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Pension Expense Calculation for John

The document outlines the calculation of pension expense for John based on his years of service, expected salary, retirement period, and plan details. It first calculates the present value of John's past service cost as $18,401. It then calculates components of pension expense for 2011 including service cost of $1,900, interest on projected benefit obligation of $1,656, and amortization of prior service cost of $836. The total pension expense for 2011 is $4,999.

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Kayla Shelton
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91 views3 pages

Pension Expense Calculation for John

The document outlines the calculation of pension expense for John based on his years of service, expected salary, retirement period, and plan details. It first calculates the present value of John's past service cost as $18,401. It then calculates components of pension expense for 2011 including service cost of $1,900, interest on projected benefit obligation of $1,656, and amortization of prior service cost of $836. The total pension expense for 2011 is $4,999.

Uploaded by

Kayla Shelton
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

f years of service that qualify for

pension credit, subject to a


maximum of 30 years.

Pension credit is given for years of service prior to the plans adoption.
John is 22 years away from retirement
Johns retirement period is 15 years
Johns expected salary upon retirement is $95,000
Service credit 2%/year of service
Settlement rate = 9%
Contribution to pension plan is $6,000
Actual return on plan assets = 10%

Calculate pension expense for 2011.


The components of pension expense are:
1.
2.
3.
4.
5.

Service Cost
Interest on PBO
Return on Plan Assets
Amortization of PSC
Amortization of Net Gain/Loss

Find the amount of past/prior service cost (PSC) that will be recognized as
part of pension expense for 2011:
Calculate the PV of PSC when the plan was adopted. This also represents the
PBO on 1/1/2011.
2%of $95,000 x 8 = $15,200. This amount will be paid upon retirement for
15 years.
Find the PV of Ordinary Annuity:
N = 15

I = 9%

$15,200 x 8.06069 = $122,522.48

Find the PV of this amount (single sum 22 years before Johns retirement):
N = 22

I = 9%

$122,522.48 x 0.15018 = $18,401. This represents the PV of PSC & PBO at


1/1/2011.
The PV of PSC is amortized over the service period, 22 years before
retirement.
$18,401 / 22 years = $836/year.
expense for 2011.

This is one element of the pension

Find service cost for 2011:


0.02 x $95,000 = $1,900

Find PV of Ordinary Annuity: N = 15

I = 9%

$1,900 x 8.06069 = $15,315.30


Find PV of single sum n = 21
(HintService cost is computed at the end of each year, so 21 years before
retirement)
N = 21

I = 9%

$15,315.30 x 0.1637 = $2,507


Find the Interest on PBO = $18,401 x 0.09 = $1,656
For the remainder of the computation, see Pension Schedule

Journal Entry on December 31, 2011:


Pension Expense $4,999
Pension Liability $17,565
Cash
OCI Prior Service Cost

$6,000
$16,564

Disclosures:
Income Statement:
Pension Expense

$4,999
Balance Sheet:

L-T LiabilitiesPension Obligation

$16.564

Calculate pension expense for 2012:


1. PSC = $836
2. Service Cost:
2% of $95,000 = $1,900
$1,900 x 8.06069 (N = 15 I = 9%) = $15,315
$15,315 x 0.17843 (N = 20 I = 9%) = $2,733
3. Interest Cost: 9% of $22,564 = $2,031
4. Actual Return: 10% of $6,000 = $600

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