ILLUSTRATION 21-1

BASIC FEATURES AND TYPES OF PENSION PLANS

Defined Contribution Plan Defined Benefits Plan

The amounts of the The amounts of benefits
contributions are known are known (defined).
(defined).

No promise regarding The amount of contribution

size of benefits. needed now to pay benefits
in the future is a computation.

Pension Fund
Employer Contributions Investments Earnings Benefits Pension
(company) $ $ Recipients
$ $ (employees)
Fund Assets

Must account for A separate legal

the costs of and and accounting
contributions to entity. Maintains
the pension plan a set of books.

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 ILLUSTRATION 21-2
COMPONENTS OF PENSION EXPENSE

COMPONENTS OF PENSION EXPENSE

Service Cost
+ Interest Cost
– Actual Return On Plan Assets Pension Expense xx
+ Amort. Of Unrecognized PSC Cash xx {Company Funding
± Amort. Of Unrecognized Gain (Loss) Prepaid/Accrued Pension Cost xx {Difference

Service Cost Interest Cost

The actuarial present value of benefits earned by
employees for the current year of service, measured
by the actuary using the benefit formula and
discounted to present value using the assumed
discount (settlement) rate.
The assumed discount rate multiplied by the
beginning of year plan obligation measured as the
projected benefit obligation. This indicates the
increase in plan liabilities during a year due to the
passage of time-—in effect, interest expense for the
year on an existing liability.

Actual Return Amortization Of Unrecognized

On Plan Assets
The actual return on plan assets during the year
determined based on the fair value of plan assets.
This reduces pension expense—it represents the
investment return for the year on assets previously
set aside to satisfy plan obligations.
Prior Service Costs
A plan initiation or amendment granting retroactive
benefits to employees for services rendered previously
results in an immediate increase in the projected
benefit obligation and a deferred cost to be amortized.
Prior service cost is amortized over the future service-
years of employees.

Amortization Of Unrecognized
Net Gain Or Loss
Amortization of the combination of (a) the current
year's asset gains and losses and liability gains and
losses and (b) the unrecognized net gain or loss from
previous years. This may decrease or increase
pension expense.

Copyright © 1998 John Wiley & Sons, Inc. Kieso/Intermediate 9e 147

ILLUSTRATION 21-3
EXAMPLE: AMORTIZATION OF UNRECOGNIZED PRIOR
SERVICE COST

The pension plan covers 200 employees and prior service cost is $98,000.
Number of Retirement
Group Employees on Dec. 31
A 20 1998
B 30 1999
C 40 2000
D 60 2001
E 40 2002
F 10 2003
200

Computation of Service-Years
Service-Years
Year A B C D E F Total
1998 20 30 40 60 40 10 200
1999 30 40 60 40 10 180
2000 40 60 40 10 150
2001 60 40 10 110
2002 40 10 50
2003 10 10
20 60 120 240 200 60 700
$98,000/700 = $140 per service-year.

Annual Amortization of Prior Service Cost

Service- Cost Per Annual
Year Years ´ Service-Year = Amortization
1998 200 $140 $28,000
1999 180 140 25,200
2000 150 140 21,000
2001 110 140 15,400
2002 50 140 7,000
2003 10 140 1,400
700 $98,000

Copyright © 1998 John Wiley & Sons, Inc. Kieso/Intermediate 9e 148

ILLUSTRATION 21-4
EXAMPLE: AMORTIZATION OF UNRECOGNIZED
GAINS OR LOSSES

The average remaining service life of all active employees is 5.5 years.
1997 1998 1999
(beginning of the year)
Projected benefit obligation 2,100,000 $2,600,000 $2,900,000
Market-related asset value 2,600,000 2,800,000 2,700,000
Unrecognized net loss –0– 400,000 300,000

Corridor Test and Gain/Loss Amortization Schedule

Minimum
Projected Cumulative Amortization
Benefit Plan Unrecognized of Loss
Year Obligationa Assetsa Corridorb Net Lossa (For Current Year)
1997 $2,100,000 $2,600,000 $260,000 $–0– $–0–
1998 2,600,000 2,800,000 280,000 400,000 21,818c
1999 2,900,000 2,700,000 290,000 678,182 70,579d
aAllas of the beginning of the period.
b10% of the greater of projected benefit obligation or plan assets.
c$400,000 – $280,000 = $120,000; $120,000 ÷ 5.5 = $21,818
d$400,000 – $21,818 + $300,000 = $678,192
$678,182 – $290,000 = $388,182
$388,182 ÷ 5.5 = $70,579

300 1998 1999

1997

200 280 290

260
The
(000s omitted)

100
Corridor
0

(100)

(200)

(300) 260
280 290

Copyright © 1998 John Wiley & Sons, Inc. Kieso/Intermediate 9e 149

 ILLUSTRATION 21-5
THE PENSION WORK SHEET

Both sets of records below are treated as one for entering transactions and events.
Debits and credits must be equal for each transaction or event.
Zarie Company
Pension Work Sheet—1997
General Journal Entries Memo Record
Annual Prepaid/ Projected
Pension Accrued Benefit Plan
Items Expense Cash Cost Obligation Assets
Balance, Jan. 1, 1997 –0- 100,000 Cr. 100,000 Dr.
(a) Service cost 9,000 Dr. 9,000 Cr.
(b) Interest cost 10,000 Dr. 10,000 Cr.
(c) Actual return 10,000 Cr. 10,000 Dr.
(d) Contributions 8,000 Cr. 8,000 Dr.
(e) Benefits 7,000 Dr. 7,000 Cr.
Journal entry, 12/31 9,000 Dr. 8,000 Cr. 1,000 Cr.*
Balance, Dec. 31, 1997 1,000 Cr.** 112,000 Cr. 111,000 Dr.
*$9,000 – $8,000 = $1,000 **$112,000 – $111,000 = $1,000 Net balance = $1,000 Cr.
(These two items must be in equal amount $1,000 in this example.

These must be recorded in the regular Maintains balances for the

general journal posted to the formal unrecorded (noncapitalized)
general ledger accounts. pension items.

Entry to record pension expense

Pension Expense……………………………………………………………. 9,000
Cash…………………………………………………………………. 8,000
Prepaid/Accrued Pension Cost…………………………………… 1,000

Source: C.G. Avery

Copyright © 1998 John Wiley & Sons, Inc. Kieso/Intermediate 9e 150

 ILLUSTRATION 21-6
PENSION RECONCILIATION SCHEDULE

PENSION RECONCILIATION SCHEDULE

Actuarial present value of benefit obligations:
Vested benefit obligation $ xxx

Accumulated benefit obligation $ xxx

Projected benefit obligation (end of period) $ (xxxx)

Plan assets at fair value (end of period) xxx
Projected benefit obligation in excess of plan assets (xxx)
Unrecognized prior service cost xx
Unrecognized net gain or loss xx
Prepaid/accrued pension cost (xxx)
Adjustment required to recognize minimum liability (xx)
Prepaid/accrued pension cost recognized in the
balance sheet $ xxx

Appears
on
Pension
Work Sheet

BACK TO RESOURCES

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