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
General journal example.
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

  1. Pension expense = (\$832,000\;-\;\$750,000)\;+\;\$57,000\;=\;\$139,000
  2. 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.

Pension Plan Company Accounting Records
DBO Plan Assets Net Defined Benefit Balance Cash Annual Pension Expense OCI
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. General journal example.
c. The company will report a non-current liability of $247,000 on December 31, 2021.

Exercise 16.6

a.

Pension Plan Company Accounting Records
DBO Plan Assets Net Defined Benefit Balance Cash Annual Pension Expense OCI
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. General journal example.
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:

Pension Plan Company Accounting Records
DBO Plan Assets Net Defined Benefit Balance Cash Annual Pension Expense OCI
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:

Pension Plan Company Accounting Records
DBO Plan Assets Net Defined Benefit Balance Cash Annual Pension Expense OCI
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:

Pension Plan Company Accounting Records
DBO Plan Assets Net Defined Benefit Balance Cash Annual Pension Expense OCI
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:
General journal example.
2021:
General journal example.
2022:
General journal example.

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

  1. Pension Plan Company Accounting Records
    DBO Plan Assets Net Defined Benefit Balance Cash Annual Pension Expense
    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
  2. general journal
  3. 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. General journal example.
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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