Electronic Distribution has a
Electronic Distribution has a defined benefit pension plan.Characteristics of the plan during 2021 are as follows:
| ($ millions) | |||||
| PBO balance, January 1 | $ | 640 | |||
| Plan assets balance, January 1 | 500 | ||||
| Service cost | 105 | ||||
| Interest cost | 85 | ||||
| Gain from change in actuarial assumption | 36 | ||||
| Benefits paid | (68 | ) | |||
| Actual return on plan assets | 47 | ||||
| Contributions 2021 | 95 | ||||
The expected long-term rate of return on plan assets was 10%. Therewere no AOCI balances related to pensions on January 1, 2021, butat the end of 2021, the company amended the pension formula,creating a prior service cost of $20 million. (Enter youranswers in millions (i.e., 10,000,000 should be entered as10).)Required:
1. Calculate the pension expense for2021.2. Prepare the journal entries to record (a)pension expense, (b) gains or losses, (c) prior service cost, (d)funding, and (e) payment of benefits for 2021.3. What amount will Electronic Distribution reportin its 2021 balance sheet as a net pension asset or net pensionliability?
Answer:
1) The pension expense for 2021 is calculated asfollows:
| $(millions) | |
|---|---|
| Service Cost | 105 |
| Interest Cost | 85 |
| Expected Return on Planassets ($500 *10%) | (50) |
| Amortization of priorservice cost | – |
| Pensionexpense | $140 |
2) Journal entries are as follows:
| No. | Account and Explanation | Debit($) | Credit($) |
|---|---|---|---|
| (a) | Pension Expenses | 140 | |
| Plan Assets ($500 *10%) | 50 | ||
| Projected Benefit Obligation (PBO)(105+85) | 190 | ||
| (Recorded the Pension Expenses ) | |||
| (b) 1) | Projected Benefit Obligation (PBO) | 36 | |
| Gain – OCI | 36 | ||
| (Recorded the gain – OCI) | |||
| (b) 2) | Loss – OCI ($500 *10%) – $47 | 3 | |
| Plan Asset | 3 | ||
| (Recorded the Loss – OCI) | |||
| (c) | Prior service cost – OCI | 20 | |
| Projected Benefit Obligation (PBO) | 20 | ||
| (Recorded the Prior service cost ) | |||
| (d) | Plan Asset | 95 | |
| Cash | 95 | ||
| (Recorded the funding ) | |||
| (e) | Projected Benefit Obligation (PBO) | 68 | |
| Plan Asset | 68 | ||
| (Recorded the benefits paid) |
3) An amount that Electronic Distribution report will inits 2021 balance sheet as a net pension asset or net pensionliability is calculated as follows:
a) Net pension asset :
| ($ millions) | |
|---|---|
| Plan Asset Balance, January1 | 500 |
| Actual Return in PlanAssets | 47 |
| Contributions | (68) |
| Benefits Paid | 95 |
| Plan Asset Balance, December 31 | 574 |
b) Net pension liability:
| $ | |
|---|---|
| Projected BenefitObligation (PBO), January 1 | 640 |
| Service Cost | 105 |
| Interest Cost | 85 |
| Gain from change inactuarial assumption | (36) |
| Prior Service Cost | 20 |
| Benefit Paid | ( 68) |
| Projected BenefitObligation (PBO),December 31 | 746 |
| Plan Asset Balance, December 31 | (574) |
| Net pensionLiability | $172 |
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