Defined Benefit Plans Part 3

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Defined Benefit Plans Part 3

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1. Defined Benefit Plans Part 3 A discussion adapted from Bline and Skekel, “Accounting for Postretirement Benefits,” Corporate Accounting Deskbook 1991, New York: Executive Enterprises Publications Co., Inc.

3. PBO Information (from actuary) Beginning PBO $1,660,000 Adjustment due to plan amendments -0- Service cost (add) 110,000 Interest cost (add) 141,100 Benefits paid to retirees (deduct) (125,000) Expected ending PBO $1,786,100

4. PBO Information (from actuary) Actual ending PBO $1,786,100 Ending ABO $1,600,000 Ending VBO $1,071,660

5. PBO Information (from actuary) Beginning PBO $1,660,000 Adjustment due to plan amendments -0- Service cost (add) 110,000 Interest cost (add) 141,100 Benefits paid to retirees (deduct) (125,000) Expected ending PBO $1,786,100

6. PBO Information (from actuary) Interest Cost: Beginning PBO $1,660,000 Interest Rate 8.5% Interest Cost $ 141,100

7. PBO Information (from actuary) Interest Cost: Beginning PBO $1,660,000 Interest Rate 8.5% Interest Cost $ 141,100

8. PBO Information (from actuary) Difference in expected and actual ending PBO Actual PBO $1,786,100 Expected PBO 1,786,100 Difference $ -0-

9. Market Value of Plan Assets (from trustee) Beginning market value $1,000,000 Actual return 156,700 Contribution to plan 150,000 Benefits paid (125,000) Ending market value $1,181,700

10. Market Value of Plan Assets ending At the end of 2004, market and market-related asset values were not equal. Because the firm experienced an asset gain or loss in 2005, the two values will not be equal.

11. Market-Related Asset Value for 2005 Beginning market-related value $1,067,000

12. Market-Related Asset Value for 2005 Beginning market-related value$1,067,000 Expected return

13. Market-Related Asset Value for 2005 Beginning market-related value$1,067,000 Expected return $1,067,000 * 10% = $106,700

14. Market-Related Asset Value for 2005 Beginning market-related value$1,067,000 Expected return 106,700

15. Market-Related Asset Value for 2005 Beginning market-related value$1,067,000 Expected return 106,700 Contribution to plan 150,000

16. Market-Related Asset Value for 2005 Beginning market-related value$1,067,000 Expected return 106,700 Contribution to plan 150,000 Benefits paid (125,000)

17. Market-Related Asset Value for 2005 Beginning market-related value$1,067,000 Expected return 106,700 Contribution to plan 150,000 Benefits paid (125,000) Asset gain (loss)

18. Asset Gain (Loss) Amortization

19. Asset Gain (Loss) From 2004 Loss: $83,750 * .20 $(16,750) From 2005 Gain: $50,000 * .20 10,000 Net asset gain (loss) $( 6,750)

20. Market-Related Asset Value for 2005 Beginning market-related value$1,067,000 Expected return 106,700 Contribution to plan 150,000 Benefits paid (125,000) Asset gain (loss) (6,750)

21. Market-Related Asset Value for 2005 Beginning market-related value $1,067,000 Expected return 106,700 Contribution to plan 150,000 Benefits paid (125,000) Asset gain (loss) $ (6,750) Ending market-related value $1,191,950

22. Computation of Pension Expense Using the information provided, the components of pension expense are:

23. Computation of Pension Expense Service cost (from actuary) $110,000

24. Computation of Pension Expense Service cost (from actuary) $110,000 Interest on BPO (from actuary) 141,100

25. Computation of Pension Expense Service cost (from actuary) $110,000 Interest on BPO (from actuary) 141,100 Expected return on plan assets

26. Computation of Pension Expense Expected return on plan assets Beginning market value $1,067,000 Expected return x .10 Expected return on plan assets $ 106,700

27. Computation of Pension Expense Service cost (from actuary) $110,000 Interest on BPO (from actuary) 141,100 Expected return on plan assets (106,700)

28. Computation of Pension Expense Service cost (from actuary) $110,000 Interest on BPO (from actuary) 141,100 Expected return on plan assets (106,700) Prior service cost amortization

29. Computation of Pension Expense Prior service cost is amortized over the total expected future years of service of the existing workforce benefiting from the amendment. Prior service cost $325,000 Expected service years 32,500 Allocation per expected service year $ 10 Employee service years for 2004 2,400 Amortization $ 24,000

30. Computation of Pension Expense Service cost (from actuary) $110,000 Interest on BPO (from actuary) 141,100 Expected return on plan assets (106,700) Prior service cost amortization 24,000

31. Computation of Pension Expense Service cost (from actuary) $110,000 Interest on BPO (from actuary) 141,100 Expected return on plan assets (106,700) Prior service cost amortization 24,000 Gain/Loss amortization

32. (Gain) Loss Amortization The corridor is ten percent of the larger of the PBO $1,660,000 or the market-related asset value of $1,067,000. Corridor = $1,660,000 * 10% = $166,000 Gain and loss amortization is based on the beginning balances. Formula: Liability gain (loss) + Asset gain (loss) included in market-related asset value = Gain (loss) subject to amortization

33. (Gain) Loss Amortization At the beginning of 2005, we had Liability loss $(168,750) Asset loss included in 2004 market value ( 16,750) Loss subject to amortization $(185,500)

34. (Gain) Loss Amortization Gain (loss) amortization: Formula: [Gain (loss) subject to amortization –Corridor]/Average remaining life = Gain (loss) amortization ($185,000 – $166,000)/13 years = $1,500

35. (Gain) Loss Amortization Gain (loss) amortization: Formula: [Gain (loss) subject to amortization –Corridor]/Average remaining life = Gain (loss) amortization ($185,000 – $166,000)/13 years = $1,500

36. Computation of Pension Expense Service cost (from actuary) $110,000 Interest on BPO (from actuary) 141,100 Expected return on plan assets (106,700) Prior service cost amortization 24,000 Gain/Loss amortization 1,500

37. Computation of Pension Expense Service cost (from actuary) $110,000 Interest on BPO (from actuary) 141,100 Expected return on plan assets (106,700) Prior service cost amortization 24,000 Gain/Loss amortization 1,500 Transition amount amortization 10,000

38. Computation of Pension Expense Service cost (from actuary) $110,000 Interest on BPO (from actuary) 141,100 Expected return on plan assets (106,700) Prior service cost amortization 24,000 Gain/Loss amortization 1,500 Transition amount amortization 10,000 Pension expense $179,900

39. Journal Entry Pension Expense 179,900 Ppd/accrued pension cost 29,900 Cash 150,000

40. Minimum Liability An employer must report a pension liability at least equal to the amount by which its ABO exceeds its plan assets under SFAS No. 87. Note: This is the minimum liability that can be reported.

41. Computation of Minimum Liability ABO $1,600,000 Market value of plan assets 1,181,700 Minimum pension liability $ 418,300

42. Maximum Value of Intangible Asset – Deferred Pension Cost Prior service cost $325,000 Less amortization (49,000) Transition amount 130,000 Less amortization (30,000) Maximum intangible asset $376,000

43. Minimum Liability to be Journalized There are 3 balance sheet accounts affected by pensions: Prepaid (accrued) pension cost Intangible asset-deferred pension cost Excess of additional pension liability over unrecognized prior service cost

44. Liability before Minimum Adjustment

45. Minimum Liability to be Journalized Existing balance sheet asset accounts Intangible asset-deferred Pension cost 202,500 Excess of additional pension liability over unrecognized prior service cost -0- Prepaid (accrued) pension cost (229,900)

46. Minimum Liability to be Journalized Existing balance sheet asset accounts Intangible asset-deferred Pension cost 202,500 Excess of additional pension liability over unrecognized prior service cost -0- Pension liability (229,900)

47. Journal Entry Intangible asset-deferred pension cost 173,500 Excess of additional pension liability over unrecognized prior service cost 14,900 Additional pension liability 188,400

48. Journal Entry Intangible asset-deferred pension cost 173,500 Excess of additional pension liability over unrecognized prior service cost 14,900 Additional pension liability 188,400

49. Journal Entry Intangible asset-deferred pension cost 173,500 Excess of additional pension liability over unrecognized prior service cost 14,900 Additional pension liability 188,400

50. Journal Entry Intangible asset-deferred pension cost 173,500 Excess of additional pension liability over unrecognized prior service cost 14,900 Additional pension liability 188,400

51. Journal Entry Intangible asset-deferred pension cost 173,500 Excess of additional pension liability over unrecognized prior service cost 14,900 Additional pension liability 188,400

52. Journal Entry Intangible asset-deferred pension cost 173,500 Excess of additional pension liability over unrecognized prior service cost 14,900 Additional pension liability 188,400

53. Footnote Disclosure Two schedules are included in the footnotes to the financial statements: The computation of pension expense for 2005 The reconciliation of the funded status of the plan and the amounts recorded on the balance sheet.

54. Pension Cost Disclosure Pension expense for 2005 includes the following components: Service cost-benefits earned during the period $110,000

55. Pension Cost Disclosure Pension expense for 200 includes the following components: Service cost-benefits earned during the period $110,000 Interest on PBO 141,100

56. Pension Cost Disclosure Pension expense for 200 includes the following components: Service cost-benefits earned during the period $110,000 Interest on PBO 141,100 Actual return on plan assets (156,700)

57. Pension Cost Disclosure Pension expense for 200 includes the following components: Service cost-benefits earned during the period $110,000 Interest on PBO 141,100 Actual return on plan assets (156,700) Net amortization and deferral

58. Computation of Net Amortization and Deferral Prior service cost amortization $ 24,000

59. Computation of Net Amortization and Deferral Prior service cost amortization $ 24,000 (Gain) Loss amortization 1,500

60. Computation of Net Amortization and Deferral Prior service cost amortization $ 24,000 (Gain) Loss amortization 1,500 Transition amount amortization 10,000

61. Computation of Net Amortization and Deferral Prior service cost amortization $ 24,000 (Gain) Loss amortization 1,500 Transition amount amortization 10,000 Difference between actual and expected return on plan assets ($156,700-$106,700) $ 50,000

62. Computation of Net Amortization and Deferral Prior service cost amortization $ 24,000 (Gain) Loss amortization 1,500 Transition amount amortization 10,000 Difference between actual and expected return on plan assets $ 50,000 Net amortization and deferral $ 85,500

63. Computation of Net Amortization and Deferral Prior service cost amortization $ 24,000 (Gain) Loss amortization 1,500 Transition amount amortization 10,000 Difference between actual and expected return on plan assets ($97,700-$13,950) $ 50,000 Net amortization and deferral $ 85,500

64. Pension Cost Disclosure Pension expense for 200 includes the following components: Service cost-benefits earned during the period $110,000 Interest on PBO 141,100 Actual return on plan assets (156,700) Net amortization and deferral 85,500

65. Pension Cost Disclosure Pension expense for 200 includes the following components: Service cost-benefits earned during the period $110,000 Interest on PBO 141,100 Actual return on plan assets (156,700) Net amortization and deferral 85,500 Pension expense $179,900

66. Reconciliation Disclosure Actuarial present value of benefit obligations:

67. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600)

68. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000)

69. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100)

70. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700

71. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400)

72. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss

73. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss Liability loss: 2004 $168,750

74. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss Liability loss: 2004 $168,750 Asset loss: 2004 83,750

75. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss Liability loss: 2004 $168,750 Asset loss: 2004 83,750 Loss amortization: 2005 (1,500)

76. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss Liability loss: 2004 $168,750 Asset loss: 2004 83,750 Loss amortization: 2005 (1,500) Asset gain: 2005 (50,000)

77. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss Liability loss: 2004 $168,750 Asset loss: 2004 83,750 Loss amortization: 2005 (1,500) Asset gain: 2005 (50,000) Unrecognized net (gain) loss $201,000

78. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss 201,000

79. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss 201,000 Prior service cost not yet recognized in net periodic pension cost

80. Unrecognized Prior Service Cost Prior service cost at amendment date $325,000 Cumulative amortization 49,000 Unrecognized prior service cost $276,000

81. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss 201,000 Prior service cost not yet recognized in net periodic pension cost 276,000

82. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss 201,000 Prior service cost not yet recognized in net periodic pension cost 276,000 Unrecognized net obligation (asset) at December 31, 2004

83. Unrecognized Net Obligation Net obligation at adoption $130,000 Cumulative amortization 30,000 Unrecognized net obligation $100,000

84. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss 201,000 Prior service cost not yet recognized in net periodic pension cost 276,000 Unrecognized net obligation (asset) at December 31, 2004 100,000

85. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss 201,000 Prior service cost not yet recognized in net periodic pension cost 276,000 Unrecognized net obligation (asset) at December 31, 2004 100,000 Adjustment required to recognize minimum liability

86. Minimum Liability Adjustment Pension liability $(418,300) Net liability $( 27,400) Total adjustment $(390,900)

87. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss 201,000 Prior service cost not yet recognized in net periodic pension cost 276,000 Unrecognized net obligation (asset) at December 31, 2004 100,000 Adjustment required to recognize minimum liability (390,900)

88. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss 201,000 Prior service cost not yet recognized in net periodic pension cost 276,000 Unrecognized net obligation (asset) at December 31, 2004 100,000 Adjustment required to recognize minimum liability (390,900)

89. Reconciliation Disclosure Actuarial present value of benefit obligations: VBO (from actuary) $(1,071,600) ABO (from actuary) (1,600,000) PBO (from actuary) (1,786,100) Plan assets at fair market value 1,181,700 PBO (in excess of) or less than plan assets $( 604,400) Unrecognized net (gain) or loss 201,000 Prior service cost not yet recognized in net periodic pension cost 276,000 Unrecognized net obligation (asset) at December 31, 2004 100,000 Adjustment required to recognize minimum liability (390,900) Prepaid pension cost (pension liability) recognized on the balance sheet $( 418,300)

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