Accounting for Pensions and Postretirement Benefits - ppt download - Free Printable

Let’s walk through this pension worksheet step by step. We’re preparing a pension worksheet for Uddin for the year 2008. The goal is to figure out what journal entries need to be made and what the final pension liability or asset is at the end of the year.

We’ll go row by row, explaining what each line means and how the numbers are calculated.

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Step 1: Start with Jan 1, 2008 balances

At the beginning of the year:
- Projected Benefit Obligation (PBO) = $250,000 → This is how much the company owes employees for their future pensions.
- Plan Assets = $250,000 → This is how much money the company has set aside in the pension fund.
- Since PBO equals Plan Assets, there’s no net liability or asset yet → Pension Asset/Liability = $0

Note: In accounting, obligations (like PBO) are shown as negative numbers when they increase, but here we’ll follow the format in the table — positive numbers for assets, negative for liabilities unless otherwise noted.

Actually, looking at the table, it shows:
- PBO: (250,000) → meaning it’s a liability (negative)
- Plan Assets: 250,000 → positive asset
So net = 0 → correct.

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Step 2: Service costs = $27,500

This is the cost of benefits earned by employees during 2008. It increases the pension expense and also increases the PBO (because the company now owes more).

→ So under “Pension Expense” we put +27,500
→ Under “Projected Benefit Obligation” we add another (27,500) → so total PBO becomes (250,000) + (27,500) = (277,500)? Wait — let’s hold on. Actually, we’ll track cumulative totals at the bottom. For now, just record the change.

In the table, it’s listed as (27,500) under PBO column — which makes sense because it’s an increase in liability.

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Step 3: Interest costs = $25,000

Interest cost is calculated as: Beginning PBO × discount rate.

The table shows: ($250,000 × 10%) = $25,000 → that’s correct.

This interest accrues on the existing obligation. So again, it increases pension expense and increases PBO.

→ Pension Expense: +25,000
→ PBO: additional (25,000)

Total PBO so far: (250,000) + (27,500) + (25,000) = (302,500)? But wait — we haven’t subtracted benefits paid yet. Let’s keep going.

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Step 4: Actual return on plan assets = $25,000

This is the actual gain from investing the pension fund’s assets. It reduces pension expense (because you earned money), and increases plan assets.

→ Pension Expense: (25,000) → because it’s a reduction in expense
→ Plan Assets: +25,000

Note: Sometimes expected return is used instead of actual, but here it says “actual return”, so we use that.

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Step 5: Contributions = $20,000

This is cash the company puts into the pension fund.

→ Cash: (20,000) → because cash goes out
→ Plan Assets: +20,000

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Step 6: Benefits paid = $17,500

This is money paid out to retirees. It reduces both the PBO (since less is owed) and reduces plan assets (since cash was paid out).

→ PBO: +17,500 → because liability decreases (so we add back to reduce the negative)
Wait — in the table, it’s shown as 17,500 under PBO? That seems odd.

Looking at the table:

Under “Benefits paid”:
- PBO column: 17,500 → but since PBO is a liability, paying benefits reduces it → so if PBO was (250,000), adding 17,500 would make it less negative → yes, that’s correct.
- Plan Assets: (17,500) → because assets decrease when you pay out.

So:
→ PBO: +17,500 (reduces liability)
→ Plan Assets: (17,500)

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Step 7: Calculate Journal Entry

Now we sum up all the changes that affect the income statement and balance sheet.

First, calculate total Pension Expense:

Service cost: +27,500
Interest cost: +25,000
Actual return: (25,000)
→ Total Pension Expense = 27,500 + 25,000 - 25,000 = 27,500

That matches the table.

Next, Cash contributed: (20,000) → so credit cash for 20,000

Now, what about the difference between pension expense and cash paid?

Pension expense is 27,500
Cash paid is 20,000
Difference = 7,500 → this must be recorded as an increase in pension liability (or decrease in asset).

In the table, under “Pension Asset / Liability”, it shows (7,500) → meaning a liability of 7,500.

Why? Because the company recognized 27,500 in expense but only paid 20,000 in cash → so it still owes 7,500 more → liability increases.

Also, check OCI columns: PSC and Gain/Loss are both zero → nothing else to adjust.

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Step 8: Ending Balances (Dec 31, 2008)

Let’s compute ending PBO and Plan Assets.

PBO:
Start: (250,000)
+ Service cost: (27,500)
+ Interest cost: (25,000)
– Benefits paid: +17,500 (since paying benefits reduces liability)
→ Total PBO = (250,000) + (27,500) + (25,000) + 17,500 = let’s compute:

250,000 + 27,500 = 277,500
277,500 + 25,000 = 302,500
302,500 - 17,500 = 285,000 → so PBO = (285,000)

Matches table.

Plan Assets:
Start: 250,000
+ Actual return: 25,000
+ Contributions: 20,000
– Benefits paid: (17,500)
→ Total = 250,000 + 25,000 = 275,000; +20,000 = 295,000; -17,500 = 277,500

Matches table: 277,500

Net Pension Liability:
PBO: (285,000)
Plan Assets: 277,500
Net = (285,000) + 277,500 = (7,500) → so net liability of $7,500

Which matches the yellow box: “($7,500) net liability”

And the journal entry records:
Debit Pension Expense 27,500
Credit Cash 20,000
Credit Pension Liability 7,500

Perfect.

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Final Answer:
The pension worksheet for Uddin for 2008 results in a net pension liability of $7,500 at December 31, 2008. The journal entry to record pension expense for the year is: debit Pension Expense $27,500, credit Cash $20,000, and credit Pension Liability $7,500.