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Computation, Recording, and Funding of Pension Expense

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Problem 17-43 Computation, Recording, and Funding of Pension Expense
Averon Industrial, Inc., computed the following components of pension expense for the years 2011-2013:
(In thousands)
Components of Pension Expense 2011 2012 2013
Service cost........................................................................................................ $330 $415 $580
Interest cost....................................................................................................... 150 170 220
Actual return on the pension fund................................................................. 35 50 40
Expected return on the pension fund............................................................ 30 45 50
Amortization of deferred pension (gain or loss) -
Above corridor amount...................................................................... (20) (10) 18
Amortization of prior service cost................................................................... 70 90 90
Amount contributed to fund........................................................................... 520 580 750
Instructions:
1. Compute the net periodic pension expense for the years 2011-2013.
2. Prepare the summary journal entries to record the computed pension expense in (1) and the funding of the pension plan.
3. If the pension-related asset balance at January 1, 2011, was $75,000, compute the balance of the pension-related asset/liability account at December 31, 2013. Also compute the balance in pension-related accumulated other comprehensive income at December 31, 2013; the balance on January 1, 2011 was a debit of $600,000.

Problem 17-52 Does Accounting Have Political Consequences?
C.B. Seabright, a U.S. congresswoman, has just received from her staff an analysis of FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Seabright is very influential in the formation of tax legislation and in federal regulation of employer-provided health care plans. How might FASB Statement No. 106 impact Seabright's legislative agenda?

Problem 17-54 Deciphering Financial Statements (Northrop Grumman)
Northrop Grumman is a leading aerospace/defense company. The company has developed the F-16 fighter, the Apache helicopter, the AWACS early warning airborne radar, and the B-2 Stealth bomber. Grumman, one of the predecessor companies of Northrop Grumman, was the primary contractor for the Lunar Excursion Module (LEM) that landed Neil Armstrong and Buzz Aldrin on the moon in 1969. Information relating to Northrop Grumman's pension and other post-retirement benefit plan follows.

Medical and Life
Pension Benefits Benefits
$ in millions 2007 2006 2007 2006
Change in Benefits Obligation
Benefit obligation at beginning of year...............$21,484 $20,692 $2,867 $3,341
Service cost.............................................................. 786 755 52 69
Interest cost............................................................. 1,250 1,159 164 183
Plan participants' contributions........................... 24 29 84 88
Plan amendments.................................................. 18 40 (2) (464)
Actuarial gain........................................................... (357) (119) (103) (64)
Benefits paid............................................................ (1,157) (1,112) (250) (281)
Acquisitions, divestitures, transfers and other.. 21 40 (5)
Benefit obligation t end of year............................ 22,069 21,484 2,812 2,867

Change in Plan Assets
Fair value of plan assets at beginning of year.... 21,407 18,867 880 780
Gain on plan assets................................................ 2,275 2,444 46 95
Employer contributions........................................ 342 1,157 191 198
Plan participants' contributions.......................... 24 29 84 88
Benefits paid.......................................................... (1,157) (1,112) (250) (281)
Acquisitions, divestitures, transfers and other... 22
Fair value of plan assets at end of year............... 22,891 21,407 951 880
Funded status......................................................... 822 (77) $(1,861) $(1,987)

Amounts Recognized in the Consolidation
Statements of Financial Position
Non-current assets............................................... 2,033 1,303 47 46
Current liability....................................................... (43) (41) (68) (70)
Non-current liability.............................................. (1,168) (1,339) (1,840) (1,963)

Amounts Recorded in Accumulated Other
Comprehensive Loss
Net actuarial Loss................................................ (975) (1,877) (429) (545)
Prior service cost and net transition
Obligation............................................................. (254) (277) 452 515
Income tax benefits related to above
Items..................................................................... 479 890 (9) 10
Unamortized benefit plan cost....................................... (750) (1,264) 14 (20)

Medical and Life
Pension Benefits Benefits
$ in millions 2007 2006 2005 2007 2006 2005
Components of Net Periodic
Benefit Cost
Service cost................................ $786 $755 $675 $52 $69 $66
Interest cost............................... 1250 1159 1091 164 183 183
Expected return on plan
Assets......................................... (1774) (1572) (1468) (58) (52) (49)
Amortization of
Prior service cost (credit)... 40 35 53 (65) (16) (1)
Net loss from previous yr... 48 91 59 25 31 27
Other........................................... 2 (13)
Net periodic benefit cost......... $352 $468 $410 $118 $215 $213

Based on the information, answer the following questions:

1. Is Northrop Grumman's pension plan over-funded or underfunded? How can you tell?
2. Are Northrop Grumman's medical and life benefits programs over-funded or underfunded? Explain.
3. As of the end of 2007, does Northrop Grumman's pension-related accumulated other comprehensive income increase or decrease its stockholders' equity?
4. During 2007, was the actual return on Northrop Grumman's pension fund more or less than the expected return? Explain.

Problem 17-57 Writing Assignment (Pensions in foreign countries)

In the United States, accounting for pensions has received a great deal of attention. In other countries, pension accounting is given much less attention. In one page, examine the reasons that would explain why pension accounting is given much less emphasis in most foreign countries as compared to the emphasis it receives in the United States.
This assignment is not designed to require you to go to the library or to access International Accounting Standards. If you spend your time just thinking about the issue, the answers should be apparent.

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Accounting for Pension Obligations

1. Interest cost included in pension expense recognized for a period by an employer sponsoring a defined-benefit pension plan represents the
A) shortage between the expected and actual returns on plan assets
B) increase in the projected benefit obligation due to the passage of time
C) increase in the fair value of plan assets due to the passage of time
D) amortization of the discount on accumulated OCI (PSC)

2. Seigel Co. maintains a defined-benefit pension plan for its employees. At each balance sheet date, Yeager should report a pension asset/liability equal to the
A) accumulated benefit obligation
B) projected benefit obligation
C) accumulated benefit obligation
D) funded status relative to the projected benefit obligation

3. Prior service cost is amortized on a
A) straight-line basis over the expected future years of service
B) years-of-service method or on a straight-line basis over the average remaining service life of active employees
C) straight-line basis over 15 years
D) straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer

4. Gains and losses that relate to the computation of pension expense should be
A) recorded currently as an adjustment to pension expense in the period incurred
B) recorded currently and in the future by applying the corridor method which provides the amount to be amortized
C) amortized over a 15-year period
D) recorded only if a loss is determined

5. According to the FASB, recognition of a liability is required when the projected benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the projected benefit obligation, the Board
A) requires recognition of an asset
B) requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount
C) recommends recognition of an asset but does not require such recognition
D) does not permit recognition of an asset

6. Which of the following statements about the expected postretirement benefit obligation (EPBO) is not correct?
A) The EPBO is an actuarial present value.
B) The EPBO is recorded in the accounts.
C) The EPBO is used in measuring periodic expense.
D) All of these are correct.

7. The main purpose of the Pension Benefit Guaranty Corporation is to
A) require minimum funding of pensions
B) require plan administrators to publish a comprehensive description and summary of their plans
C) administer terminated plans and to impose liens on the employer's assets for certain unfunded pension liabilities
D) all of these

8. Which of the following is not a characteristic of a defined-contribution pension plan?
A) The employer's contribution each period is based on a formula.
B) The benefits to be received by employees are usually determined by an employee's 3 highest years of salary defined by the terms of the plan.
C) The accounting for a defined-contribution plan is straightforward and uncomplicated.
D) The benefit of gain or the risk of loss from the assets contributed to the pension fund are borne by the employee.

9. The projected benefit obligation is the measure of pension obligation that
A) is required to be used for reporting the service cost component of pension expense
B) requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and based on existing salary levels
C) requires the longest possible period for funding to maximize the tax deduction
D) is not sanctioned under generally accepted accounting principles for reporting the service cost component of pension expense

10. A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the
A) projected benefit obligation exceeds the fair value of the plan assets.
B) fair value of the plan assets exceeds the projected benefit obligation.
C) amount of employer contributions exceeds the pension expense.
D) amount of pension expense exceeds the amount of employer contributions.

11. Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?
A) Vested benefit obligation
B) Accumulated benefit obligation
C) Projected benefit obligation
D) Restructured benefit obligation

12. Whenever a defined-benefit plan is amended and credit is given to employees for years of service provided before the date of amendment
A) both the accumulated benefit obligation and the projected benefit obligation are usually greater than before.
B) both the accumulated benefit obligation and the projected benefit obligation are usually less than before.
C) the expense and the liability should be recognized at the time of the plan change.
D) the expense should be recognized immediately, but the liability may be deferred until a reasonable basis for its determination has been identified.

13. If no change in actuarial estimates occurred during 2011, Hopson's projected benefit obligation at December 31, 2011 was:
A) $64,200
B) $75,000
C) $79,200
D) $82,200

14. What is the amount of the pension liability that should be shown on Vargas' December 31, 2011 balance sheet?
A) $7,200,000
B) $2,700,000
C) $1,620,000
D) $1,080,000

15. The amount of postretirement expense for 2011 is:
A) $184,500
B) $192,000
C) $211,500
D) $216,000

16. The amount reported as the liability for pensions on the December 31, 2010 balance sheet is:
A) $0
B) $30,000
C) $360,000
D) $390,000

17. The fair value of plan assets at December 31, 2011 is:
A) $2,430,000
B) $2,250,000
C) $2,232,000
D) $2,214,000

18. The service cost component of pension expense for 2011 is $840,000 and the amortization of prior service cost due to an increase in benefits is $180,000. The settlement rate is 10% and the expected rate of return is 8%. What is the amount of pension expense for 2011?
A) $1,716,000
B) $1,680,000
C) $1,608,000
D) $1,440,000

19. What amount should be reported for pension expense in 2011?
A) $1,365,000
B) $1,335,000
C) $1,515,000
D) $1,155,000

20. Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-benefit pension plan for its employees?
A) Yes ; Yes
B) Yes ; No
C) No ; Yes
D) No ; No

See attached document for full questions.

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