
Accrued pension liability
Additional pension liability
Liability as reported in the balance sheet
$2,885
754
F:\course\ACCT3322\200720\module3\c17\tnotes\c17d.doc 11/10/2006
$3,639
4