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Benefit Pension Plan

Your accounting firm has been hired to consult with the Graduate Manufacturing Company (GMC). GMC is preparing its annual financial statements as of December 31.

GMC has a defined benefit pension plan. For the year, GMC provides you with the following information:

Service cost for the year $3,500,000
Projected benefit obligation, beginning of year 52,500,000
Benefits paid to retirees 6,700,000
Contributions to plan assets 4,250,000
Actual/Expected return on plan assets 4,000,000
Prior service cost amortization 790,000
Interest/discount rate 7%

You have been assigned to prepare a written report to be presented to GMC's senior management that explains the proper accounting treatment for the year's pension expense. Additionally, you are to draft the disclosure note necessary to be included with GMC's annual financial reports relative to GMC's pension plan.

Your report should include the following:

1. Any accounting entries needed to record pension expense for the year.
2. A discussion of why these accounting entries are appropriate and necessary, from accounting theory and regulatory standpoints.
3. The proposed disclosure note to be included in GMC's annual audited financial statements.
4. References to the appropriate accounting authority supporting your conclusions using the FASB's ASC suggested reference notation that can be found in the ASC Notice to Constituents, to the section level.

As you prepare your report, keep in mind that your client is not an accountant and, consequently, your description should not utilize technical accounting jargon. It should be clearly written in layman's terms and logically explain the rationale behind the accounting entries.

Solution Preview

First, a defined benefit pension plan is a pension plan to which GMC is required to contribute a certain amount each year to the plan and promise to pay employees or members of the plan a specified income after they retire for a specified period.

Second, the pension expense is computed as follows:
Service cost
+Interest cost
-Return on plan assets
-Amortization of prior service cost
┬▒Amortization and deferral of gains or losses
┬▒Amortization of unrecognized net obligation or asset
Hence, GMC's pension expense for the period is comprised of the following
Service cost $3,500,000
Interest cost (PBO of ...

Solution Summary

The benefit of a pension plan is given. The proposes disclosure note to be included in GMC's annual audited financial statements is discussed.