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Pension Accounting Smith Construction Johnson Corporation

Question 1:

Smith Construction has a noncontributory, defined benefit pension plan. At December 31, 2011, Smith received the following information:

(see data attached)

The expected long-term rate of return on plan assets was 10%. There were no AOCI balances related to pensions on January 1, 2011. At the end of 2011, Smith amended the pension formula creating a prior service cost of $12 million, one-third of which is related to employees whose pension benefits have vested.
Determine Smith's pension expense for 2011.

Question 2

On November 30, the Board of Directors of Johnson Corporation amended its pension plan giving retroactive benefits to its employees. The information below is provided at November 30.

Using the straight-line method of amortization, the amount of prior service cost charged to expense during the year ended November 30 is (one of the following)

a. $9,500
b. $19,000
c. $30,250
d. $190,000

Question 3:

Bargain Industries adopted a defined benefit pension plan on April 12, 2011. The provisions of the plan were not made retroactive to prior years. A local bank, engaged as trustee for the plan assets, expects plan assets to earn a 10% rate of return. A consulting firm, engaged as actuary, recommends 6% as the appropriate discount rate. The service cost is $150,000 for 2011 and $200,000 for 2012. Year-end funding is $160,000 for 2011 and $170,000 for 2012. No assumptions or estimates were revised during 2011.

Calculate each of the following amounts as of both December 31, 2011, and December 31, 2012:

1. Projected benefit obligation

2. Plan assets

3. Pension expense.

4. Net pension asset or net pension liability

Attachments

Solution Preview

Question 1:

The ingredients in the Pension Expense for 2011 include:

Service Cost...........................$60
Interest Cost..........................$36
Less: Actual Return.............($27)
Plus: Unexpected gain..........$4
................................................--------
Total pension expense..........$73

The returns used in pension expense are the expected return, 10% of the ...

Solution Summary

Your tutorial includes a discussion of actual vs expected returns, the amortization of prior service costs, the computation of two years' PBO, plan assets, pension expense, and the net asset and net liability for a particular company. The computations are in Excel. Click in the cell to see the calculations.

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