2. C H A P T E R 20 ACCOUNTING FOR PENSIONS AND POSTRETIREMENT BENEFITS Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield

9. LO 3 Explain alternative measures for valuing the pension obligation. The employer’s pension obligation is the deferred compensation obligation it has to its employees for their service under the terms of the pension plan. FASB’s choice Alternative measures of the Liability Accounting for Pensions Illustration 20-3

10. Recognition of the Net Funded Status Companies must recognize on their balance sheet the full overfunded or underfunded status of their defined-benefit pension plan. The overfunded or underfunded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation. Accounting for Pensions LO 3 Explain alternative measures for valuing the pension obligation.

11. Service Costs Interest on the Liability Actual Return on Plan Assets Amortization of Prior Service Costs Gain or Loss + + +- + +- Accounting for Pensions LO 4 List the components of pension expense. Components of Pension Expense 1. 2. 3. 4. 5. Effect on Expense

12. Service Costs + 1. Accounting for Pensions LO 4 List the components of pension expense. Components of Pension Expense Effect on Expense Actuarial present value of benefits attributed by the pension benefit formula to employee service during the period.

13. Interest on the Liability + 2. Accounting for Pensions LO 4 List the components of pension expense. Components of Pension Expense Effect on Expense Interest for the period on the projected benefit obligation outstanding during the period. The interest rate ( settlement rate ) should reflect the rate at which companies can effectively settle pension benefits.

14. Actual Return on Plan Assets +- 3. Accounting for Pensions LO 4 List the components of pension expense. Components of Pension Expense Effect on Expense The actual return on plan assets is the increase in pension funds from interest, dividends, and realized and unrealized changes in the fair-market value of the plan assets.

15. Accounting for Pensions LO 4 List the components of pension expense. Components of Pension Expense Effect on Expense Plan amendments often increase benefits for service provided in prior years. The cost ( prior service cost ) of providing these retroactive benefits is allocated to pension expense over the remaining service-years of the affected employees. Amortization of Prior Service Costs + 4.

16. Gain or Loss +- 5. Accounting for Pensions LO 4 List the components of pension expense. Components of Pension Expense Effect on Expense Volatility in pension expense can result from sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation.

18. Using a Pension Work Sheet LO 5 Use a worksheet for employer’s pension plan entries. The “General Journal Entries” columns determine the journal entries to be recorded in the formal general ledger. The “Memo Record” columns maintain balances for the unrecognized pension items.

19. BE20-3: At January 1, 20100, KRC Company had plan assets of $280,000 and a projected benefit obligation of the same amount. During 2010, service cost was $27,500, the settlement rate was 10%, actual and expected return on plan assets were $25,000, contributions were $20,000, and benefits paid were $17,500. Instructions: Prepare a pension worksheet for KRC for 2010. Using a Pension Work Sheet LO 5 Use a worksheet for employer’s pension plan entries.

20. Using a Pension Work Sheet BE20-3: Prepare a pension worksheet for KRC for 2010. LO 5 Use a worksheet for employer’s pension plan entries. ($280,000 x 10%) ($10,500) net liability

23. E20-7: The following defined pension data of Rydell Corp. apply to the year 2010. Using a Pension Work Sheet Projected benefit obligation, 1/1/10 (before amendment) $560,000 Plan assets, 1/1/10 546,200 Pension liability 13,800 On January 1, 2010, Rydell Corp., through plan amendment, grants prior service benefits having a present value of 120,000 Settlement rate 9% Service cost 58,000 Contributions (funding) 65,000 Actual (expected) return on plan assets 52,280 Benefits paid to retirees 40,000 Prior service cost amortization for 2010 17,000 Instructions: For 2010, prepare a pension work sheet for Rydell Corp. that shows the journal entry for pension expense. LO 6 Describe the amortization of prior service costs.

24. Using a Pension Work Sheet – E20-7 ($135,720) liability Solution on notes page

25. Pension Expense 83,920 OCI - PSC 103,000 Pension Liability 121,920 Cash 65,000 Using a Pension Work Sheet E20-7: Pension Journal Entry for 2010. Dec. 31 LO 6 Describe the amortization of prior service costs.

27. Question: What is the potential negative impact on Net Income of these unexpected swings? Volatility The profession decided to reduce the volatility with smoothing techniques . Gains and Losses LO 7 Explain the accounting for unexpected gains and losses.

28. Answer Recorded in Net Gain or Loss account. Amortize amount in excess of corridor to pension expense, over the average remaining service period of active employees expected to receive benefits under the plan. Gains and Losses Question: What happens to the difference between the expected return and the actual return? LO 7 Explain the accounting for unexpected gains and losses.

29. LO 7 Explain the accounting for unexpected gains and losses. Gains and Losses Question: What happens with unexpected gains or losses from changes in the Projected Benefit Obligation (PBO)? Answer Recorded in Net Gain or Loss account. Amortize amount in excess of corridor to pension expense, over the average remaining service period of active employees expected to receive benefits under the plan.

30. Corridor Amortization FASB invented the corridor approach for amortizing the accumulated net gain or loss balance when it gets too large. How large is too large? 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value (which may equal fair value) of the plan assets . Any accumulated net gain or loss balance above the 10% must be amortized. Gains and Losses LO 8 Explain the corridor approach to amortizing gains and losses.

31. BE20-7: Shin Corporation had a projected benefit obligation of $3,100,000 and plan assets of $3,300,000 at January 1, 2010. Shin’s also had a net pension actuarial loss of $465,000 in accumulated OCI at January 1, 2020. The average remaining service period of Shin’s employees is 7.5 years. Instructions: Compute Shin’s minimum amortization of the actuarial loss. Gains and Losses LO 8 Explain the corridor approach to amortizing gains and losses.

32. BE20-7: Compute Shin’s amortization of the loss. Gains and Losses LO 8 Explain the corridor approach to amortizing gains and losses. ÷

33. Using a Pension Work Sheet P20-2: Jackson Company adopts acceptable accounting for its defined benefit pension plan on January 1, 2009, with the following beginning balances: plan assets $200,000; projected benefit obligation $250,000. Other data are as follows. LO 8 Explain the corridor approach to amortizing gains and losses.

34. Using a Pension Work Sheet P20-2: Pension Work Sheet for 2009 ($57,000) * Expected Return on Plan Assets $200,000 x 10% = $20,000 * Solution on notes page LO 8 Explain the corridor approach to amortizing gains and losses.

35. Using a Pension Work Sheet P20-2 Pension Journal Entry for 2009 Pension Expense 21,000 OCI – Gain/Loss 2,000 Pension Asset/Liability 7,000 Cash 16,000 Dec. 31 LO 8 Explain the corridor approach to amortizing gains and losses.

36. Using a Pension Work Sheet P20-2: Pension Work Sheet for 2010 ($217,700) liability * Actual return = Expected Return * LO 8 Explain the corridor approach to amortizing gains and losses. Solution on notes page

37. Using a Pension Work Sheet P20-2 Pension Journal Entry for 2010 Pension Asset/Liability 160,700 Pension Expense 95,100 Dec. 31 Cash 40,000 LO 8 Explain the corridor approach to amortizing gains and losses. OCI - PSC 105,600

38. Using a Pension Work Sheet P20-2: Pension Work Sheet for 2011 ($203,400) liability * Plug * LO 8 Explain the corridor approach to amortizing gains and losses. Solution on notes page

39. Using a Pension Work Sheet P20-2 Pension Journal Entry for 2011 Pension Expense 89,370 Pension Asset/Liability 14,300 OCI - Gain/Loss 14,070 OCI - PSC 41,600 Cash 48,000 Dec. 31 LO 8 Explain the corridor approach to amortizing gains and losses.

46. Accounting Guidance In December 1990, the FASB issued rules on “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” These rules cover for healthcare and other “welfare benefits” provided to retirees, their spouses, dependents, and beneficiaries. Other welfare benefits include life insurance offered outside a pension plan; medical, dental, and eye care; legal and tax services; tuition assistance; day care; and housing assistance.

47. Differences Between Pension Benefits and Healthcare Benefits LO 10 Identify the differences between pensions and postretirement healthcare benefits. Illustration 20A-1

49. Postretirement Benefits Accounting Provisions LO 10 Identify the differences between pensions and postretirement healthcare benefits. Attribution Period - period of time over which the postretirement benefit cost accrue. Illustration 20A-2

53. Illustrative Accounting Entries 2010 Entries and Worksheet Illustration 20A-4 Journal Entry

56. Illustrative Accounting Entries 2011 Entries and Worksheet Illustration 20A-6 Journal Entry

57. Amortization of Gains and Losses in 2012 Illustrative Accounting Entries LO 11 Contrast accounting for pensions to accounting for other postretirement benefits. Illustration 20A-8

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