Module 15

Pensions and Other Post-Employment Benefits

Pension plans
Post-employment benefits refer to promises made by a company to terminated or laid-off
employees. These benefits include pensions, health-care benefits, unemployment pay, job-
training, or employment counseling. Thus, the phrase post-employment benefits is broader
than post-retirement benefits. However, post-retirement benefits are the most important of the
post-employment benefits, and constitute the focus of this module. Pensions and health-care
benefits are the two primary post-retirement benefits.
tatement of !inancial "ccounting tandard #!"$ %o. &' provides guidance related to
accounting for pension plans. "ccounting for other post-retirement benefits other than pensions
#primarily related to health care$ is governed by !" %o. ()*.
Pension plans pay benefits to employees after retirement. There are two broad categories of
pension plans
+efined-contribution plan, and
+efined-benefit plan.
,n a defined-contribution plan, the employer contributes a -nown amount #usually based on a
specified percent of employee salary$ to a pension plan. The only obligation for the employer is
to pay this amount each period, as long as the employee is wor-ing for the company. .sually,
the employee also contributes some amount to the pension plan. The assets are invested in a
variety of securities #such as stoc-s, bonds, money mar-et funds, and real estate investment
trusts$. The account belongs to the employee who withdraws from the account after
retirement. The widely popular /)(-- plans are defined contribution plans.
The -ey point to note is that once the periodic payment is made, there is no other future
financial obligation for the employer in a defined-contribution plan. That is, the ris- associated
with the plan is borne entirely by the employee. ,f the employee invests wisely and successfully,
then he or she will have a comfortable pension during retirement. However, if the employee is
not successful in his or her investment decisions, then there will be less money available during
retirement.
!rom an accounting perspective, defined-contribution plans are very easy. There is only one
journal entry each period. 0hen the company ma-es a payment to the pension plan, there will
be a debit to 0ages #or 1ompensation$ 23pense and a credit to 1ash. #"lternatively, the
company may first credit a Payable account and then once the payment is made, credit the
Payable account. That is, there may be two journal entries each period.$
The e3cellent performance of the stoc- mar-et during the (4&)s and (44)s also has contributed
to the rising popularity of defined-contribution plans. ,n addition, as noted below, the employer
has to bear the ris-s associated with defined-benefit plans. Hence, employers have become
increasingly more li-ely to offer defined-contribution plans.
Defined Benefit Plans
,n a defined-benefit plan, the ultimate pension benefit to be received by the employee is
specified in the employment contract. The periodic payments are not specified in the contract.
#Hence, the name 5since it is the benefit that is defined, the plan is called defined-benefit
plan.$ Thus, the employer is responsible for ma-ing sure there is enough assets in the
retirement plan to pay the specified amounts during retirement. That is, the ris- associated with
the plan rests with the employer. The employer has to ma-e the investment decisions that will
ensure there is enough money in the plan to pay for the specified retirement benefits. The rest
of this module will focus on defined-benefit plans.
The usual formula for calculating the retirement benefits under a defined-benefit plan is as
follows6
"nnual pension 7 %umber of years of service 3 pecified percent 3 "verage salary
The percent specified is usually between two to three percent. ,n many plans, only the average
of the salaries over the last few years #usually between two to five years$ before retirement is
used in the formula. ome plans use the average of the highest salaries received #that is, the
average used may be the average of the three or five highest salaries received$. #However,
since salaries usually increase with time, the difference may not matter.$
23ample.
8im 8ones retired from 0ebb 1ompany on +ecember 9(, :)):, after wor-ing for 9) years. The
1ompany;s defined-benefit pension plan specifies a credit of :< for each year of service, and
calculated benefits based on the average of the last three years; salaries. 8ones salaries for the
years :))), :))(, and :)): were =/&,>)), =/4,>)) and =>:,))), respectively. 1alculate the
annual pension that 8ones will receive.
The average of the last three years; salaries 7 =>),))) #?=/&,>)) @ =/4,>)) @ =>:,)))AB9$.
Thus, the annual pension for 8ones 7 9) years 3 :< per year 3 =>),))) 7 =9),))).
8ones will receive =9),))) a year as long as he lives.
Benefit Obligations (PBO and ABO)
The accounting issue for the employer is that the pension will be paid in the future, but it
represents an obligation of the company today. Hence, the employer must calculate the present
value of the future pension payments. The interest rate used for the present value calculation of
the future pension obligation is -nown as the settlement rate. This interest rate is chosen by
management, and can have a significant impact on the amount of the pension obligations
recogniCed by the company.
1ontinuing with our 0ebb 1ompany e3ample, assume that 8im 8ones is e3pected to live for ()
years after retirement. !or the sa-e of simplicity, we assume that the first retirement chec- will
be given on 8anuary (, :))9 and that pension chec-s are mailed on 8anuary ( of each year.
ince the annual pension for 8im 8ones was calculated to be =9),))) paid at the beginning of
each year, the pension payments represent an annuity due of =9),))) per period for () periods.
"lso, assume that the settlement rate used by 0ebb 1ompany is &<. Then, the current
obligation of 0ebb 1ompany for the future pension payments to be made to 8im 8ones is
7 Present value of an annuity of =9),))) for () periods, &< per period
7 =9),))) 3 PD factor for annuity due of () periods, &<
7 =9),))) 3 '.:>
7 =:(',>)).
23ample.
"s of +ecember 9(, :)):, ally 8ones has wor-ed with 0ebb 1ompany for :> years. ally is
e3pected to retire on +ecember 9(, :))', and live for () years after retirement. Her current
annual salary is =/),))) but her average annual salary for the last three years before retirement
is e3pected to be =>),))).
%ote that ally;s salaries during the last three years before retirement and her e3pected life are
the same as that of 8im 8ones. !urther, as of the date she retires, she also will have the same
9) years of service with the 1ompany as 8im 8ones. Thus, her pension benefits will be e3actly
the same as that of 8im 8ones, and the 1ompany;s obligation with respect to her pension is the
same as the obligation for the pension of 8im 8ones.
The difference is that ally is e3pected to retire not tomorrow #as will 8im 8ones$ but only five
years from now. The present value of ally;s future pension obligation to the 1ompany also will
be =:(',>)) but that is as of the date ally retires. ince ally will retire only five years from
now, that amount has to be discounted bac- to the present. Thus, as of +ecember 9(, :)):,
the present value of the future pension obligation related to ally is6
7 Present value of a single sum of =:(',>)), due five years from now
ince the discount rate used by the 1ompany is &<, the present value is
7 =:(',>)) 3 PD of single sum, five years from now at &<
7 =:(',>)) 3 ).*&
7 =(/',4)).
This amount is -nown as the projected benefit obligation #PEF$. This is the present value of all
pension benefits earned by ally 8ones based on her past service to the 1ompany.
%ote the difference between the situations of 8im 8ones and ally 8ones. ,n the case of 8im
8ones, only one present value calculation was needed. That is because 8im is retiring today,
and the present value of his pension benefits as of today is needed. ,n the case of ally 8ones,
there was a two-step process. ,n the first step, the e3pected future obligation to the 1ompany
as of the date she will retire was calculated. ,n the second step, since ally;s retirement is in
the future, the present value of that amount as of today was calculated. %ote that only the
pension represents an annuity. The amount calculated in the first step represents a single-sum
eGuivalent as of the date the employee will retire, so only a single-sum discounting is needed in
the second stage.
The PEF was calculated using 2HP21T2+ !.T.I2 "J"I,2. ,nstead of using e3pected
salaries, the present value of pension benefits earned by ally 8ones can also be calculated
using her 1.II2%T "%+ P"T "J"I,2. This amount is -nown as the accumulated benefit
obligation #"EF$.
Thus, the only difference between the PEF and "EF is that the PEF uses e3pected future
salary levels while the "EF uses current and past salary levels. ince salaries are usually
increasing over time, the PEF will usually be higher than the "EF.
nterest !ost and "er#i$e !ost
The PEF is a discounted present value amount. "ny present value number automatically
increases over time. !or e3ample, assume that today is +ecember 9(, :)):. 1onsider a single
sum of =(,))) due five years from now #on +ecember 9(, :))'$. ,f the interest rate used for
discounting is &<, the present value factor for discounting is ).*&. Thus, the present value of
the =(,))) due five years from now eGuals =*&) #=(,))) 3 ).*&$ now.
"ssume that one year has elapsed. There are only four more years left before the =(,)))
becomes due. The present value of the =(,))) as of +ecember 9(, :))9 can be obtained by
discounting the =(,))). The discount factor for four years at ()< per period eGuals .'9>, so the
present value of the =(,))) as of now #that is, +ecember 9(, :))9$ is ='9>.
This amount can also be calculated as follows. The present value due as of +ecember 9(,
:)): was =*&). ince one year has gone by, this amount has earned interest at &< for one
year. Hence the interest on the =*&) for one year eGuals =>> #&< of =*&), with a small
adjustment for rounding$, and the total amount due as of +ecember 9(, :))9 eGuals ='9> #=*&)
due as of +ecember 9(, :)): plus one year;s interest of =>>$.
Thus, the rule is that any present value amount increases simply with the passage of time as it
earns interest. ince the PEF is a present value amount, there is interest associated with the
PEF each year. The interest cost is calculated based on the beginning balance of the PEF,
and the settlement rate is used to calculate the interest.
1ontinuing with the 0ebb 1ompany e3ample, as one year goes by ally 8ones has wor-ed for
one more year. Eased on the pension plan, she receives a :< credit for each e3tra year she
wor-s for the 1ompany. The average of her three highest salaries was assumed to be
=>),))). Thus, by wor-ing one more year up to +ecember 9(, :))9, the e3tra pension she
receives will be
7 =>),))) 3 :< per year 3 one year
7 =(,))) per year.
Thus, the pension annuity increases by =(,))) because ally 8ones wor-s for one more year.
ince this is in the future, the present value of this e3tra annuity must be calculated as of now.
ince ally is e3pected to live for () years in retirement, the total present value of this e3tra
=(,))) pension annuity as of the date she will retire will be
7 =(,))) 3 Present value factor for annuity due, () years, &< per period
7 =(,))) 3 '.:>
7 =',:>).
However, this is the present value as of the date ally will retire which is +ecember 9(, :))' or
four years from +ecember 9(, :))9. o the present value of this e3tra benefit as of now #that
is, +ecember 9(, :))9 5remember ally has now wor-ed for one more year$ will be
7 =',:>) 3 Present value factor for single sum, four years, &< per period
7 =',:>) 3 ).'9>
7 =>,9:4 #rounded$.
This amount is -nown as the service cost and is the present value of the benefits attributed by
the pension plan because the employee has wor-ed during the current year.
%ote the difference between interest cost and service cost. ,nterest cost arises simply because
of the passage of time, regardless of whether or not the employee has wor-ed during the year.
Thus, interest cost will be relevant for all employees covered by the pension plan, irrespective of
whether they are still wor-ing or have retired or have been laid-off by the 1ompany during the
year. ervice cost arises because the employee has wor-ed for one more year. ervice cost
will not arise for retired employees or for employees who did not wor- during the current year.
Prior "er#i$e !ost and Pension benefits
1ompanies may introduce a new pension plan or ma-e changes to their e3isting pension plan.
!or e3ample, a company may decide to adopt a new pension plan and give credit to current
employees. !or e3ample, assume that the 0ebb 1ompany introduced the pension plan during
the year :)):. The 1ompany may decide that employees will receive credit for their previous
years of service with the company, as opposed to starting the benefits for everyone from
scratch. That is, someone li-e ally 8ones who has wor-ed for :> years with the 1ompany may
get the credit for her past service with the 1ompany on the day that the pension plan is adopted.
This in turn means the 1ompany has assumed new obligations on the day the pension plan was
adopted.
1ompanies also may decide to change the terms of their pension plan. !or e3ample, 0ebb
1ompany may decide that employees will receive a credit of 9< #as opposed to :<$ for each
year of service with the 1ompany. uch a change increases the obligations for the 1ompany
related to the pension plan.
Thus, the pension obligations of the 1ompany change as a result of adopting a new plan or
ma-ing changes to an e3isting plan. The present value of such changes in the obligations of
the 1ompany are -nown as prior service costs. The 1ompany grants such e3tra benefits in
appreciation of services rendered in the past, and e3pects to receive benefits in the future #in
the form of happier employees who may be more loyal and wor- better$. Thus, the e3tra
benefits granted to the employees are accounted for as assets #because they are e3pected to
provide future benefits$. Hence, when pension benefits are newly granted or increased the
obligations increase and an asset is recogniCed.
The journal entry when new pension benefits are granted is6
+ebit Prior ervice 1osts #"sset$
1redit Projected Eenefit Fbligation #Jiability$
Prior ervice 1ost is an intangible asset. Hence, it is amortiCed each period. The asset is
amortiCed over the estimated useful service life of the employees, using the straight-line
method. "ssume that the Prior ervice 1ost when 0ebb 1ompany introduced a new pension
plan was =>)),))) and that the estimated average remaining service life of the employees is :)
years. Then, the annual amortiCation of the Prior ervice 1ost will be =:>,))) #=>)),)))
divided over :) years$. The journal entry for amortiCing Prior ervice 1ost each period is
+ebit "mortiCation 23pense
1redit Prior ervice 1osts
Pension benefits are paid to employees after they retire. "s the benefits are paid, the
obligations of the company decrease. Hence, the PEF will decrease by the amount of pension
benefits paid.
Iecall that the PEF is a present value discounted number, and hence will increase with the
passage of time. This is the interest cost associated with the PEF. !urther, the PEF will
increase during a period by the amount of the service cost.
This gives the following relationship6
PEF at the end of a year 7 PEF at the beginning of the year @
1urrent period service costs @
,nterest cost on PEF for the period 5
Eenefits paid in current period
%e#ie& 'uestion 1
(. ,n a KKKKKKK pension plan, the employer contributes a -nown amount #usually based on a
specified percent of employee salary$ to a pension plan.
:. ,n a KKKKKKK pension plan, the payments to be received by the employee is specified in the
employment contract.
9. The KKKKKK is the present value of all pension benefits earned by employees based on past
service to a 1ompany, using current and past salary levels.
/. KKKKKKKK is a cost which arises each period merely because of the passage of time.
>. KKKKKKKK is a cost which arises each period because the employee has wor-ed for one
more year.
*. The KKKKKK is the present value of all pension benefits earned by employees based on past
service to a 1ompany, using e3pected future salary levels.
"nswers
(. +efined contribution :. +efined benefit 9. "ccumulated benefit obligation
/. ,nterest cost >. ervice cost *. Projected benefit obligation
Pension funding and Pension e(pense
Iecall that defined-benefit pension plans specify the benefits but are silent about the funding
each period. However, the 2mployee Ietirement ecurity "ct #2I,"$ of (4'/ specifies
minimum funding standards. Lanagement decides the amount of funding for the pension plan,
subject to the reGuirements of 2I,".
The assets in the pension plan are invested in a variety of assets and earn returns. The fair
value of the pension assets increases by the amount of return on the assets, and also by any
additional contributions to the pension plan by the company. The plan assets decrease when
benefits are paid to employees. Thus,
2nding balance of pension plan assets
7 Eeginning balance of pension plan assets @ Ieturn on plan assets for the period @
%ew contributions to plan by the company 5 Eenefits paid during period
There are two issues from an accounting perspective related to pension plan assets and
pension funding. !irst, the pension plan assets and the PEF are not shown separately as asset
and liability on the balance sheet. ,nstead, they are netted and the balance is shown as an
asset or liability #called PrepaidB"ccrued Pension 1ost$.
The second point to note is that the amount of funding for the pension plan during a period is
not the same as the pension e3pense for a period. However, the return on the pension assets
decreases the pension e3pense to be recogniCed in any period.
The pension e3pense for a period will be
7 1urrent period service costs @
,nterest cost on PEF for the period @
"mortiCation e3pense of Prior ervice 1osts 5
Ieturn on pension plan assets during the current period
"t the end of each period, the 1ompany will record a journal entry for the periodic pension
e3pense and the funding for the period. ince e3penses are debited and cash outflows are
credited, the journal entry is
+ebit Pension 1ost
1redit 1ash #for the amount of pension-plan funding during the year$
The two need not be eGual. That is, a 1ompany need not fund the pension plan by the e3act
amount of the periodic pension e3pense for that period. Hence, a plug entry #to ma-e debits
eGual credits$ is usually reGuired. The name of the account for the plug entry is Prepaid B
"ccrued Pension 1ost. This is a combined asset B liability account, and will be called an asset
or liability depending on the balance at any given point in time.
"ssume that during :))9 the pension cost is =9),))) while the pension funding was only
=:*,))). This means there is a plug credit entry of =/,))) reGuired for the PrepaidB"ccrued
Pension 1ost account. ,f the balance in the account at the start of the year was Cero, then as of
the end of :))9 the PrepaidB"ccrued Pension 1ost account will have a credit balance of =/,)))
and hence will be a liability.
1ontinuing with the e3ample above, assume that during :))/ the pension cost is =99,))) while
the pension funding was =9&,))). This means there is a plug debit entry of =>,))) reGuired for
the PrepaidB"ccrued Pension 1ost account. %ote that the balance in the PrepaidB"ccrued
Pension 1ost account at the start of :))/ was a credit balance of =/,))). Hence, the balance
as of the end of :))/ in the PrepaidB"ccrued Pension 1ost account will be a net debit of =(,)))
#that is, it will be an asset with a balance of =(,))) at the end of :))/$.
A$tual and E(pe$ted %eturns on Plan Assets
"ccounting standards are often the products of compromises. !" &' is a primary e3ample of
an accounting standard issued on the basis of practical compromises. Theoretically, the
pension cost calculation noted above #1urrent period service costs @ ,nterest cost on PEF for
the period @ "mortiCation e3pense of Prior ervice 1osts 5 Ieturn on pension plan assets
during the current period$ ma-es sense. However, when the draft of !" &' was issued, there
were vehement protests from many companies. Fne of the reasons for the protests was that
the return on pension plan assets could vary significantly each period. This in turn would lead to
significant variations in the pension e3pense, and hence the reported net income. #Lanagers
usually do not li-e great fluctuations in reported net income.$ The protesters noted that pension
plans have long-term focus and hence short-term fluctuations would distort reality.
"s a compromise the !"E decided that companies should subtract not the actual returns, but
the e3pected returns in calculating the periodic pension e3pense. ince e3pected returns do
not vary significantly from period to period, this compromise leads to smoothing the periodic
pension e3pense.
23ample.
,nformation about the pension plan details of Eristol 1ompany for the year ending +ecember 9(,
:)): are given below6
ervice cost for :)): = 4),)))
,nterest on Projected benefit obligation 9/,)))
"mortiCation of prior service cost *,)))
!air mar-et value of pension plan assets, (B(B:)): 9)),)))
"ctual return on pension plan assets /),)))
23pected Iate of return on plan assets ()<
1alculate pension e3pense for :)):.
The e3pected return on plan assets 7 =9)),))) 3 ).() 7 =9),))).
Hence, the pension e3pense for :)): is calculated as follows6
ervice cost for :)): = 4),)))
@ ,nterest on Projected benefit obligation 9/,)))
@ "mortiCation of prior service cost *,)))
5 23pected return on plan assets #9),)))$
7 Pension e3pense for :)): ()),)))
The actual return on plan assets for the period was =/),))). Thus, there is an e3cess return
of =(),))) over the e3pected return. This e3cess is li-e a rainy-day reserve, and will be useful
in future periods if the actual returns are less than e3pected returns.
%ote.
23cess return 7 "ctual return 5 23pected return, or
23pected return 7 "ctual return 5 23cess return.
Thus,
ome amount 5 23pected return 7 ome amount 5 "ctual return @ 23cess return.
Thus, the table above to calculate the periodic pension e3pense can be rearranged as follows6
ervice cost for :)): = 4),)))
@ ,nterest on Projected benefit obligation 9/,)))
@ "mortiCation of prior service cost *,)))
5 23pected return on plan assets 7
"ctual return on plan assets #/),)))$
+eferral of e3cess gain during year (),)))
#9),)))$
7 Pension e3pense for :)): ()),)))
The e3cess return is referred to as gain on plan assets. ,t is possible that in other periods the
actual returns may be lower than the e3pected return on plan assets. ,n such instances, the
difference between the actual return and e3pected return is referred to as a loss on plan assets.
%ote that the term loss does not mean the company had a negative return, but only means
that the actual return was less than the e3pected return.
!orridor Amorti)ation
,n the Eristol 1ompany e3ample above, the e3cess return that has been deferred #that is,
postponed$ for future periods was =(),))). The e3pectation was that such gains would balance
out losses #or returns lower than e3pected$ in other periods. However, it is possible that there
could be prolonged periods when a company e3periences gains #or losses$ each year. ,n such
cases, the gains #or losses$ could -eep adding up, and become significant.
"ssume that the Eristol 1ompany had =&,))) of e3cess returns in the ne3t year #:))9$. Thus,
as of the end of :))9, the cumulative e3cess returns #gains$ that have been deferred are
=(&,))) #=(),))) in :)): and =&,))) in :))9$. #This assumes that the 1ompany had a Cero
balance of gains and losses as of the beginning of :)):$. This amount is -nown as the
cumulative uncreogniCed net gain or loss.
,f the cumulative unrecogniCed net gain or loss becomes large, then it has to be amortiCed over
the e3pected average future service periods of the employees. This is -nown as the corridor
method. The calculations for the corridor method are as follows.
tep (. +etermine the larger of the PEF or plan assets, as of the beginning of the period.
tep :. 1alculate ()< of the amount in step (. This amount is -nown as the corridor. %ote that
the corridor is based on absolute values #that is, plus or minusM the plus side is used in dealing
with e3cess gains, and the negative side is used in dealing with e3cess losses$.
tep 9. 1hec- the cumulative unrecogniCed net gain or loss as of the beginning of the period. ,f
this amount is less than the absolute value of the corridor amount, then do nothing. Ftherwise,
calculate the difference between the cumulative unrecogniCed net gain or loss and the corridor
calculated in step :. This difference is the amount that has to be amortiCed.
tep /. "mortiCe the difference calculated in step 9, over the average future service periods of
the employees. %ote that when e3cess gains are amortiCed, they reduce the current period
pension e3pense. 1onversely, if e3cess losses from past periods are amortiCed, they will
increase current period pension e3pense.
The corridor calculations have to be performed each year. ,t is possible that one year e3cess
gains have to be amortiCed, but the second year may not reGuire any amortiCation because the
e3cess gains or losses have come within the corridor for the second year. ,t also is possible
#though it would be rare$ that one year e3cess gains have to be amortiCed, while e3cess losses
have to be amortiCed in the second year.
23ample.
The following information is available about the pension plan of Erown 1ompany6
Near 8anuary (, PEF 8anuary (, Plan
"ssets
"ctual return minus
e3pected return
:)): = 9'),))) = 9*),))) = #&,)))$
:))9 /:),))) />),))) *,)))
The cumulative unrecogniCed gain as of 8anuary (, :))( was =/>,))). "ssuming an average
remaining service life of () years in both years, calculate for each year #a$ the amount of gain or
loss to recogniCe #amortiCe$ and #b$ the cumulative unrecogniCed gain or loss at year end.
1alculations for :)):6
tep (. The PEF is greater than the plan assets as of 8anuary (, :)):, and the PEF balance is
=9*),))) as of 8anuary (, :)):.
tep :. ()< of the amount in step ( is =9*,))). This is the corridor.
tep 9. The cumulative unrecogniCed gain as of 8anuary (, :)): is =/>,))). This is greater
than the corridor #=9*,)))$. The difference is =4,))) #=/>,))) 5 =9*,)))$.
tep /. The amortiCation this year is =4,))) divided by the average e3pected service lives which
is () years. o the amortiCation this year is =4)) #=4,)))B()$. This is amortiCation of e3cess
gains, so this will reduce the current period pension e3pense.
"fter the amortiCation, the balance in the cumulative unrecogniCed gain or loss account is
=//,()) #=/>,))) 5 =4))$. !urther, there was a loss #remember that loss only means the actual
returns were less than e3pected returnsM both actual and e3pected returns could be positive$ of
=&,))) during :)):. Hence, the balance in the cumulative unrecogniCed gain or loss account
as of the end of :)): would be =9*,()) #=//,()) 5 =&,)))$.
1alculations for :))96
tep (. The plan assets are more than the PEF as of 8anuary (, :))9, and the plan assets total
=/>),))) of 8anuary (, :))9.
tep :. ()< of the amount in step ( is =/>,))). This is the corridor.
tep 9. The cumulative unrecogniCed gain as of 8anuary (, :))9 is =9*,()). This is less than
the corridor #=/>,)))$, so no amortiCation is reGuired in :))9.
The e3cess gain during :))9 was =(>,))). This means that the balance in the cumulative
unrecogniCed gain or loss account as of the end of :))9 would be =9*,()) @ =*,))) 7 =/:,()).
Minimum Pension *iability
The !"E was concerned that the approach is !" &' might lead to companies reporting a
very low amount as a liability related to pensions in some circumstances. Hence, the !"E
reGuires companies to report a minimum liability related to pensions.
The calculations in this module have so far used the PEF. However, for the purposes of the
minimum pension liability calculations, !" &' reGuires the use of the "EF. %ote that the
"EF uses current and past salary levels, while the PEF is based on e3pected future salary
levels. Hence, the "EF is usually lower than the PEF.
The "EF must be compared against the fair value of plan assets as of the end of a period. ,f
the plan assets are greater than the "EF, then no adjustment is reGuired for the minimum
pension liability. However, if the plan assets are lower than the "EF, then the balance sheet
must show at least the difference between the two amounts as a pension related liability.
23ample.
The balance in pension related accounts of Oarcia 1ompany and Harris 1ompany as of
+ecember 9(, :)): are given below.
"EF !air value of plan
assets
Linimum pension
liability
Oarcia 1ompany = 9)),))) = 9/),))) )
Harris 1ompany /)),))) 9&),))) = :),)))
Eecause the "EF of Oarcia 1ompany is lower than the fair value of its plan assets, there is no
minimum liability reGuired. ,n the case of Harris 1ompany, since the "EF e3ceeds the fair value
of plan assets by =:),))), a minimum pension liability of =:),))) is reGuired on the balance
sheet.
"fter calculating the minimum pension liability, the ne3t step involves e3amining the e3isting
balance in the PrepaidB"ccrued Pension 1ost account. Iecall that this is an account which can
have either a debit or credit balance, and accordingly will be characteriCed as an asset or
liability on the balance sheet. Iecall also that liabilities have credit balances.
"ssume that Harris 1ompany has a credit balance of =&,))) in its PrepaidB"ccrued Pension
1ost account. ince the minimum liability reGuired is =:),))) and there is already a credit
balance of =&,))), the additional pension liability to be shown on the balance sheet is only
=(:,))) #=:),))) 5 =&,)))$.
However, if Harris 1ompany has a debit balance of =>,))) in its PrepaidB"ccrued Pension 1ost
account then the additional pension liability to be shown on the balance sheet will be =:>,))).
This is because to go from a debit balance of =>,))) to a credit balance of =:),))) reGuires a
credit entry of =:>,))).
The creation of this liability #=(:,))) or =:>,))), as may be the case$ reGuires a journal entry.
The credit entry will be made to the PrepaidB"ccrued Pension 1ost account. The debit entry is
made to an account called ,ntangible Pension "sset. However, the balance in this account
cannot be more than the amount of unrecogniCed prior service costs. "ny remaining amounts
are debited to an account called 23cess of "dditional Pension Jiability Fver .nrecogniCed Prior
ervice 1osts. This is a contra-eGuity account, and is shown on the balance sheet as a
deduction from toc-holders; 2Guity.
Other Post-retirement Benefits
,n addition to pensions, retirees #and their spouses$ may receive other benefits from the
company. "s noted previously, health-care benefits constitute the most financially significant
issue related to such benefits. "ccounting for post-retirement health benefits is governed by
!" ()*, which parallels !" &' #governing accounting for pensions$.
"s with pensions, the annual cost related to post-retirement health care includes the following
components.
ervice cost
,nterest cost
"mortiCation of prior-service cost
Ieturn on plan assets #actual less deferred gain ?or plus deferred lossA$
"mortiCation of unrecogniCed transition obligation.
"ccounting for post-retirement health care benefits is even more imprecise than accounting for
pension plans. This is because in a pension plan a company must ma-e estimates related to
future increases in the compensation of its employees. The company may be able to control
such future increases. However, in accounting for post-retirement health care benefits a
company must ma-e estimates related to future increases in the cost of health care. " company
may only have a limited ability to predict future innovations in health care and to control costs
associated with medical technology in the future. The assumptions related to future health-
benefit payments may be impacted by changes in, among others, the following factors
government regulations related to medicare and medicaid.
innovations in medical technology
health-care cost trends.
retirement age of employees.
mortality rates #or, how long people will live$.
lifestyle choices by retirees.
number of covered dependents.
Thus, it is essential to -eep in mind that the accounting for post-retirement health-care benefits
is based on numbers that may be very imprecise and subject to change over time.
%e#ie& 'uestion +
(. The PEF is reduced by the amount of KKKKKKKKK.
:. The PEF is increased by the amount of KKKKKKK.
9. The pension e3pense for a period is reduced by the amount of KKKKKKKK.
/. 0hen the plan funding for a year is less than the pension e3pense, the KKKKKK account is
credited.
>. The minimum liability adjustment is reGuired when the plan assets are lower than the KKKKK.
*. The pension plan assets are increased by the amount of KKKKKK.
"nswers6
(. Eenefits paid :. ervice costs 9. 23pected return on plan assets
/. PrepaidBaccrued pension cost >. "EF *. "ctual return on plan assets
,lossary
"ccumulated benefit obligation #PEF$ is the present value of all pension benefits earned by
employees based on past service to a 1ompany, using current and past salary levels to
calculate the amount of the pension benefits.
1orridor method is used to amortiCe cumulative unrecogniCed net gain or loss.
+efined-benefit plan is a pension plan in which the pension payments to be received by the
employee is specified in the employment contract.
+efined-contribution plan is a pension plan in which the employer contributes a -nown amount
#usually based on a specified percent of employee salary$ to a pension plan. /)(-- plans are
defined contribution plans.
,nterest cost is the increase in the PEF based on the passage of time. ,t is calculated based on
the beginning balance of the PEF, and the settlement rate of interest.
Linimum liability is the amount reGuired to be shown on the balance sheet, and eGuals the
amount by which the "EF e3ceeds the fair value of the pension plan assets.
Post-employment benefits refer to promises made by a company to terminated or laid-off
employees. These benefits include pensions, health-care benefits, unemployment pay, job-
training, or employment counseling.
Post-retirement benefits are received by employees after retirement, and include pensions and
health-care benefits.
Pension benefits are paid to employees after they retire, and reduce the PEF #and the pension
plan assets$.
Pension plans pay benefits to employees after retirement.
Prior service costs are the present value of changes in the pension obligations of a company as
a result of adopting a new plan or ma-ing changes to an e3isting plan.
Projected benefit obligation #PEF$ is the present value of all pension benefits earned by
employees based on past service to a company, using e3pected future salaries to calculate the
amount of the pension benefits.
ervice cost is the present value of the benefits attributed by the pension plan because the
employee has wor-ed during the current year.
ettlement rate is the interest rate used for the present value calculation of the future pension
obligation.
Demonstration Problem 1
-arner !ompany
,nformation about the pension plan details of 0arner 1ompany as of 8anuary (, :)): are given
below6
!air mar-et value of pension plan assets = ')),)))
Projected benefit obligation >)),)))
.namortiCed prior service cost (&),)))
Prepaid #accrued$ pension cost #9>,)))$
ervice cost for :)): :)),)))
1ontribution to pension fund during :)): (*>,)))
"ctual return on pension plan assets '/,)))
"mortiCation of unrecogniCed net loss *,)))
ettlement rate 4<
Iate of return on plan assets ()<
"mortiCation period for prior service cost :) years
1alculate #a$ pension e3pense for :)):, and #b$ prepaid #accrued$ pension cost as of +ecember
9(, :)):.
olution to +emonstration Problem (, 0arner 1ompany
a. Pension e3pense for :)):
ervice cost for :)): = :)),)))
,nterest on the PEF #=>)),))) 3 .)4$ />,)))
"mortiCation of prior service cost #=(&),)))B:)$ 4,)))
"ctual return on plan assets #'/,)))$
+eferral of e3cess gain during year /,)))
%et deduction #see below$ #'),)))$
"mortiCation of net loss *,)))
Pension e3pense = (4),)))
%ote that another way of arriving at the amount to deduct is by considering only the e3pected
return on plan assets. ince plan assets at the beginning of the year were =')),))) and the
e3pected return is ()<, the deduction for e3pected return would be =')),))) 3 ).() 7 ='),))).
b. Prepaid #accrued$ pension cost as of +ecember 9(, :)):
The beginning balance of prepaid #accrued$ pension cost is given to be =#9>,)))$. This means
the beginning balance is accrued pension cost, with a credit balance in the account.
+ebit 1redit
Pension e3pense #step ($ = (4),)))
!unding of pension plan during year #step :$ = (*>,)))
+ifference #plug number, step 9$ :>,)))

Eeginning balance, prepaidBaccrued pension cost = 9>,)))
Hence, ending balance, prepaidBaccrued pension cost = *),)))
ince the plug number is a credit entry, it adds to the accrued pension cost balance. The
ending balance of accrued pension cost is =9>,))) @ =:>,))) 7 =*),))).
Demonstration Problem +
,reen !ompany
The following information is available about the pension plan of Oreen 1ompany6
Near 8anuary (, PEF 8anuary (, Plan
"ssets
"ctual return minus
e3pected return
:))( = >'),))) = *)),))) = 4,)))
:)): ':),))) ')),))) #:),)))$
:))9 4)),))) &)),))) (),)))
The cumulative unrecogniCed gain as of 8anuary (, :))( was =()),))). "ssuming an average
remaining service life of () years throughout the three years, calculate for each year #a$ the
amount of gain or loss to recogniCe #amortiCe$ and #b$ the cumulative unrecogniCed gain or loss
at year end.
olution to +emonstration Problem :, Oreen 1ompany
,tem :))( :)): :))9
1umulative gainBloss as
of 8anuary ( " = ()),))) = ()>,))) = &(,'))
Jarger of PEF or Plan
assets, 8anuary ( E *)),))) ':),))) 4)),)))
1orridor
1 7
P()< of EP P*),)))P P':,)))P P4),)))P
"mount subject to
amortiCation
+ 7 P"P 5 P1P
,f P"P Q P1P P/),)))P P99,)))P P)P
"mortiCation for the year
#corridorBservice life$ 2 /,))) 9,9)) )
23cess gain #loss$ for
year ! 4,))) #:),)))$ (),)))
1umulative gainBloss as
of year end
O 7
" 5 2 @! ()>,))) &(,')) 4(,'))
%ote
(. The RP3P; symbol means the absolute value #ignoring the plus or minus$ of a number. The
amortiCation reGuirement is for both sides of the corridor. Hence the corridor amount is
shown as an absolute number.
:. imilarly, the amount subject to amortiCation also is shown as an absolute amount.
9. The ending balance of the cumulative gain #loss$ of any year becomes the beginning
balance for the ne3t year.
Demonstration Problem .
Butler !ompany
,nformation about the pension plan details of Eutler 1ompany are given below6
!air #mar-et$ value of pension plan assets, (B(B:)): = >:),)))
!air #mar-et$ value of pension plan assets, (:B9(B:)): *)),)))
Projected benefit obligation, (B(B:)): (,:)),)))
Projected benefit obligation, (:B9(B:)): (,/)),)))
"ccumulated benefit obligation (B(B:)): >)),)))
"ccumulated benefit obligation (:B9(B:)): *9),)))
.nrecogniCed prior service cost, (:B9(B:)): /),)))
Prepaid #accrued$ pension cost, (:B9(B:)): (>,)))
"mortiCation of prior service cost in :)): /,)))
ervice cost for :)): (4),)))
"mortiCation of unrecogniCed net loss *,)))
ettlement rate 4<
Iate of return on plan assets ()<
(. 1alculate the pension e3pense for :)):.
:. 1alculate the following amounts as of +ecember 9(, :)):.
#a$ Linimum pension liability.
#b$ "dditional pension liability.
9. 0hat is the amount of the debit entry for the contra eGuity adjustment account for pension
liability made at the end of :)):S
olution to +emonstration Problem 9, Eutler 1ompany
(. Pension e3pense for :)):
ervice cost for :)): = (4),)))
,nterest on the PEF #=(,:)),))) 3 .)4$ ()&,)))
"mortiCation of prior service cost /,)))
23pected return on plan assets #=>:),))) 3 ).()$ #>:,)))$
"mortiCation of net loss *,)))
Pension e3pense = :>*,)))
:. Jiability calculations
"EF as of (:B9(B:)): " = *9),)))
!air #mar-et$ value of pension plan assets, (:B9(B:)): E *)),)))
.nderfunding #Linimum pension liability$ 1 7 " 5 E 9),)))
Prepaid pension cost + (>,)))
"dditional pension liability 2 7 1 @ + />,)))
.nrecogniCed prior service cost ! /),)))
1ontra eGuity adjustment account O 7 2 5 ! >,)))
9. The amount of "dditional Pension Jiability is =/>,))). The balance of .nrecogniCed Prior
ervice 1ost is =/),))). Hence, the debit to the contra eGuity account will be =>,))).

Pra$ti$e Problem 1
,annon !ompany
,nformation about the pension plan details of Oannon 1ompany as of 8anuary (, :)): are given
below6
!air mar-et value of pension plan assets = &)),)))
Projected benefit obligation *)),)))
.namortiCed prior service cost 9)),)))
Prepaid #accrued$ pension cost #>),)))$
ervice cost for :)): (&),)))
1ontribution to pension fund during :)): ('),)))
"ctual return on pension plan assets 4),)))
"mortiCation of unrecogniCed net gain >,)))
ettlement rate &<
Iate of return on plan assets ()<
"mortiCation period for prior service cost :> years
1alculate #a$ pension e3pense for :)):, and #b$ prepaid #accrued$ pension cost as of +ecember
9(, :)):.
olution to Practice Problem (, Oannon 1ompany
a. Pension e3pense for :)):
ervice cost for :)): = (&),)))
,nterest on the PEF #=*)),))) 3 .)&$ /&,)))
"mortiCation of prior service cost #=9)),)))B:>$ (:,)))
"ctual return on plan assets #4),)))$
+eferral of e3cess gain during year (),)))
%et deduction #see below$ #&),)))$
"mortiCation of net gain #>,)))$
Pension e3pense = (>>,)))
%ote that another way of arriving at the amount to deduct is by considering only the e3pected
return on plan assets. ince plan assets at the beginning of the year were =&)),))) and the
e3pected return is ()<, the deduction for e3pected return would be =&)),))) 3 ).() 7 =&),))).
b. Prepaid #accrued$ pension cost as of +ecember 9(, :)):
The beginning balance of prepaid #accrued$ pension cost is given to be =#>),)))$. This means
the beginning balance is accrued pension cost, with a credit balance in the account.
+ebit 1redit
Pension e3pense #step ($ = (>>,)))
!unding of pension plan during year #step :$ = ('),)))
+ifference #plug number, step 9$ (>,)))

Eeginning balance, prepaidBaccrued pension cost = >),)))
Hence, ending balance, prepaidBaccrued pension cost = 9>,)))
ince the plug number is a debit entry, it reduced the accrued pension cost balance. The
ending balance of accrued pension cost is =>),))) 5 =(>,))) 7 =9>,))).
Pra$ti$e Problem +
!ampo !ompany
The following information is available about the pension plan of 1ampo 1ompany6
Near 8anuary (, PEF 8anuary (, Plan
"ssets
"ctual return minus
e3pected return
:))( = (,))),))) = 4>),))) = ::,)))
:)): (,()),))) (,(:),))) #:'),)))$
:))9 (,:)),))) 4)),))) *),)))
The cumulative unrecogniCed gain as of 8anuary (, :))( was =&),))). "ssuming an average
remaining service life of () years throughout the three years, calculate for each year #a$ the
amount of gain or loss to recogniCe #amortiCe$ and #b$ the cumulative unrecogniCed gain or loss
at year end.
olution to Practice Problem :, 1ampo 1ompany
,tem :))( :)): :))9
1umulative gain #loss$ as
of 8anuary ( " = (:),))) = (/),))) = #(9:,&))$
Jarger of PEF or Plan
assets, 8anuary ( E (,))),))) (,(:),))) (,:)),)))
1orridor
1 7
P()< of EP P()),)))P P((:,)))P P(:),)))P
"mount subject to
amortiCation
+ 7 P"P 5 P1P
,f P"P Q P1P P:),)))P P:&,)))P P(:,&))P
"mortiCation for the year
#corridorBservice life$ 2 :,))) :,&)) #(,:&)$
23cess gain #loss$ for
year ! ::,))) #:'),)))$ *),)))
1umulative gain #loss$ as
of year end
O 7
" 5 2 @! (/),))) #((:,&))$ #'(,>:)$
%ote
(. "mortiCation reGuirement is for both sides of the corridor. Thus, in the year :))9, the
beginning balance of the cumulative loss is =(9:,&)). The absolute value of the amount
subject to amortiCation is =(9:,&)) 5 =(:),))) 7 =(:,&)).
:. This =(:,&)) of e3cess loss is amortiCed over ten years, giving annual amortiCation for this
year of =(,:&). Eecause it is a loss that is being amortiCed, the amortiCation amount is
shown as a negative number.
9. 0hen =(,:&) is amortiCed, the remaining e3cess #unamortiCed$ loss is =#(9:,&))$ 5
=#(,:&)$ 7 =(9(,>:).
/. However, the e3cess return for :))9 was a gain of =*),))). This amount when added to
the remaining unamortiCed balance of =#(9(,>:)$ reduces the e3cess #unamortiCed$ loss to
=#'(,>:)$.
Pra$ti$e Problem .
Ba/er !ompany
,nformation about the pension plan details of Eutler 1ompany are given below6
!air #mar-et$ value of pension plan assets, (B(B:)): = ')),)))
!air #mar-et$ value of pension plan assets, (:B9(B:)): &)),)))
Projected benefit obligation, (B(B:)): (,9)),)))
Projected benefit obligation, (:B9(B:)): (,>)),)))
"ccumulated benefit obligation (B(B:)): *&),)))
"ccumulated benefit obligation (:B9(B:)): &:),)))
.nrecogniCed prior service cost, (:B9(B:)): >),)))
Prepaid #accrued$ pension cost, (:B9(B:)): #(:,)))$
"mortiCation of prior service cost in :)): >,)))
ervice cost for :)): (>),)))
"mortiCation of unrecogniCed net gain ',)))
ettlement rate &<
Iate of return on plan assets ((<
(. 1alculate the pension e3pense for :)):.
:. 1alculate the following amounts as of +ecember 9(, :)):.
#a$ Linimum pension liability.
#b$ "dditional pension liability.
9. 0hat is the amount of the debit entry for the contra eGuity adjustment account for pension
liability made at the end of :)):S
olution to Practice Problem 9, Ea-er 1ompany
(. Pension e3pense for :)):
ervice cost for :)): = (>),)))
,nterest on the PEF #=(,9)),))) 3 .)&$ ()/,)))
"mortiCation of prior service cost >,)))
23pected return on plan assets #=')),))) 3 ).(($ #'',)))$
"mortiCation of net gain #',)))$
Pension e3pense = ('>,)))
:. Jiability calculations
"EF as of (:B9(B:)): " = &:),)))
!air #mar-et$ value of pension plan assets, (:B9(B:)): E &)),)))
.nderfunding #Linimum pension liability$ 1 7 " 5 E :),)))
Prepaid #"ccrued$ pension cost + #(:,)))$
"dditional pension liability 2 7 1 @ + &,)))
.nrecogniCed prior service cost ! >),)))
1ontra eGuity adjustment account O )
9. The amount of "dditional Pension Jiability is =&,))). The balance of .nrecogniCed Prior
ervice 1ost is =>),))). ince the "dditional Pension Jiability is less than the .nrecogniCed
Prior ervice 1ost, there is no need for a debit entry to the contra eGuity account.
o the amount of the debit to the contra eGuity account 7 ).
Pra$ti$e Problem 0
(. 0hich of the following is not included in calculating periodic pension costS
a. ,nterest cost
b. ervice cost
$1 Amount of funding for pension plan
d. Ieturn on plan assets
:. The present value of all pension benefits earned by employees based on past service to a
1ompany, using current and past salary levels to calculate the amount of the benefits, is called
a. Projected benefit obligation
b1 A$$umulated benefit obligation
c. PrepaidBaccrued pension cost
d. Linimum liability
9. %et periodic pension cost is increased by
a1 Amorti)ation of prior ser#i$e $ost
b. "mortiCation of cumulative unrecogniCed gain
c. "ctual return on plan assets
d. 23pected return on plan assets
/. 0hen periodic pension cost is lower than pension funding, which account must be debitedS
a. Projected benefit obligation
b. "ccumulated benefit obligation
$1 Prepaid2a$$rued pension $ost
d. Prior service cost
>. The present value of pension obligations of a company as a result of adopting a new plan is
called
a. Projected benefit obligation
b. "ccumulated benefit obligation
c. PrepaidBaccrued pension cost
d1 Prior ser#i$e $ost
*. The minimum liability adjustment is reGuired when the plan assets are lower than
a. Projected benefit obligation
b1 A$$umulated benefit obligation
c. PrepaidBaccrued pension cost
d. Prior service cost
'. The following data are available related to the pension plan of !o3 1ompany as of +ecember
9(, :)):6 "ccumulated Eenefit Fbligation, =9)),)))M Projected Eenefit Fbligation, =/)),)))M
service cost for the year, ='>,)))M settlement rate, ()<M return on plan assets, =*),)))M
amortiCation of prior service cost, =(:,))). The pension e3pense for :)): is
a. =:',)))
b. =/9,)))
c. =>',)))
d1 3456777
&. The following data are available related to the pension plan of Eo3er 1ompany as of
+ecember 9(, :)):6 "ccumulated Eenefit Fbligation, =/9),)))M Projected Eenefit Fbligation,
=>:),)))M plan assets, =/(),)))M unamortiCed prior service cost, =(>),))). The minimum
pension liability is
a1 3+76777
b. =4),)))
c. =((),)))
d. =:*),)))
8ome&or/ Problem 1
Plummer !ompany
,nformation about the pension plan details of Plummer 1ompany as of 8anuary (, :)): are
given below6
!air mar-et value of pension plan assets = >)),)))
Projected benefit obligation /)),)))
.namortiCed prior service cost (>),)))
Prepaid #accrued$ pension cost #*),)))$
ervice cost for :)): (:>,)))
1ontribution to pension fund during :)): ()>,)))
"mortiCation of unrecogniCed net loss ',)))
ettlement rate 4<
Iate of return on plan assets (:<
"mortiCation period for prior service cost :) years
1alculate #a$ pension e3pense for :)):, and #b$ prepaid #accrued$ pension cost as of +ecember
9(, :)):.
olution to Homewor- Problem (, Plummer 1ompany
a. Pension e3pense for :)):
ervice cost for :)): = (:>,)))
,nterest on the PEF #=/)),))) 3 .)4$ 9*,)))
"mortiCation of prior service cost #=(>),)))B:)$ ',>))
23pected return on plan assets #*),)))$
"mortiCation of net loss ',)))
Pension e3pense = ((>,>))
b. Prepaid #accrued$ pension cost as of +ecember 9(, :)):
The beginning balance of prepaid #accrued$ pension cost is given to be =#*),)))$. This means
the beginning balance is accrued pension cost, with a credit balance in the account.
+ebit 1redit
Pension e3pense #step ($ = ((>,>))
!unding of pension plan during year #step :$ ()>,)))
+ifference #plug number, step 9$ = (),>))

Eeginning balance, prepaidBaccrued pension cost = *),)))
Hence, ending balance, prepaidBaccrued pension cost = '),>))
ince the plug number is also a credit entry, it adds to the accrued pension cost balance. The
ending balance of accrued pension cost is ='),>)).
8ome&or/ Problem +
9assel !ompany
The following information is available about the pension plan of !assel 1ompany6
Near 8anuary (, PEF 8anuary (, Plan
"ssets
"ctual return minus
e3pected return
:))( = 9)),))) = 9:),))) = #(>,)))$
:)): 9>),))) 9*),))) (),)))
:))9 /:),))) /(),))) >,)))
The cumulative unrecogniCed gain as of 8anuary (, :))( was =>),))). "ssuming an average
remaining service life of () years throughout the three years, calculate for each year #a$ the
amount of gain or loss to recogniCe #amortiCe$ and #b$ the cumulative unrecogniCed gain or loss
at year end.
olution to Homewor- Problem :, !assel 1ompany
,tem :))( :)): :))9
1umulative gain #loss$ as
of 8anuary ( " = >),))) = 99,:)) = /9,:))
Jarger of PEF or Plan
assets, 8anuary ( E 9:),))) 9*),))) /:),)))
1orridor
1 7
P()< of EP P9:,)))P P9*,)))P P/:,)))P
"mount subject to
amortiCation
+ 7 P"P 5 P1P
,f P"P Q P1P P(&,)))P P)P P(,:))P
"mortiCation for the year
#corridorBservice life$ 2 (,&)) ) (:)
23cess gain #loss$ for
year ! #(>,)))$ (),))) >,)))
1umulative gain #loss$ as
of year end
O 7
" 5 2 @! 99,:)) /9,:)) /&,)&)
8ome&or/ Problem .
Barber !ompany
,nformation about the pension plan details of Eutler 1ompany are given below6
!air #mar-et$ value of pension plan assets, (B(B:)): = /)),)))
!air #mar-et$ value of pension plan assets, (:B9(B:)): /*),)))
Projected benefit obligation, (B(B:)): ')),)))
Projected benefit obligation, (:B9(B:)): &>),)))
"ccumulated benefit obligation (B(B:)): 9&),)))
"ccumulated benefit obligation (:B9(B:)): >:),)))
.nrecogniCed prior service cost, (:B9(B:)): 9),)))
Prepaid #accrued$ pension cost, (:B9(B:)): (:,)))
"mortiCation of prior service cost in :)): 9,)))
ervice cost for :)): ()),)))
"mortiCation of unrecogniCed net gain /,)))
ettlement rate &<
Iate of return on plan assets ()<
(. 1alculate the following amounts as of +ecember 9(, :)):.
#a$ Linimum pension liability.
#b$ "dditional pension liability.
:. 0hat is the amount of the debit entry for the contra eGuity adjustment account for pension
liability made at the end of :)):S
olution to Homewor- Problem 9, Earber 1ompany
(. Jiability calculations
"EF as of (:B9(B:)): " = >:),)))
!air #mar-et$ value of pension plan assets, (:B9(B:)): E /*),)))
.nderfunding #Linimum pension liability$ 1 7 " 5 E *),)))
Prepaid #"ccrued$ pension cost + (:,)))
"dditional pension liability 2 7 1 @ + ':,)))
.nrecogniCed prior service cost ! 9),)))
1ontra eGuity adjustment account O /:,)))
:. The amount of "dditional Pension Jiability is =':,))). The balance of .nrecogniCed Prior
ervice 1ost is =9),))). Hence the amount of the debit entry to the contra eGuity account will
be =/:,))) #=':,))) 5 =9),)))$.
8ome&or/ Problem 0
(. 0hich of the following is not included in calculating periodic pension costS
a. "mortiCation of net gain
b. ervice cost
$1 Amorti)ation of PBO
d. "mortiCation of Prior ervice 1ost
:. The present value of all pension benefits earned by employees based on past service to a
1ompany, using e3pected future salary levels to calculate the amount of the benefits, is called
a1 Pro:e$ted benefit obligation
b. "ccumulated benefit obligation
c. PrepaidBaccrued pension cost
d. Linimum liability
9. %et periodic pension cost is decreased by
a. ,nterest on the "EF
b. "mortiCation of cumulative unrecogniCed loss
c. "mortiCation of prior service cost
d1 Amorti)ation of $umulati#e unre$ogni)ed gain
/. !or the year :)):, the pension cost and pension funding of Litchell 1ompany were =/),)))
and =>),))), respectively. This will result in
a. +ebiting Prior ervice 1ost by =(),)))
b1 Debiting Prepaid2A$$rued Pension !ost by 3176777
c. 1rediting Prior ervice 1ost by =(),)))
d. 1rediting PrepaidB"ccrued Pension 1ost by =(),)))
>. +uring :)):, Powell 1ompany changed the pension benefit formula by increasing the yearly
credit from :< to 9<. The present value of the change in pension obligations as a result of this
change in the pension formula will increase the
a. Projected benefit obligation
b. "ccumulated benefit obligation
c. PrepaidBaccrued pension cost
d1 Prior ser#i$e $ost
*. 0hen a journal entry is made to recogniCe the minimum pension liability, which account will
be debitedS
a. ervice cost
b. Projected benefit obligation
$1 ntangible pension asset
d. PrepaidBaccrued pension cost
'. The following data are available related to the pension plan of 1abot 1ompany as of
+ecember 9(, :)):6 Projected Eenefit Fbligation, =>)),)))M plan assets at beginning of year,
=*)),)))M service cost for the year, =&>,)))M settlement rate, 4<M e3pected return on plan
assets, =()<M amortiCation of prior service cost, =(:,))). The pension e3pense for :)): is
a. =>&,)))
b1 3;+6777
c. =49,)))
d. =*4,)))
&. The following data are available related to the pension plan of Eo3er 1ompany as of
+ecember 9(, :)):6 "ccumulated Eenefit Fbligation, =*9),)))M Projected Eenefit Fbligation,
='&),)))M plan assets, ='(),)))M unamortiCed prior service cost, =>(),))). The minimum
pension liability is
a1 37
b. ='),)))
c. =&),)))
d. =:)),)))