Exercise

17-1 Exercise 17-2

EXERCISES

Determine pension
LO17-6 LO17-7
expense
LO17-6 LO17-7 Text: E 17-16
Text: E 17-10

Hunt Industries has a noncontributory, defined benefit pension plan.

December 31, 2013, Hunt received the following information:
Projected Benefit obligation
($ in millions)
Balance, January 1
$360
Service cost
60
Interest cost
36
Benefits paid
(27)
Balance, December 31
$429
Plan Assets
Balance, January 1
Actual return on plan assets
Contributions 2013
Benefits paid
Balance, December 31

At

$240
27
60
(27)
$300

The expected long-term rate of return on plan assets was 10%. There was no
prior service cost and a negligible net lossAOCI on January 1, 2013.
Required:
1. Determine Hunts pension expense for 2013.
2. Prepare the journal entries to record Hunts pension expense, funding, and
payment of benefits for 2013.
Determine and
record pension
expense, gains and
losses; funding and
retiree benefits

Actuary and trustee reports indicate the following changes in the PBO and
plan assets of JL Logistics during 2013:
Prior service costAOCI at Jan. 1, 2013, from plan amendment at the
beginning of 2006 (amortization: $2 million per year)
Net lossAOCI at Jan.1, 2013 (previous losses exceeded previous gains)
Average remaining service life of the active employee group
Actuarys discount rate

Alternate Exercises and Problems

$14 million
$40 million
10 years
7%

The McGraw-Hill Companies, Inc., 2013

17-1
13-1

Exercise 17-3

Exercise 17-4

Postretirement
benefits;
determine the
APBO and
service cost

Postretirement
benefits; determine
expense
LO17-11
Text: E 17-29

LO17-9 LO17-10
Text: BE 17-24

($ in millions)

Beginning of 2013

PBO
$300

Beginning of 2013

Service cost

40

Return on plan assets,

Interest cost, 7%

21

8% (10% expected)

Loss (gain) on PBO

(7)

Less: Retiree benefits

End of 2013

(19)
$335

Cash contributions
Less: Retiree benefits
End of 2013

PLAN
ASSETS
$200
16
45
(19)
$242

Required:
1. Determine JL Logistics pension expense for 2013 and prepare the
appropriate journal entries to record the expense as well as the cash
contribution to plan assets.
2. Prepare the appropriate journal entry to record any 2013 gains and losses.
3. Prepare the appropriate journal entry to record any 2013 the cash
contribution to plan assets.
4. Prepare the appropriate journal entry to record retiree benefits.
Love Industries has an unfunded postretirement health care benefit plan.
Medical care benefits are provided to employees who render 10 years service and
attain age 55 while in service. At the end of 2013, Larry Abbott is 31. He was
hired by Love at age 25 (6 years ago) and is expected to retire at age 64. The
expected postretirement benefit obligation for Abbott at the end of 2013 is
$200,000 and $216,000 at the end of 2014.
Required:
Calculate the accumulated postretirement benefit obligation at the end of 2013
and 2012 and the service cost for 2013 and 2014 as pertaining to Abbott.

Tomorrow, Inc. provides postretirement health care benefits to employees who

provide at least 14 years service and reach age 61 while in service. On January 1,
2013, the following plan-related data were available:
The McGraw-Hill Companies, Inc., 2013
17-2

Intermediate Accounting, 7e

Problem 17-1
ABO calculations;
present value
concepts
LO17-2 LO17-3
Text: P 17-1

Accumulated postretirement benefit obligation

Fair value of plan assets
Average remaining service period to retirement
Average remaining service period to full eligibility

($ in millions)
$210
none
20 years
15 years

On January 1, 2013, Tomorrow amends the plan to provide certain dental

benefits in addition to previously provided medical benefits. The actuary
determines that the cost of making the amendment retroactive increases the
APBO by $30 million. Management chooses to amortize the prior service cost
on a straight-line basis. The service cost for 2013 is $61 million. The interest
rate is 5%.
PROBLEMS
Required:
1. Calculate the postretirement benefit expense for 2013.
2. Prepare the journal entry to record the expense.

[Problems 1 5 are variations of the same situation, designed to focus on different

elements of the pension plan.]

D&C Advisorys defined benefit pension plan specifies annual retirement

benefits equal to: 1.5% x service years x final years salary, payable at the end of
each year. Bobby Flay was hired by D&C at the beginning of 1999 and is
expected to retire at the end of 2043 after 45 years service. His retirement is
expected to span 18 years. Flays salary is $80,000 at the end of 2013, and the
companys actuary projects his salary to be $250,000 at retirement. The
actuarys discount rate is 7%.
Required:
1. Draw a time line that depicts Flays expected service period, retirement period,
and a 2013 measurement date for the pension obligation.
2. Estimate by the accumulated benefits approach the amount of Flays annual
retirement payments earned as of the end of 2013.

Alternate Exercises and Problems

The McGraw-Hill Companies, Inc., 2013

17-3
13-3

Problem 17-2

Problem 17-3

PBO calculations;
present value
concepts
LO17-3

Service cost,
interest, and PBO
calculations;
present value
concepts

Text: P 17-2

LO17-3
Text: P 17-3

3. What is the companys accumulated benefit obligation at the end of 2013 with
respect to Flay?
4. If no estimates are changed in the meantime, what will be the accumulated
benefit obligation at the end of 2013 (two years later) when Flays salary is
$85,000?
[Problems 1 5 are variations of the same situation, designed to focus on different
elements of the pension plan.]

D&C Advisorys defined benefit pension plan specifies annual retirement

benefits equal to: 1.5% x service years x final years salary, payable at the end of
each year. Bobby Flay was hired by D&C at the beginning of 1999 and is
expected to retire at the end of 2043 after 45 years service. His retirement is
expected to span 18 years. Flays salary is $80,000 at the end of 2013, and the
companys actuary projects his salary to be $250,000 at retirement. The
actuarys discount rate is 7%.
Required:
1. Draw a time line that depicts Flays expected service period, retirement period,
and a 2013 measurement date for the pension obligation.
2. Estimate by the projected benefits approach the amount of Flays annual
retirement payments earned as of the end of 2013.
3. What is the companys projected benefit obligation at the end of 2013 with
respect to Flay?
4. If no estimates are changed in the meantime, what will be the projected benefit
obligation at the end of 2015 (two years later) when Flays salary is $85,000?
[Problems 1 5 are variations of the same situation, designed to focus on different
elements of the pension plan.]

D&C Advisorys defined benefit pension plan specifies annual retirement

benefits equal to: 1.5% x service years x final years salary, payable at the end of
each year. Bobby Flay was hired by D&C at the beginning of 1999 and is
expected to retire at the end of 2043 after 45 years service. His retirement is
expected to span 18 years. Flays salary is $80,000 at the end of 2013, and the
companys actuary projects his salary to be $250,000 at retirement. The
actuarys discount rate is 7%.
Required:
1. What is the companys projected benefit obligation at the beginning of 2013
(after 14 years service) with respect to Flay?
2. Estimate by the projected benefits approach the portion of Flays annual
retirement payments attributable to 2013 service.
The McGraw-Hill Companies, Inc., 2013
17-4

Intermediate Accounting, 7e

Problem 17-4

Problem 17-5

Prior service cost;

components of
pension expense;
present value
concepts

Loss on PBO;
present value
concepts

LO17-3 LO17-6

Text: P 17-5

LO17-3 LO17-6

Text: P 17-4

3. What is the companys service cost for 2013 with respect to Flay?
4. What is the companys interest cost for 2013 with respect to Flay?
5. Combine your answers to requirements 1, 3, and 4 to determine the
companys projected benefit obligation at the end of 2013 (after 15 years
service) with respect to Flay?
[Problems 1 5 are variations of the same situation, designed to focus on different
elements of the pension plan.]

D&C Advisorys defined benefit pension plan specifies annual retirement

benefits equal to: 1.5% x service years x final years salary, payable at the end of
each year. Bobby Flay was hired by D&C at the beginning of 1999 and is
expected to retire at the end of 2043 after 45 years service. His retirement is
expected to span 18 years. Flays salary is $80,000 at the end of 2013, and the
companys actuary projects his salary to be $250,000 at retirement. The
actuarys discount rate is 7%.
At the beginning of 2014, the pension formula was amended to:
1.65% x service years x final years salary
The amendment was made retroactive to apply the increased benefits to prior
service years.
Required:
1. What is the companys prior service cost at the beginning of 2014 with
respect to Flay after the amendment described above?
2. Since the amendment occurred at the beginning of 2014, amortization of the
prior service cost begins in 2014. What is the prior service cost amortization
that would be included in pension expense?
3. What is the service cost for 2014 with respect to Flay?
4. What is the interest cost for 2014 with respect to Flay?
5. Calculate pension expense for 2014 with respect to Flay assuming plan assets
attributable to him of $70,000 and a rate of return (actual and expected) of
10%.
[Problems 1 5 are variations of the same situation, designed to focus on different
elements of the pension plan.]

D&C Advisorys defined benefit pension plan specifies annual retirement

benefits equal to: 1.5% x service years x final years salary, payable at the end of
each year. Bobby Flay was hired by D&C at the beginning of 1999 and is
expected to retire at the end of 2043 after 45 years service. His retirement is
expected to span 18 years. Flays salary is $80,000 at the end of 2013, and the
Alternate Exercises and Problems

The McGraw-Hill Companies, Inc., 2013

17-5
13-5

companys actuary projects his salary to be $250,000 at retirement. The

actuarys discount rate is 7%.
At the beginning of 2014, changing economic conditions caused the actuary to
reassess the applicable discount rate. It was decided that 6% is the appropriate
rate.
Required:
Calculate the effect of the change in the assumed discount rate on the PBO at the
beginning of 2014 with respect to Flay.

The McGraw-Hill Companies, Inc., 2013

17-6

Intermediate Accounting, 7e