Chapter 16

Michael Van Roestel

Chapter 16

Solutions

Exercise 16.1

	DC or DB
The employer has no obligation to the fund beyond the required payment	DC
Accounting for this type of plan is more complicated	DB
The employer bears the investment risk with this type of plan	DB
A liability is only recorded when the required payment is not made by year-end	DC
Accounting for this type of plan will likely require the use of actuarial specialists	DB

Exercise 16.2

a. $\$10,500,000\;\div\;12\;=\;\$875,000$ monthly salary

Employee contribution = $\$875,000\;\times\;4\%\;=\;\$35,000$

Employer contribution = $\$875,000\;\times\;6\%\;=\;\$52,500$

Note: Pension expense = $\$52,500\;\times\;12\;=\;\$630,000$

Pension liability = $\$52,500\;+\;\$35,000\;=\;\$87,500$

Cash paid to the pension plan = $(\$52,500\;+\;\$35,000)\;\times\;11\;=\;\$962,500$

Cash paid to the employees = $\$10,500,000\;-\;(\$35,000\;\times\;12)\;=\;\$10,080,000$

b. The company will report a pension expense of $630,000 in the appropriate section of the income statement.

c. The company will report a pension liability of $87,500 on December 31, 2022. This will be reported as a current liability, as the funds are remitted to the plan in January 2023.

Exercise 16.3

Pension expense = $(\$832,000\;-\;\$750,000)\;+\;\$57,000\;=\;\$139,000$
Pension expense = $(\$832,000\;-\;\$750,000)\;+\;\$57,000\;-\;\$12,000\;=\;\$127,000$

Exercise 16.4

Current Service Cost		$1,600,000
Interest on DBO		936,000
Interest on Assets		(900,000)
Pension Expense		$1,636,000

Exercise 16.5

a.

	DBO	Plan Assets	Net Defined Benefit Balance	Cash	Annual Pension Expense	OCI
	Pension Plan		Company Accounting Records
Opening balance	6,300,000 CR	5,950,000 DR	350,000 CR
Service cost	575,000 CR				575,000 DR
Interest: DBO	441,000 CR				441,000 DR
Interest: assets		416,500 DR			416,500 CR
Contribution		682,000 DR		682,000 CR
Benefits paid	186,000 DR	186,000 CR
Remeasurement		20,500 DR				20,500 CR
gain: assets
Journal entry			103,000 DR	682,000 CR	599,500 DR	20,500 CR
Closing balance	7,130,000 CR	6,883,000 DR	247,000 CR

b.
c. The company will report a non-current liability of $247,000 on December 31, 2021.

Exercise 16.6

a.

	DBO	Plan Assets	Net Defined Benefit Balance	Cash	Annual Pension Expense	OCI
	Pension Plan		Company Accounting Records
Opening balance	4,400,000 CR	4,550,000 DR	150,000 DR
Service cost	565,000 CR				565,000 DR
Interest: DBO	352,000 CR				352,000 DR
Interest: assets		364,000 DR			364,000 CR
Contribution		422,000 DR		422,000 CR
Benefits paid	166,000 DR	166,000 CR
Remeasurement		52,000 CR				52,000 DR
loss: assets
Remeasurement	176,000 CR					176,000 DR
loss: DBO
Journal entry			359,000 CR	422,000 CR	553,000 DR	228,000 DR
Closing balance	5,327,000 CR	5,118,000 DR	209,000 CR

b.
c.

Non-Current Liabilities:
Net defined benefit liability		$209,000
Accumulated Other Comprehensive Income:
Net remeasurement losses on defined benefit liability		$(228,000)

Exercise 16.7

a. 2020:

	DBO	Plan Assets	Net Defined Benefit Balance	Cash	Annual Pension Expense	OCI
	Pension Plan		Company Accounting Records
Opening balance	0 CR	0 DR	0 CR
Service cost	389,000 CR				389,000 DR
Interest: DBO	0 CR				0 DR
Interest: assets		0 DR			0 CR
Contribution		348,000 DR		348,000 CR
Benefits paid	0 DR	0 CR
Remeasurement		2,000 DR				2,000 CR
gain: assets
Remeasurement	27,000 DR					27,000 CR
gain: DBO
Journal entry			12,000 CR	348,000 CR	389,000 DR	29,000 CR
Closing balance	362,000 CR	350,000 DR	12,000 CR

Remeasurement gains are derived by working backwards from the ending balances of the DBO and plan assets. No interest is calculated as the opening balances were zero and it is assumed that transactions occur at the end of the period.

2021:

	DBO	Plan Assets	Net Defined Benefit Balance	Cash	Annual Pension Expense	OCI
	Pension Plan		Company Accounting Records
Opening balance	362,000 CR	350,000 DR	12,000 CR
Service cost	395,000 CR				395,000 DR
Interest: DBO*	25,340 CR				25,340 DR
Interest: assets**		24,500 DR			24,500 CR
Contribution		301,000 DR		301,000 CR
Benefits paid	50,000 DR	50,000 CR
Remeasurement		15,500 CR				15,500 DR
loss: assets***
Remeasurement	0 CR					0 DR
loss: DBO
Journal entry			110,340 CR	301,000 CR	395,840 DR	15,500 DR
Closing balance	732,340 CR	610,000 DR	122,340 CR

* $\$362,000\;\times\;7\%\;=\;\$25,340$
** $\$350,000\;\times\;7\%\;=\;\$24,500$
*** $\$610,000\;-\;\$350,000\;-\;\$24,500\;-\;\$301,000\;+\;\$50,000\;=\;\$15,500\;CR$
(Work backwards from the ending balance to determine the balancing figure.)

2022:

	DBO	Plan Assets	Net Defined Benefit Balance	Cash	Annual Pension Expense	OCI
	Pension Plan		Company Accounting Records
Opening balance	732,340 CR	610,000 DR	122,340 CR
Service cost	410,000 CR				410,000 DR
Interest: DBO*	58,587 CR				58,587 DR
Interest: assets**		48,800 DR			48,800 CR
Contribution		265,000 DR		265,000 CR
Benefits paid	54,000 DR	54,000 CR
Remeasurement		15,000 CR				15,000 DR
loss: assets
Remeasurement	42,000 CR					42,000 DR
loss: DBO
Journal entry			211,787 CR	265,000 CR	419,787 DR	57,000 DR
Closing balance	1,188,927 CR	854,800 DR	334,127 CR

* $\$732,340\;\times\;8\%\;=\;\$58,587$
** $\$610,000\;\times\;8\%\;=\;\$48,800$

b. 2020:

2021:

2022:

c. 2020:

Non-Current Liabilities:
Net defined benefit liability (underfunded)		$12,000
Accumulated Other Comprehensive Income:
Net remeasurement gains on defined benefit liability		$29,000

2021:

Non-Current Liabilities:
Net defined benefit liability (underfunded)		$122,340
Accumulated Other Comprehensive Income:
Net remeasurement gains on defined benefit liability		$13,500*

* Note: Balance = $\$29,000\;CR\;-\;\$15,500\;DR$

2022:

Non-Current Liabilities:
Net defined benefit liability (underfunded)		$334,127
Accumulated Other Comprehensive Income:
Net remeasurement losses on defined benefit liability		$(43,500)*

* Note: Balance = $\$13,500\;CR\;-\;\$57,000\;DR$

Exercise 16.8

a.

	Pension Plan		Company Accounting Records
	DBO	Plan Assets	Net Defined Benefit Balance	Cash	Annual Pension Expense
Opening balance	6,246,000 CR	6,871,000 DR	625,000 DR
Past service cost	215,000 CR				215,000 DR
Service cost	510,000 CR				510,000 DR
Interest:	581,490 CR				581,490 DR
Health Benefit Obligation*
Interest: assets**		618,390 DR			618,390 CR
Contribution		430,000 DR		430,000 CR
Benefits paid	850,000 DR	850,000 CR
Journal entry			258,100 CR	430,000 CR	688,100 DR
Closing balance	6,702,490 CR	7,069,390 DR	366,900 DR

* $(\$6,246,000\;+\;\$215,000)\;\times\;9\%\;=\;\$581,490$
** $\$6,871,000\;\times\;9\%\;=\;\$618,390$

The post-employment health benefit expense will be $688,100 for the year. Note that the interest on the health benefit obligation is calculated after taking the past service adjustment into account. This is necessary as the past service adjustment was made on January 1.

b. The company will report a non-current asset of $366,900, subject to any adjustment required as a result of the asset ceiling test.

Exercise 16.9

	DBO	Plan Assets	Net Defined Benefit Balance	Cash	Annual Pension Expense
	Pension Plan		Company Accounting Records
Opening balance	6,300,000 CR	5,950,000 DR	350,000 CR
Service cost	575,000 CR				575,000 DR
Interest: DBO	441,000 CR				441,000 DR
Interest: assets		416,500 DR			416,500 CR
Contribution		682,000 DR		682,000 CR
Benefits paid	186,000 DR	186,000 CR
Remeasurement		20,500 DR			20,500 CR
gain: assets
Journal entry			103,000 DR	682,000 CR	579,000 DR
Closing balance	7,130,000 CR	6,883,000 DR	247,000 CR

The company will report a non-current liability of $247,000 on December 31, 2021.

Exercise 16.10

a.

	Pension Plan		Company Accounting Records
	DBO	Plan Assets	Net Defined Benefit Balance	Cash	Annual Pension Expense
Opening balance	4,400,000 CR	4,550,000 DR	150,000 DR
Service cost	565,000 CR				565,000 DR
Interest: DBO	352,000 CR				352,000 DR
Interest: assets		364,000 DR			364,000 CR
Contribution		422,000 DR		422,000 CR
Benefits paid	166,000 DR	166,000 CR
Remeasurement		52,000 CR			52,000 DR
loss: assets
Remeasurement	176,000 CR				176,000 DR
loss: DBO
Journal entry			359,000 CR	422,000 CR	781,000 DR
Closing balance	5,327,000 CR	5,118,000 DR	209,000 CR

b.
c.

Non-Current Liabilities:
Net defined benefit liability		$209,000

No accumulated other comprehensive income is reported. The remeasurement losses would simply be included in retained earnings through the closing of the pension expense account at the end of the year.

Exercise 16.11

1. IFRS

Item	DBO		Plan Assets		Net Defined Pension Balance		Cash		Expense		OCI
Balance, 1/1/Y8	317,500	CR	317,500	DR	-
Current service cost	74,300	CR							74,300	DR
Interest: DBO (1)	15,875	CR							15,875	DR
Interest: Assets (2)			15,875	DR					15,875	CR
Remeasurement Loss: Assets (3)			3,075	CR							3,075	DR
Contributions			64,900	DR			64,900	CR
Benefits Paid	48,000	DR	48,000	CR
Past service adjustment	55,800	CR	-		-		-		55,800	DR	-
Entry					68,275	CR	64,900	CR	130,100	DR	3,075	DR
Balance, 12/31/Y8	415,475	CR	347,200	DR	68,275	CR

(1) $317,500 × 5%
(2) $317,500 × 5%
(3) $15,875 - 12,800 actual return

Entry
Pension Expense		130,100
Pension Adjustment - OCI		3,075
	Cash		64,900
	Net Defined Pension Liability		68,275

2. ASPE

Item	DBO		Plan Assets		Net Defined Pension Balance		Cash		Expense
Balance, 1/1/Y8	317,500	CR	317,500	DR	-
Current service cost	74,300	CR							74,300	DR
Interest: DBO (1)	15,875	CR							15,875	DR
Interest: Assets (2)			15,875	DR					15,875	CR
Remeasurement Loss: Assets (3)			3,075	CR					3,075	DR
Contributions			64,900	DR			64,900	CR
Benefits Paid	48,000	DR	48,000	CR
Past service adjustment	55,800	CR	-		-		-		55,800	DR
Entry					68,275	CR	64,900	CR	133,175	DR
Balance, 12/31/Y8	415,475	CR	347,200	DR	68,275	CR

Entry
Pension Expense		133,175
	Cash		64,900
	Net Defined Pension Liability		68,275

Exercise 16.12

1. IFRS

Item		DBO		Plan Assets		Net Defined Pension Balance		Cash		Expense		OCI
Opening balances		268,600	CR	300,100	DR	31,500	DR
Current service cost		45,600	CR							45,600	DR
Interest - debt	10%	26,860	CR							26,860	DR
Interest - assets	10%			30,010	DR					30,010	CR
Remeasurement				3,001	CR							3,001	DR
Contributions				99,700	DR			99,700	CR
Benefits Paid		54,700	DR	54,700	CR

Journal Entries						54,249	DR	99,700	CR	42,450	DR	3,001	DR
Closing Balance		286,360	CR	372,109	DR	85,749	DR

Journal Entry
Plan Assets			Pension Expense		42,450
	Actual	27,009	OCI		3,001
	Expected	30,010	Net Defined Benefit		54,249
		- 3,001		Cash		99,700

Note - the plan is OVER funded

2. ASPE

		DBO		Plan Assets		Net Defined Pension Balance		Cash		Expense
Opening balances		268,600	CR	300,100	DR	31,500	DR
Current service cost		45,600	CR							45,600	DR
Interest - debt	10%	26,860	CR							26,860	DR
Interest - assets	10%			30,010	DR					30,010	CR
Remeasurement				3,001	CR					3,001	DR
Contributions				99,700	DR			99,700	CR
Benefits Paid		54,700	DR	54,700	CR

Journal Entries						54,249	DR	99,700	CR	45,451	DR
Closing Balance		286,360	CR	372,109	DR	85,749	DR

Journal Entry
Plan Assets			Pension Expense		45,451
	Actual	27,009
	Expected	30,010	Net Defined Benefit		54,249
		- 3,001		Cash		99,700

Note - the plan is OVER funded

Exercise 16.13

1. IFRS

Item	DBO		Plan Assets		Net Defined Pension Balance		Cash		Expense
Balance, 1/1/Y7	578,960	CR	500,640	DR	78,320	CR
Past Service Cost	34,700	CR							34,700	DR
Current service cost	35,600	CR							35,600	DR
Interest: DBO (1)	36,820	CR							36,820	DR
Interest: Assets (2)			30,038	DR					30,038	CR
Contributions			114,200	DR			114,200	CR
Benefits Paid	77,800	DR	77,800	CR
Entry					37,119	DR	114,200	CR	77,081	DR
Balance, 12/31/Y7	608,280	CR	567,078	DR	41,201	CR

(1) ($578,960 + $34,700) × 6% since past service adjustment was effective Jan 1, interest should be included on the adjustment as well as the opening DBO balance
(2) $500,640 × 6% since return and discount rate are the same, no remeasurement

Entry
Pension Expense		77,081
Net Defined Pension Asset		37,119
	Cash		114,200

Note - the plan is UNDER funded

2. ASPE

Item	DBO		Plan Assets		Net Defined Pension Balance		Cash		Expense
Balance, 1/1/Y7	578,960	CR	500,640	DR	78,320	CR
Past Service Cost	34,700	CR							34,700	DR
Current service cost	35,600	CR							35,600	DR
Interest: DBO (1)	36,820	CR							36,820	DR
Interest: Assets (2)			30,038	DR					30,038	CR
Contributions			114,200	DR			114,200	CR
Benefits Paid	77,800	DR	77,800	CR
Entry					37,119	DR	114,200	CR	77,081	DR
Balance, 12/31/Y7	608,280	CR	567,078	DR	41,201	CR

(1) ($578,960 + $34,700) × 6% since past service adjustment was effective Jan 1, interest should be included on the adjustment as well as the opening DBO balance
(2) $500,640 × 6% since return and discount rate are the same, no remeasurement

Entry
Pension Expense		77,081
Net Defined Pension Asset		37,119
	Cash		114,200

Note - the plan is UNDER funded

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Intermediate Financial Accounting 2 Copyright © 2022 by Michael Van Roestel is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

Exercise 16.1

Exercise 16.2

Exercise 16.3

Exercise 16.4

Exercise 16.5

Exercise 16.6

Exercise 16.7

Exercise 16.8

Exercise 16.9

Exercise 16.10

Exercise 16.11

1. IFRS

2. ASPE

Exercise 16.12

1. IFRS

2. ASPE

Exercise 16.13

1. IFRS

2. ASPE

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