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Chapter 17 Pensions and Other Postretirement Benefits

REPORTING ISSUES

The four off-balance-sheet asset and liability accounts (informal records) reconcile to the prepaid
(accrued) pension cost that is reported in the balance sheet. In this section we are going to look
at the utilization of the pension spreadsheet. To accomplish this we will use the following
example.

Example: Spencer Company provided you with the following pension spreadsheet for the year
ended March 31, 2002.

Informal Records Formal Records


Prior Prepaid
Plan Service Net Loss Pension (Accrued)
PBO Assets Cost (Gain) Expense Cash Cost
Balance, April 1, 2001 (20,000) 20,000 0
Service cost (1,800) 1,800
Interest cost (1,200) 1,200
Actual return 1,600 (1,600)
Loss (gain) on plan assets 0 0
Prior service cost (2,000) 2,000
Amortizaiton of:
Prior service cost 0 0
Net gain (loss) 0 0
Contributions to fund 1,000 (1,000)
Benefits paid 900 (900)
2003 Journal entry 1,400 (1,000) (400)
Balance, March 31, 2002 (24,100) 21,700 2,000 0 (400)

Information provided from the actuarys report for the year ended March 31, 2003 is as follows:

Contribution $425
Service cost 3,000
Interest/discount reate 6%
ABO, 3/31/02 21,000
ABO, 3/31/03 27,000
Actual return on plan assets 1,736
Expected return 8%
Benefits paid 500
Average remaing service life 10 years
FV of plan assets, 3/31/02 21,700
FV of plan assets, 3/31/03 23,361

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Chapter 17 Pensions and Other Postretirement Benefits

The report indicated no actuarial gains or losses in the fiscal year ended March 31, 2003. Prior
service cost is to be amortized over the average remaining service life. In the current year, there
will be an initial adoption of minimum pension liability reporting.

The following is the pension spreadsheet for the year ended March 31, 2003.

Informal Records Formal Records


Prior Prepaid
Plan Service Net Loss Pension (Accrued)
PBO Assets Cost (Gain) Expense Cash Cost
Balance, April 1, 2002 (24,100) 21,700 2,000 (400)
Service cost (3,000) 3,000
Interest cost (1,446) 1,446
Actual return 1,736 (1,736)
Loss (gain) on plan assets 0 0
Prior service cost
Amortizaiton of:
Prior service cost (200) 0 200
Net gain (loss) 0 0
Contributions to fund 425 (425)
Benefits paid 500 (500)
2003 Journal entry 2,910 (425) (2,485)
Balance, March 31, 2003 (28,046) 23,361 1,800 0 (2,885)

Note that the informal records (off-balance-sheet) reconcile to the prepaid (accrued) pension cost
account.

PBO ($28,046)
Plan Assets 23,361
Prior Service Cost 1,800
Net Loss (Gain) 0
Accrued Cost ($2,885)

The journal entry to record pension expense for the fiscal year ended March 31, 2003 is as
follows:

Date Account Debit Credit


3/31/03 Pension expense $2,910
Cash $425
Prepaid/Accrued Pension Cost 2,485
To record pension expene, pension contributions and accured pension cost for
the fiscal year ended March 31, 2003.

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Chapter 17 Pensions and Other Postretirement Benefits

Minimum Liability

As a result of the above journal entry, the ending balance in the accrued pension liability account
is $2,885.

T-Account: Accrued Pension Liability


Date Description Debit Credit
4/1/02 Beginning balance $400
3/31/03 Journal entry to record pension expense 2,485
3/31/03 Ending balance $2,885

The next step is to test minimum liability. The minimum pension liability that should be
presented in the financial statements is the excess of the ABO over the FV of the plan assets.
This test is as follows:

March 31, 2003


ABO $27,000
FV of Plan Assets 23,361
Excess of ABO over Plan Asset $3,639

Since $2,885 is currently the liability that would be reported in the balance sheet we need to
accrue an additional pension liability to reflect the excess of ABO over Plan Assets of $3,639.
This additional adjusting journal entry would be as follows:

Date Account Debit Credit


3/31/03 Intangible asset, deferred pension cost $754
Additional pension liability $754
To record minimum pension liability for 2003

Assuming that there was not prior balance in the additional pension liability account, the t-
account analysis would reflect the following:

T-Account: Additional Pension Liability


Date Description Debit Credit
4/1/02 Beginning balance $0
3/31/03 Journal entry to record additioal liability 754
3/31/03 Balance at 3/31/03 $754

The amount that will be reported in the balance sheet as a result of this additional journal will be
the excess of ABP over Plan Assets as required.

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Chapter 17 Pensions and Other Postretirement Benefits

Accrued pension liability $2,885


Additional pension liability 754
Liability as reported in the balance sheet $3,639

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