BELTRON CORPORATION
 2006
components of pension cost:

1. Service cost (para 21). . . . . . . . . . .  $ 125,000
2. Interest on PBOa .(para 22). . . . . .          49,500
3. Return on plan assetsb (para 23) . . . .       (36,000)
4. Amortization of prior service cost (para 24-28)   -
5. Amortization of gain/loss (para 29-34). . . . ._______

Pension cost for 2006                            $138,500
 

aInterest on Projected Benefit Obligation:
 Projected benefit obligation, 01/01/96. . $ 550,000
 settlement rate . . . . . . . . . . . . .        9%
                                           $  49,500

 
bReturn on plan assets:
Fair value of plan assets, 01/01/96 . . .   $ 400,000
rate of return on plan assets . . . . . .          9%
                                            $  36,000

MINIMUM LIABILITY

No longer applicable under FAS No. 158.  All unfunded obligations have to be recognized.


Required to be recognized when the accumulated benefit obligation exceeds the fair value of the plan assets.

Purpose-- to assure that if a significant plan amendment or actuarial loss occurs, a liability will be recognized at least to the extent of the unfunded portion of the accumulated benefit obligation.

Does an additional minimum liability need to be recognized for 20X6?
 (para 35-38)

12/31/2006 plan assets. . . . . . . . . . . . . . . . . $ 455,000
12/36/2006 accumulated benefit obligation . . . . . . .   570,000
Amount of liability to be recognized. . . . . . . . . . $ 115,000

Amount of existing pension liability:
1/1/2006 balance-accrued pension cost . . . .$ 30,000
    pension cost. . . . . . . . .  $ 138,500
    funding . . . . . . . . . . .    125,000
addition to accrued pension cost               13,500
12/31/2006 balance-accrued pension cost. . . . . . . .     43,500
Additional minimum liability needed. . . . . . . . . . $   71,500

 

 2006 Entries for Pensions

Pension cost. . . . . . . . . . . . . . . .$ 138,500
 Prepaid/accrued pension cost . . . . . . . . . .    $ 138,500
  to record pension cost for 2006

Prepaid/accrued pension cost . . . . . . . $ 125,000
 Cash. . . . . . . . . . . . . . . . . . . . . . .    $ 125,000
  to record funding of pension cost for 2006

would not make this entry under FAS No. 158.

Intangible asset-deferred pension cost . . $  71,500
 Add'l pension liability . . . . . . .  . . . . .      $ 71,500
  to record additional liability for pension cost

BELTRON CORPORATION 
2007

                                                       2007
1. Service cost (para 21). . . . . . . . . . . . . $ 138,000
2. Interest on PBO .(para 22)a. . . . . . . . . . .   81,950
3. Return on plan assets (para 23)b . . . . . . . .  (45,500)
4. Amortization of prior service costc (para 24-28)   10,000
5. Amortization of gain/lossd (para 29-34). . . . .    2,290
 

       Pension cost--2007                              $ 186,740
 

aInterest on Projected Benefit Obligation:
Projected benefit obligation, 01/01/2007. . . $ 819,500
settlement rate   . . . . . . . . . . . . . .       10%
                                             $  81,950

 
bReturn on plan assets:
Fair value of plan assets, 01/01/2007. . . .   $ 455,000 
rate of return on plan assets   . . . . . . .        10%
                                              $  45,500

 
cAmortization of prior service cost (para 25-26)

Amount of prior service cost . . . . . . . . .$ 105,000

Divide by number of service/years provided by 
  100  employees (see calculations below). .      1,050

Amount to amortize each year per service year.$     100

Amount to amortize in 2007 (when 100 service
  years will be provided)  . . . . . . . . .  $  10,000
 

 
Number of employees at adoption date             100 
 number retiring each year from this group          5 

        number working in: 
                    2007. . . . . . . . . . . . . . . . . . . . . .100 
                    2008. . . . . . . . . . . . . . . . . . . . . . 95 
                    2009. . . . . . . . . . . . . . . . . . . . . . 90 
                        .                                              . 
                        .                                              . 
                    2025. . . . . . . . . . . . . . . . . . . . . . 10 
                    2026. . . . . . . . . . . . . . . . . . . . . .   5 
 No. of years provided by the 100 employees:   1,050 
 divide by number of employees                         100 
 Average service life of each employee               10.5* 

 
*Short-cut approach, using formula: 

              N * (N + 1)
                    2                 *  M 

            where N = Number of years over which the
            employees retire, and 

                  M = Number retiring each year 

              20 * (20 + 1)
                            2         * 5  = 1,050;  1,050/100 employees = 10.5 

 
 
 
Amortization table:
Year Amount Year Amount
2007 $ 10,000 2017 $  5,000
2008 $  9,500 2018 $  4,500
2009 $  9,000 2019 $  4,000
2010 $  8,500 2020 $  3,500
2011 $  8,000 2021 $  3,000
2012 $  7,500 2022 $  2,500
2013 $  7,000 2023 $  2,000
2014 $  6,500 2024 $  1,500
2015 $  6,000 2025 $  1,000
2016 $  5,500 2026 $    500

 

 
Alternative amortization (para 26);  could amortize over the average remaining service life of employees if more rapid amortization occurs.

$ 105,000/ 10.5 = $ 10,000 per year for 10 1/2 years

 
dAmortization of Gains/Losses

a. projected benefit obligation, 01/01/2007. . .  $ 819,500
b. Market related asset value, 01/01/2007. . . .  $ 455,000


10% of greater of (a) or (b) [(a) in this case] $  81,950

Unrecognized gain or loss [given in problem] . ($ 106,000)

Amount to be amortized . . . . . . . . . . . .  $  24,050

average remaining service life of employees. .       10.5

Amount to include in pension cost for 2007 . .  $   2,290

Does an additional minimum liability need to be recognized for 2007?
 (para 35-38)

12/31/2007 plan assets. . . . . . . . . . . . . . . . . $ 760,000
12/31/2007 accumulated benefit obligation . . . . . . .   710,000
Amount of liability to be recognized    . . . . . . . . . $  -0-

no additional minimum liability needs to be recognized since the plan assets exceed the ABO

Amount of existing pension asset/liability:
1/1/2007 balance-accrued pension cost . . . . .$ 43,500
    pension cost. . . . . . . . .  $ 186,740
    funding . . . . . . . . . . .    260,000
reduction in accrued pension cost                73,260
12/31/2007 balance-prepaid pension cost. . . . . . . . . $  29,760

 2007 Entries for Pensions

Pension cost. . . . . . . . . . . . . . . .$ 186,740
 Prepaid/accrued pension cost . . . . . . . . . .    $ 186,740
  to record pension cost for 2007
 

Prepaid/accrued pension cost . . . . . . . $ 260,000
 Cash. . . . . . . . . . . . . . . . . . . . . .     $ 260,000
  to record funding of pension cost for 2007
 

Add'l pension liability . . . . . . .       $ 71,500
 Intangible asset-deferred pension cost . . . . .    $  71,500
  to adjust the additional liability for pension cost to
  a zero balance; no liability needed at 12/31/2007

Question:  What if the ABO at 12/31/2007 had been $810,000?  How would this fact change the calculations and entries? solution to question
HINT:  the sum of the accrued/prepaid pension cost and the additional minimum liability must = the amount of the difference between the ABO and the Plan assets.


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