solutions to E17 15 and additional questions related to E17 15

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solutions to E17 15 and additional questions related to E17 15 Powered By Docstoc
					E17-15

( $ in millions)


Service cost                                                                  $80
Interest cost               (7% x 600)                                          42
Expected return             (10% x 400)                                       (40)
Amort. of prior service cost                                                     4
Amort. of net loss                                                              2*
Pension Expense                                                                 $88
         *Corridor Approach: since the beginning Balance of net loss exceeds 10% of the greater of
         pension benefits obligation or the pension assets, the net loss needs to be amortized for 2007
         as follows: (80 – 10% x 600)/10 = $2

Journal Entries:

Pension Expense                                      4
        OCI – prior service cost                                       4
Amortization of PSC
Pension Expense                                      2
          OCI – net loss from PBO   Amortization                       2
of net loss
Pension Expense (88-4-2)                             82
Pension liability                                     8
        Cash                                                            90


The above entries can also be recorded as:
Pension expense                                          88
Pension liabilities                                       8
        OCI –Prior service cost                                            4
         OCI - net loss from BPO                                           2
          Cash                                                             90


In addition, the following two entries should be recorded for $8 unexpected loss on pension assets and
$14 unrecognized gain on projected benefit obligation (PBO) arising in 2007 :

OCI – net loss on pension assets                              8
       Pension Liability                                                         8
Recognition of unexpected loss on pension assets of 2007
Pension Liability                                             14
         OCI – net gain on PBO                                                   14
Recognition of gain on PBO of 2007
Additional questions related to E17-15:
   1. What are the balances in the following accounts on 12/31/2007:

             a. Projected benefit obligation (disclosed in the footnotes only)
             b. Plan assets (fair value) (disclosed in the footnotes only)
             c. Pension liabilities (reported on the balance sheet statement)
             d. OCI- prior service cost (reported on the balance sheet statement)
             e. OCI-net gain/loss-pensions (reported on the balance sheet statement)

   2. What is the funded status of this pension plan on 12/31/2007?

Answers: ($ in millions)
1.
   a. Projected benefit obligation =$600+80 +42 -14-38 = $670

   b. Plan assets = $400+32+90-38= 484

   c. Pension liability on 12/31/2007 = 200 (cr.) -8 (dr.) +8 (cr.) – 14 (dr.) =186 (cr.)
      Note: The pension liability recognized on the balance sheet statement equals the funded status
      of the plan (i.e., 670 (projected benefit obligations) – 484 (pension assets) = 186 underfunding.
      This result is consistent with the requirement of SFAS 158. That is the reported pension liability
      on balance sheet statement equals the funded status of pension plans.

       Derivations:

       200 (cr.) = beg. Bal. of PBO – beg. Bal. of pension assets
                  = 600 (cr.)             – 400 (dr.)
       8 (dr.) = from the entry to record pension expense and funding for 2007
       8 (cr.) = from the recording of the unexpected loss on pension assets arising in 2007 (due to
       the actual return is less than the expected return). The journal entry is as follows :

              OCI –net loss on pension assets    8
                               Pension Liability          8
       14 (dr.)= from the recording of gain on PBO arising in 2007 . The journal entry is as follows:

              Pension Liability    14
                        OCI – net gain on PBO     14


   d. The balance of OCI-PSC = beg. Balance – the amortized PSC =$28 (dr.) – 4 (cr.) =24 (dr.)

   e. The balance of OCI- net gain/loss (for both pension assets and PBO)
      = beg. Balance of 07 – amortized net loss+ OCI-net loss on pension assets- OCI-net gain on PBO
      = 80 (net loss, dr.) – 2 (cr.) + 8 (net loss, dr.)-14 (net gain, cr.) = 72 (dr.)

       Note: This ending balance of 2007 will be the beg. Balance of 2008 and will be compared with
       10% of the greater of (projected benefit obligation, $670, pension assets, $484) on 1/1/2008.
       Since 72 (dr.) is greater than $67, this unamortized net loss (from both returns and BPO) should
       be amortized in 2008. Assuming the remaining service years of active employees are 10 years,
   the amortized net loss amount equals: (72-67)/10 = $0.5 and this amortized net loss will
   increase the pension expense of 2008. The journal entry to amortize the net loss is as follows:
   2008        Pension Expense                                    0.5
                       OCI – net loss                                     0.5


2. The funded status of the pension plan on 12/31/2007:

      670 (projected pension obligation) – 484 (pension assets) = $186 underfunding

				
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