CHAPTER 20

Accounting for Pensions and Postretirement Benefits

ASSIGNMENT CHARACTERISTICS TABLE

Item
E20-2
E20-3
E20-6
E20-8
E20-10
E20-13
E20-14
*E20-22
*E20-23
P20-1

Description
Computation of pension expense.
Preparation of pension worksheet.
Computation of actual return.
Application of the corridor approach.
Pension worksheet.
Computation of actual return, gains and losses, corridor test, and
pension expense.
Worksheet for E20-13.
Postretirement benefit expense computation.
Postretirement benefit worksheet.
2-year worksheet.

Level of
Time
Difficulty (minutes)
Simple
1015
Moderate
1525
Simple
1015
Moderate
2025
Moderate
2025
Complex
3545
Complex
Simple
Moderate

4050
1012
1520

Moderate

4050

EXERCISE 20-2 (1015 minutes)

Computation of pension expense:
Service cost..............................................................
Interest cost ($700,000 X 10%) ................................
Expected return on plan assets ................................
Prior service cost amortization .................................
Pension expense for 2010 ........................................

$ 90,000
70,000
(64,000)
10,000
$106,000

EXERCISE 20-3 (1525 minutes)

Items

BICKNER COMPANY
Pension Worksheet2010
General Journal Entries
Annual
OCI
Pension
Prior Service
Pension
Expense
Cash
Cost
Asset/Liability

Balance, January 1, 2010

Service cost
90,000 Dr.
Interest cost*
70,000 Dr.
Actual return**
64,000 Cr.
Amortization of PSC
10,000 Dr.
10,000 Cr.
Contributions
105,000 Cr.
Benefits
Journal entry for 2010***
106,000 Dr. 105,000 Cr. 10,000 Cr.
150,000 Dr.
Accumulated OCI, Dec. 31, 2009
Balance, Dec. 31, 2010
140,000 Dr.
*$70,000 = $700,000 X 10%.

60,000 Cr.

Memo Record
Projected
Benefit
Obligation
Plan Assets
700,000 Cr.
90,000 Cr.
70,000 Cr.

64,000 Dr.
40,000 Dr.

105,000 Dr.
40,000 Cr.

820,000 Cr.

769,000 Dr.

9,000 Dr.
51,000 Cr.

**Note: We show actual return on the worksheet to ensure that plan assets are properly
reported. If expected and
actual return differ, then an additional adjustment is made to compute the proper amount of
pension expense.
***Pension Expense ....................................................
***Pension Asset/Liability ............................................
Other Comprehensive Income (PSC) .............
Cash.

640,000 Dr.

106,000
9,000
10,000
105,000

EXERCISE 20-6 (1015 minutes)

Computation of Actual Return on Plan Assets
Fair value of plan assets at 12/31/10 .........................
Fair value of plan assets at 1/1/10 .............................
Increase in fair value of plan assets ...........................
Deduct: Contributions to plan during 2010 ................
Less benefits paid during 2010 ...................
Actual return on plan assets for 2010.........................

$2,725,000
2,400,000
325,000
$280,000
350,000

(70,000)
$ 395,000

EXERCISE 20-8 (2025 minutes)

Corridor and Minimum Loss Amortization
Projected Benefit
Obligation (a)
Year
2009
2010
2011
2012
(a)
(b)
(c)
(d)
(e)
(f)

$2,000,000
2,400,000
2,950,000
3,600,000

Plan
Assets
$1,900,000
2,500,000
2,600,000
3,000,000

10% Corridor

$200,000
250,000
295,000
360,000

As of the beginning of the year.

($280,000 $250,000) 10 years = $3,000
$280,000 $3,000 + $90,000 = $367,000
($367,000 $295,000) 12 years = $6,000
$367,000 $6,000 + $11,000 = $372,000
($372,000 $360,000) 12 years = $1,000

Accumulated
OCI (G/L) (a)
$
0
280,000
367,000(c)
372,000(e)

Minimum
Amortization of
Loss
$

0
3,000(b)
6,000(d)
1,000(f)

EXERCISE 20-10 (2025 minutes)

(a)

Annual
Pension
Expense

Items
Balance, Jan. 1, 2010
Service cost
Interest cost*
Actual return
Unexpected gain**
Amortization of PSC
Liability increase
Contributions
Benefits
Journal entry for 2010
Accumulated OCI, Dec. 31, 2009
Balance, December 31, 2010

WEBB CORP.
Pension Worksheet
General Journal Entries
OCIPrior
Service
OCI
Cash
Cost
Gain/Loss

Pension
Asset/
Liability

Memo Record
Projected
Benefit
Obligation
Plan Assets

120,000 Cr.
90,000 Dr.
54,000 Dr.
55,000 Cr.
3,000 Dr.
19,000 Dr.

480,000 Dr.

55,000 Dr.
3,000 Cr.
19,000 Cr.
76,000 Dr.

76,000 Cr.

99,000 Cr.
111,000 Dr. 99,000 Cr.

19,000 Cr.
100,000 Dr
81,000 Dr.

73,000 Dr.
0
73,000 Dr.

85,000 Dr.

99,000 Dr.
85,000 Cr.

735,000 Cr.

549,000 Dr.

66,000 Cr.
186,000 Cr.

*$54,000 = $600,000 X .09.

**Expected return = $52,000.
Unexpected gain = Actual return minus expected return; $3,000 = $55,000 $52,000.
(b)

600,000 Cr.
90,000 Cr.
54,000 Cr.

Journal Entry
Pension Expense..111,000
Other Comprehensive Income (G/L) 73,000
Cash ..........................................................................
Other Comprehensive Income (PSC) ....................
Pension Asset /Liability ...........................................

99,000
19,000
66,000

EXERCISE 20-13 (3545 minutes)

(a)

(b)

Actual Return = (Ending Beginning) (Contributions Benefits)

Fair value of plan assets,
December 31, 2010 .............................................................
Deduct: Fair value of plan assets,
January 1, 2010 ...................................................................
Increase in fair value of plan assets .........................................
Deduct: Contributions ..............................................................
Less benefits paid..................................................
Actual return on plan assets in 2010 ........................................

$2,620
1,700
920
$700
200

500
$ 420

Computation of pension liability gains and losses and pension asset gains and losses.
1.

Difference between 12/31/10 actuarially computed PBO and 12/31/10 recorded

projected benefit obligation (PBO):
PBO at end of year ...............................................
$3,300
PBO per memo records:
1/1/10 PBO .......................................................
$2,500
Add interest (10%) ............................................
250
Add service cost ...............................................
400
Less benefits paid .............................................
(200)
2,950
Liability loss ......................................................
$350

2.

Difference between actual fair value of plan assets and

expected fair value:
12/31/10 actual fair value
of plan assets................................................
Expected fair value
1/1/10 fair value of plan assets .........................
1,700
Add expected return
($1,700 X 10%) .............................................
170
Add contributions ..............................................
700
Less benefits paid .............................................
(200)
Asset gain .........................................................
Net (gain) or loss ..................................................

2,620

2,370

(c)
Because no net gain or loss existed at the beginning of the period, no amortization
occurs. Therefore, the corridor calculation is not needed. An example of how the corridor would have
been computed is illustrated on the next page, assuming a net loss of $240 at the beginning of the
year.

(250)
$100

EXERCISE 20-13 (Continued)

Beginning-of-the-Year
Year
2010

Plan
PBO
Assets (FV)
$2,500
$1,700

10%
Corridor
$250

Accumulated
OCI (G/L)
$240

Loss
Amortization
-0-

(d) Pension expense for 2010:

Service cost ...................................................................
Interest cost ($2,500 X 10%) .........................................
Actual return on plan assets [from (a)] ...........................
Unexpected gain [from (b) 2.] ........................................
Pension expense ...........................................................

$ 400
250
(420)
250
$ 480

EXERCISE 20-14 (4050 minutes)

ERICKSON COMPANY
Pension Worksheet2010
General Journal Entries
Annual Pension
Expense

tems

Balance, Jan. 1, 2010

Service cost
(a)
nterest cost
(b)
Actual return
(c)
Unexpected gain
Contributions
Benefits
(d)
Liability increase
Journal entry for 2010
Accumulated OCI, Dec. 31, 2009
Balance, Dec. 31, 2010

Cash

OCI
Gain/Loss

Pension
Asset/Liability
800 Cr.

400 Dr.
250 Dr.
420 Cr.
250 Dr.

Memo Record Entries

Projected
Benefit
Plan
Obligation
Assets
2,500 Cr.
400 Cr.
250 Cr.

420 Dr.
250 Cr.
700 Cr.

480 Dr.

1,700 Dr.

700 Cr.

350 Dr.
100 Dr.
0
100 Dr.

(a)

$2,500 X 10%
$420 = ($2,620 $1,700) ($700 $200)
(c)
Actual return
Expected return ($1,700 X 10%)
Asset gain
(d)
$350 = $3,300 ($2,500 + $400 + $250 $200)
(b)

$420
170
$250

200 Dr.
350 Cr.

700 Dr.
200 Cr.

120 Dr.
680 Cr.

3,300 Cr.

2,620 Dr.

EXERCISE 20-14 (Continued)

Journal entries 12/31/10
1.

Other Comprehensive Income G/L ..........................

Pension Expense ....................................................
Pension Asset /Liability ............................................
Cash ................................................................

100
480
120
700

Balance Sheet at December 31, 2010

Liabilities
Pension liability................................................

$680

Stockholders equity
Accumulated other comprehensive
loss (G/L) .....................................................

$100

*EXERCISE 20-22 (1012 minutes)

Service cost ..............................................................................
Interest on accumulated postretirement
benefit obligation (9% X $760,000) ..........................................
Expected return on plan assets.................................................
Amortization of prior service cost ..............................................
Postretirement expense ............................................................

$ 90,000
68,400
(62,000)
3,000
$ 99,400

*EXERCISE 20-23 (1520 minutes)

ENGLEHART CO.
Postretirement Benefit Worksheet2010
General Journal Entries
Annual
Postretirement
Expense

Items
Balance, Jan. 1, 2010
Service cost
Interest cost
Actual return
Contributions
Benefits
Amortization of PSC
Journal entry for 2010
Accumulated OCI, Dec. 31, 2009
Balance, Dec. 31, 2010
*($760,000 X 9%)

Cash

OCIPrior
Service Cost

Memo Record

Postretirement
Asset/Liability
50,000 Cr.

90,000 Dr.
*68,400 Dr.
62,000 Cr.
56,000 Cr.
3,000 Dr.
99,400 Dr.

3,000 Cr.
56,000 Cr.
3,000 Cr.
100,000 Dr.
97,000 Dr.

APBO

Plan
Assets

760,000 Cr. 710,000 Dr.

90,000 Cr.
68,400 Cr.
62,000 Dr.
56,000 Dr.
40,000 Dr. 40,000 Cr.

40,400 Cr.
90,400 Cr.

878,400 Cr. 788,000 Dr.

PROBLEM 20-1
(a)

Items

CUNNINGHAM COMPANY
Pension Worksheet2010 and 2011
General Journal Entries
Annual
OCIPrior
Pension
Service Cost OCIGain/
Pension
Expense
Cash
Loss
Asset/Liability

Balance, Jan. 1, 2010

Service cost
150,000 Dr.
Interest cost*
450,000 Dr.
Actual return
252,000 Cr.
Contributions
240,000 Cr.
Benefits
Journal entry for 2010
348,000 Dr. 240,000 Cr.
0
0
Accumulated OCI, Dec. 31, 2009
Balance, Dec. 31, 2010
Additional PSC, 1/1/2011
500,000 Dr.
Balance, Jan. 1, 2011
Service cost
180,000 Dr.
Interest cost**
540,000 Dr.
Actual return
260,000 Cr.
Unexpected loss***
99,360 Cr.
99,360 Dr.
Amortization of PSC
90,000 Dr.
90,000 Cr.
Contributions
285,000 Cr.
Benefits
Journal entry for 2011
450,640 Dr. 285,000 Cr. 410,000 Dr. 99,360 Dr.
Accumulated OCI, Dec. 31, 2010
0
0
Balance, Dec. 31, 2011
410,000 Dr. 99,360 Dr.
*$450,000 = $4,500,000 X 10%.
**$540,000 = $5,400,000 X 10%.
***$99,360 = ($4,492,000 X .08) $260,000.
(b) Journal Entry (2011)
Pension Expense .................................................................
Other Comprehensive Income (PSC) ..................................
Other Comprehensive Income (G/L)....................................
Cash ............................................................................
Pension Asset/Liability ................................................

Memo Record
Projected
Benefit
Plan
Obligation
Assets

300,000 Cr. 4,500,000 Cr. 4,200,000 Dr.

150,000 Cr.
450,000 Cr.
252,000 Dr.
240,000 Dr.
200,000 Dr. 200,000 Cr.
108,000 Cr.
408,000 Cr. 4,900,000 Cr. 4,492,000 Dr.
500,000 Cr.
5,400,000 Cr.
180,000 Cr.
540,000 Cr.
260,000 Dr.

280,000 Dr.

285,000 Dr.
280,000 Cr.

675,000 Cr.
1,083,000 Cr. 5,840,000 Cr. 4,757,000 Dr.

450,640
410,000
99,360
285,000
675,000