Please provide the needed disclosures’ adjusting journal entries, and other required documents.  The aguamaint year 3 files are attached that contain the required information to create disclosures and statements.  Thank you!

PENSIONS

*
Accounting and Reporting Issues
How do we report assets held in the trust fund?
How do we report the promised lifetime retirement annuity?
How do we measure and record pension expense?
How do we record changes in estimate?

PENSION PLAN CHARACTERISTICS
Contributory Plan
Employer and employee contribute.
Employees keep their contributions.
Vesting requirement determines employee right to employer contributions.
Defined Contribution Plan
Specific contributions are promised by the employer.
Specific benefits are not promised.
Benefits are a function of the management of the plan assets.
Pension expense = Contributions made by employer.

*
Defined contribution – Amounts are set aside each year for employees (e.g. 7% of salary). When the employee leaves the firm or retires, he/she receives what has been allocated to his account, plus a return (interest and/or dividends).

PENSION PLAN CHARACTERISTICS
Defined Benefit Plan
Specific benefit payments are promised by the employer.
More complex accounting than contributory plans.
Funded Pension Plan
Fully funded: Plan Assets = PV of PBO
Partially funded: Plan Assets < PV of PBO Need not be fully funded; plan only needs to have enough assets to meet current payment obligations. Net Pension Benefit Cost (Pension Expense) Composed of service cost, interest cost on PBO, plan asset return, PSC amortization, gain/loss amortization. * Defined benefit – Employee is guaranteed a lifetime retirement annuity based on salary and years of service. The annuity payment may be some portion of average salary over the last five years multiplied by years of service. Accumulated Benefit Obligation (ABO) – Present value of benefits for employee service prior to a particular date, based on actual compensation levels prior to that date. Projected Benefit Obligation (PBO) – Present value of benefits for employee service prior to a particular date, based on expected future salary levels. Service Cost (SC) – Increase in PBO due to work performed in the current year. Prior Service Cost (PSC) – Present value of retroactive benefits granted in a plan amendment/adoption. Pension Expense – Comprised of the following components: service cost, interest on PBO (a time-value factor), return on fund assets, and amortization of prior service cost. ABO vs. PBO Accumulated Benefit Obligation Used for calculation of funded status for Postretirement Benefits only (ASC 715-30) PV of benefits, based on realized compensation levels Example of ABO at retirement date: ABO = 3 * 1/100 *$10,000 ABO = $300/yr. Projected Benefit Obligation Used for calculation of funded status for Defined Benefit Pension Plans only (ASC 715-30) PV of benefit obligation, based on expected future salary levels Example of PBO at retirement date: PBO = 3 * 1/100 * 20,000 PBO = $600/yr. * Accumulated Benefit Obligation (ABO) – Present value of benefits for employee service prior to a particular date, based on actual compensation levels prior to that date. Projected Benefit Obligation (PBO) – Present value of benefits for employee service prior to a particular date, based on expected future salary levels. Actuarial Assumptions Weighted average assumptions: Discount rate = 5% Return on invested assets = 10% Expected increase in annual compensation = 5% Calculate Prior Service Cost at Plan Adoption Date PBO is the present value of benefits for employee service prior to a particular date based on expected future salary levels. 20x1 20x2 20x4 20x5 20x6 20x7 20x3 1/1/x1 1/1/x3 12/31/x3 12/31/x5 12/31/x7 Hire Employee Adopt Plan Balance Sheet Date
Employee Retires
Employee Dies

*

Step 1: Calculate Prior Service Cost at Plan

Adoption Date

Benefit:

2 yrs. * 1/100 * $20,000 = $400/yr.

Begins on 1/1/X6 when employee retires.

PBO:

Compute the PV of employee’s benefits until death at the date of retirement.

N = 2 (X6 and X7), I = 5%, FV = 0, PMT = $400, Solve for PV: $780.95.

Next, calculate the present value of the retirement benefits at the date granted by the plan.

N = 3 (X3, X4, and X5), I = 5%, FV = $780.95, PMT = 0, Solve for PV: $674.61

PBO = $674.61 or the present value of the retroactive benefits granted in the plan. So PBO = PSC at the plan adoption date. Amount funded on 1/1/X3.

Sheet1

Assumptions:

Employee Hire Date: 1/1/x1

Employee Retirement Date: 12/31/x5

Employee Death Date: 12/31/x7

Plan Adoption Date: 1/1/x3

Pension Formula: Number of service years, times 0.01 times,

Highest Salary Level.

Employee Annual Salary Schedule:

19×1 through 19×3 $10,000

19×4 through 19×5 $20,000

Plan Discount Rate: 5.00%

Market Return on Plan Assets: 10.00%

Prior Service Cost Amortization 3 Years

Other Plan Data: Plan counts work years from 1/1/x1 and pension credit

is given for service years prior to the plan adoption date.

Prior service cost is fully funded on 1/1/x3 and current

service cost is funded at the end of each year.

Step 1: Calculate Prior Service Cost (PSC) at Plan Adoption Date

Calculate Benefit Using Pension Formula:

Number of service years 2

Highest salary level $20,000

Pension Benefit $400 (Begins on 1/1/x6 when employee retires)

Calculate PBO:

Compute PV of employee’s pension benefit n 2 (x6 and x7)

until death, at the date of retirement interest rate 5.00%

FV 0

pmt $400

Solve for PV at retirement date PV $780.95 (Annuity Due)

Compute PV of retirement benefits at n 3 (x3 through x5)

date granted by the plan interest rate 5.00%

FV $780.95

pmt 0

Solve for PV at plan adoption date PV $674.62 (Regular PV, no annuity due)

This is the PBO. It also happens to be the

prior service cost (PSC) at the plan adoption date.

Step 2: Calculate the Service Cost for 19×3 (the first year of the plan)

Calculate Benefit Using Pension Formula:

Number of service years 1

Highest salary level $20,000

Pension Benefit $200 (Increase in annual retirement benefit for

one year of service)

Calculate increase in PBO or Service Cost:

Compute PV of increase in pension benefit n 2 (x6 and x7)

at the date of retirement interest rate 5.00%

FV 0

pmt $200

Solve for PV at retirement date PV $390.48 (Annuity Due)

Compute PV of the increase in retirement n 2 (x4 and x5)

benefit for additional service year interest rate 5.00%

FV $390.48

pmt 0

Solve for PV of increase in benefit PV $354.17 (Regular PV, no annuity due)

This is the service cost. It also is the increase

in PBO due to work performed in the current year.

Step 3: Calculate the Pension Benefit Obligation (PBO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Highest salary level $20,000

Pension Benefit $600 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $600

Solve for PV at retirement date PV $1,171.43 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $1,171.43

pmt 0

Solve for PV of total retirement benefits PV $1,062.52 (Regular PV, no annuity due)

This is the PBO at 12/31/x3.

Alternatively, you could get this PBO

by adding the following components:

Prior Service Cost $674.62

Service Cost $354.17

Interest on PBO at discount rate $33.73 ( 5.00% x $674.62 )

$1,062.52

Step 4: Calculate the Accumulated Benefit Obligation (ABO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Current salary level $10,000

Pension Benefit $300 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $300

Solve for PV at retirement date PV $585.71 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $585.71

pmt 0

Solve for PV of ABO retirement benefits PV $531.26 (Regular PV, no annuity due)

This is the ABO at 12/31/x3.

The ABO is 50% of PBO because of the salary

used in computation (10,000 vs. 20,000).

Pension Plan Funding to Trustee by Employer

Prior service cost funded on 1/1/x3 $674.62

Service cost funded on 12/31/x3 $354.17

Trustee Account Record

Initial funding at 1/1/x3 by employer 674.62

Annual return on assets held by trustee 67.46

Funding by employer at 12/31/x3 354.17

Funds held by trustee at 12/31/x3 1,096.25

Pension Expense Calculation for x3

Service Cost for x3 354.17

Interest on PBO 33.73

Amortization of Prior Service Cost 224.87

Less: Return on plan assets (67.46)

Total pension expense 545.31

Employer Journal Entries Prepaid Pension

Expense Cash

Prepaid Pension Expense 674.62 674.62 674.62

Cash 674.62 354.17 354.17

To record funding of plan on 1/1/x3. 545.31

483.47

Prepaid Pension Expense 354.17

Cash 354.17

To record funding of plan on 12/31/x3

Pension Expense 545.31

Prepaid Pension Expense 545.31

SFAS No. 132 Pension Note Disclosures

Change in benefit obligation

Benefit obligation at beginning of year –

Service cost 354.17

Interest cost 33.73

Adopton of plan 674.62

Benefit obligation at end of year 1,062.52

Change in plan assets

Fair value of plan assets at

beginning of year –

Actual return on plan assets 67.46

Employer contributions 1,028.79

Fair value of plan assets at end of year 1,096.25

Funded status 33.73

Unrecognized prior service cost 449.74

Prepaid benefit cost 483.47

Weighted-average assumptins as of 12/31

Discount rate 5.00%

Expected return on plan assets 10.00%

Components of net periodic benefit cost

Service cost 354.17

Interest cost 33.73

Expected return on plan assets (67.46)

Amortization of prior service costs 224.87

Net periodic benefit cost 545.31

Sheet2

Sheet3

Sheet1

Assumptions:

Employee Hire Date: 1/1/x1

Employee Retirement Date: 12/31/x5

Employee Death Date: 12/31/x7

Plan Adoption Date: 1/1/x3

Pension Formula: Number of service years, times 0.01 times,

Highest Salary Level.

Employee Annual Salary Schedule:

19×1 through 19×3 $10,000

19×4 through 19×5 $20,000

Plan Discount Rate: 5.00%

Market Return on Plan Assets: 10.00%

Prior Service Cost Amortization 3 Years

Other Plan Data: Plan counts work years from 1/1/x1 and pension credit

is given for service years prior to the plan adoption date.

Prior service cost is fully funded on 1/1/x3 and current

service cost is funded at the end of each year.

Step 1: Calculate Prior Service Cost (PSC) at Plan Adoption Date

Calculate Benefit Using Pension Formula:

Number of service years 2

Highest salary level $20,000

Pension Benefit $400 (Begins on 1/1/x6 when employee retires)

Calculate PBO:

Compute PV of employee’s pension benefit n 2 (x6 and x7)

until death, at the date of retirement interest rate 5.00%

FV 0

pmt $400

Solve for PV at retirement date PV $780.95 (Annuity Due)

Compute PV of retirement benefits at n 3 (x3 through x5)

date granted by the plan interest rate 5.00%

FV $780.95

pmt 0

Solve for PV at plan adoption date PV $674.62 (Regular PV, no annuity due)

This is the PBO. It also happens to be the

prior service cost (PSC) at the plan adoption date.

Step 2: Calculate the Service Cost for 19×3 (the first year of the plan)

Calculate Benefit Using Pension Formula:

Number of service years 1

Highest salary level $20,000

Pension Benefit $200 (Increase in annual retirement benefit for

one year of service)

Calculate increase in PBO or Service Cost:

Compute PV of increase in pension benefit n 2 (x6 and x7)

at the date of retirement interest rate 5.00%

FV 0

pmt $200

Solve for PV at retirement date PV $390.48 (Annuity Due)

Compute PV of the increase in retirement n 2 (x4 and x5)

benefit for additional service year interest rate 5.00%

FV $390.48

pmt 0

Solve for PV of increase in benefit PV $354.17 (Regular PV, no annuity due)

This is the service cost. It also is the increase

in PBO due to work performed in the current year.

Step 3: Calculate the Pension Benefit Obligation (PBO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Highest salary level $20,000

Pension Benefit $600 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $600

Solve for PV at retirement date PV $1,171.43 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $1,171.43

pmt 0

Solve for PV of total retirement benefits PV $1,062.52 (Regular PV, no annuity due)

This is the PBO at 12/31/x3.

Alternatively, you could get this PBO

by adding the following components:

Prior Service Cost $674.62

Service Cost $354.17

Interest on PBO at discount rate $33.73 ( 5.00% x $674.62 )

$1,062.52

Step 4: Calculate the Accumulated Benefit Obligation (ABO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Current salary level $10,000

Pension Benefit $300 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $300

Solve for PV at retirement date PV $585.71 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $585.71

pmt 0

Solve for PV of ABO retirement benefits PV $531.26 (Regular PV, no annuity due)

This is the ABO at 12/31/x3.

The ABO is 50% of PBO because of the salary

used in computation (10,000 vs. 20,000).

Pension Plan Funding to Trustee by Employer

Prior service cost funded on 1/1/x3 $674.62

Service cost funded on 12/31/x3 $354.17

Trustee Account Record

Initial funding at 1/1/x3 by employer 674.62

Annual return on assets held by trustee 67.46

Funding by employer at 12/31/x3 354.17

Funds held by trustee at 12/31/x3 1,096.25

Pension Expense Calculation for x3

Service Cost for x3 354.17

Interest on PBO 33.73

Amortization of Prior Service Cost 224.87

Less: Return on plan assets (67.46)

Total pension expense 545.31

Employer Journal Entries Prepaid Pension

Expense Cash

Prepaid Pension Expense 674.62 674.62 674.62

Cash 674.62 354.17 354.17

To record funding of plan on 1/1/x3. 545.31

483.47

Prepaid Pension Expense 354.17

Cash 354.17

To record funding of plan on 12/31/x3

Pension Expense 545.31

Prepaid Pension Expense 545.31

SFAS No. 132 Pension Note Disclosures

Change in benefit obligation

Benefit obligation at beginning of year –

Service cost 354.17

Interest cost 33.73

Adopton of plan 674.62

Benefit obligation at end of year 1,062.52

Change in plan assets

Fair value of plan assets at

beginning of year –

Actual return on plan assets 67.46

Employer contributions 1,028.79

Fair value of plan assets at end of year 1,096.25

Funded status 33.73

Unrecognized prior service cost 449.74

Prepaid benefit cost 483.47

Weighted-average assumptins as of 12/31

Discount rate 5.00%

Expected return on plan assets 10.00%

Components of net periodic benefit cost

Service cost 354.17

Interest cost 33.73

Expected return on plan assets (67.46)

Amortization of prior service costs 224.87

Net periodic benefit cost 545.31

Sheet2

Sheet3

Sheet1

Assumptions:

Employee Hire Date: 1/1/x1

Employee Retirement Date: 12/31/x5

Employee Death Date: 12/31/x7

Plan Adoption Date: 1/1/x3

Pension Formula: Number of service years, times 0.01 times,

Highest Salary Level.

Employee Annual Salary Schedule:

19×1 through 19×3 $10,000

19×4 through 19×5 $20,000

Plan Discount Rate: 5.00%

Market Return on Plan Assets: 10.00%

Prior Service Cost Amortization 3 Years

Other Plan Data: Plan counts work years from 1/1/x1 and pension credit

is given for service years prior to the plan adoption date.

Prior service cost is fully funded on 1/1/x3 and current

service cost is funded at the end of each year.

Step 1: Calculate Prior Service Cost (PSC) at Plan Adoption Date

Calculate Benefit Using Pension Formula:

Number of service years 2

Highest salary level $20,000

Pension Benefit $400 (Begins on 1/1/x6 when employee retires)

Calculate PBO:

Compute PV of employee’s pension benefit n 2 (x6 and x7)

until death, at the date of retirement interest rate 5.00%

FV 0

pmt $400

Solve for PV at retirement date PV $780.95 (Annuity Due)

Compute PV of retirement benefits at n 3 (x3 through x5)

date granted by the plan interest rate 5.00%

FV $780.95

pmt 0

Solve for PV at plan adoption date PV $674.62 (Regular PV, no annuity due)

This is the PBO. It also happens to be the

prior service cost (PSC) at the plan adoption date.

Step 2: Calculate the Service Cost for 19×3 (the first year of the plan)

Calculate Benefit Using Pension Formula:

Number of service years 1

Highest salary level $20,000

Pension Benefit $200 (Increase in annual retirement benefit for

one year of service)

Calculate increase in PBO or Service Cost:

Compute PV of increase in pension benefit n 2 (x6 and x7)

at the date of retirement interest rate 5.00%

FV 0

pmt $200

Solve for PV at retirement date PV $390.48 (Annuity Due)

Compute PV of the increase in retirement n 2 (x4 and x5)

benefit for additional service year interest rate 5.00%

FV $390.48

pmt 0

Solve for PV of increase in benefit PV $354.17 (Regular PV, no annuity due)

This is the service cost. It also is the increase

in PBO due to work performed in the current year.

Step 3: Calculate the Pension Benefit Obligation (PBO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Highest salary level $20,000

Pension Benefit $600 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $600

Solve for PV at retirement date PV $1,171.43 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $1,171.43

pmt 0

Solve for PV of total retirement benefits PV $1,062.52 (Regular PV, no annuity due)

This is the PBO at 12/31/x3.

Alternatively, you could get this PBO

by adding the following components:

Prior Service Cost $674.62

Service Cost $354.17

Interest on PBO at discount rate $33.73 ( 5.00% x $674.62 )

$1,062.52

Step 4: Calculate the Accumulated Benefit Obligation (ABO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Current salary level $10,000

Pension Benefit $300 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $300

Solve for PV at retirement date PV $585.71 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $585.71

pmt 0

Solve for PV of ABO retirement benefits PV $531.26 (Regular PV, no annuity due)

This is the ABO at 12/31/x3.

The ABO is 50% of PBO because of the salary

used in computation (10,000 vs. 20,000).

Pension Plan Funding to Trustee by Employer

Prior service cost funded on 1/1/x3 $674.62

Service cost funded on 12/31/x3 $354.17

Trustee Account Record

Initial funding at 1/1/x3 by employer 674.62

Annual return on assets held by trustee 67.46

Funding by employer at 12/31/x3 354.17

Funds held by trustee at 12/31/x3 1,096.25

Pension Expense Calculation for x3

Service Cost for x3 354.17

Interest on PBO 33.73

Amortization of Prior Service Cost 224.87

Less: Return on plan assets (67.46)

Total pension expense 545.31

Employer Journal Entries Prepaid Pension

Expense Cash

Prepaid Pension Expense 674.62 674.62 674.62

Cash 674.62 354.17 354.17

To record funding of plan on 1/1/x3. 545.31

483.47

Prepaid Pension Expense 354.17

Cash 354.17

To record funding of plan on 12/31/x3

Pension Expense 545.31

Prepaid Pension Expense 545.31

SFAS No. 132 Pension Note Disclosures

Change in benefit obligation

Benefit obligation at beginning of year –

Service cost 354.17

Interest cost 33.73

Adopton of plan 674.62

Benefit obligation at end of year 1,062.52

Change in plan assets

Fair value of plan assets at

beginning of year –

Actual return on plan assets 67.46

Employer contributions 1,028.79

Fair value of plan assets at end of year 1,096.25

Funded status 33.73

Unrecognized prior service cost 449.74

Prepaid benefit cost 483.47

Weighted-average assumptins as of 12/31

Discount rate 5.00%

Expected return on plan assets 10.00%

Components of net periodic benefit cost

Service cost 354.17

Interest cost 33.73

Expected return on plan assets (67.46)

Amortization of prior service costs 224.87

Net periodic benefit cost 545.31

Sheet2

Sheet3

Calculate Service Cost for x3
(First Year of the Plan)
Service Cost is the increase in PBO due to work performed in the current year.

20×4
20×5
20×6
20×7
12/31/x5
12/31/x7
Employee Retires
Employee Dies
20×1
20×2
20×3
12/31/x3
Balance Sheet Date

1/1/x1
1/1/x3
Hire Employee
Adopt Plan
PSC is $674.61

*

Step 2: Calculate the Service Cost for 19X3

(the first year of the plan)

Benefit:

1 yr * 1/100 * $20,000 = $200/yr.

Increase in annual retirement benefit for one year of service.

Service Cost (Increase in PBO):

Compute the PV of the increase in the employee’s benefits at the date of retirement.

N = 2 (X6 and X7), I = 5%, FV = 0, PMT = $200, Solve for PV: $390.48.

Next, calculate the present value of the increase in retirement benefits earned by the employee for an additional year of service.

N = 2 (X4 and X5), I = 5%, FV = $390.48, PMT = 0, Solve for PV: $354.17

Service Cost = $354.17 or the increase in PBO due to work performed in the current year. Amount funded at the end of 19X3.

Sheet1

Assumptions:

Employee Hire Date: 1/1/x1

Employee Retirement Date: 12/31/x5

Employee Death Date: 12/31/x7

Plan Adoption Date: 1/1/x3

Pension Formula: Number of service years, times 0.01 times,

Highest Salary Level.

Employee Annual Salary Schedule:

19×1 through 19×3 $10,000

19×4 through 19×5 $20,000

Plan Discount Rate: 5.00%

Market Return on Plan Assets: 10.00%

Prior Service Cost Amortization 3 Years

Other Plan Data: Plan counts work years from 1/1/x1 and pension credit

is given for service years prior to the plan adoption date.

Prior service cost is fully funded on 1/1/x3 and current

service cost is funded at the end of each year.

Step 1: Calculate Prior Service Cost (PSC) at Plan Adoption Date

Calculate Benefit Using Pension Formula:

Number of service years 2

Highest salary level $20,000

Pension Benefit $400 (Begins on 1/1/x6 when employee retires)

Calculate PBO:

Compute PV of employee’s pension benefit n 2 (x6 and x7)

until death, at the date of retirement interest rate 5.00%

FV 0

pmt $400

Solve for PV at retirement date PV $780.95 (Annuity Due)

Compute PV of retirement benefits at n 3 (x3 through x5)

date granted by the plan interest rate 5.00%

FV $780.95

pmt 0

Solve for PV at plan adoption date PV $674.62 (Regular PV, no annuity due)

This is the PBO. It also happens to be the

prior service cost (PSC) at the plan adoption date.

Step 2: Calculate the Service Cost for 19×3 (the first year of the plan)

Calculate Benefit Using Pension Formula:

Number of service years 1

Highest salary level $20,000

Pension Benefit $200 (Increase in annual retirement benefit for

one year of service)

Calculate increase in PBO or Service Cost:

Compute PV of increase in pension benefit n 2 (x6 and x7)

at the date of retirement interest rate 5.00%

FV 0

pmt $200

Solve for PV at retirement date PV $390.48 (Annuity Due)

Compute PV of the increase in retirement n 2 (x4 and x5)

benefit for additional service year interest rate 5.00%

FV $390.48

pmt 0

Solve for PV of increase in benefit PV $354.17 (Regular PV, no annuity due)

This is the service cost. It also is the increase

in PBO due to work performed in the current year.

Step 3: Calculate the Pension Benefit Obligation (PBO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Highest salary level $20,000

Pension Benefit $600 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $600

Solve for PV at retirement date PV $1,171.43 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $1,171.43

pmt 0

Solve for PV of total retirement benefits PV $1,062.52 (Regular PV, no annuity due)

This is the PBO at 12/31/x3.

Alternatively, you could get this PBO

by adding the following components:

Prior Service Cost $674.62

Service Cost $354.17

Interest on PBO at discount rate $33.73 ( 5.00% x $674.62 )

$1,062.52

Step 4: Calculate the Accumulated Benefit Obligation (ABO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Current salary level $10,000

Pension Benefit $300 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $300

Solve for PV at retirement date PV $585.71 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $585.71

pmt 0

Solve for PV of ABO retirement benefits PV $531.26 (Regular PV, no annuity due)

This is the ABO at 12/31/x3.

The ABO is 50% of PBO because of the salary

used in computation (10,000 vs. 20,000).

Pension Plan Funding to Trustee by Employer

Prior service cost funded on 1/1/x3 $674.62

Service cost funded on 12/31/x3 $354.17

Trustee Account Record

Initial funding at 1/1/x3 by employer 674.62

Annual return on assets held by trustee 67.46

Funding by employer at 12/31/x3 354.17

Funds held by trustee at 12/31/x3 1,096.25

Pension Expense Calculation for x3

Service Cost for x3 354.17

Interest on PBO 33.73

Amortization of Prior Service Cost 224.87

Less: Return on plan assets (67.46)

Total pension expense 545.31

Employer Journal Entries Prepaid Pension

Expense Cash

Prepaid Pension Expense 674.62 674.62 674.62

Cash 674.62 354.17 354.17

To record funding of plan on 1/1/x3. 545.31

483.47

Prepaid Pension Expense 354.17

Cash 354.17

To record funding of plan on 12/31/x3

Pension Expense 545.31

Prepaid Pension Expense 545.31

SFAS No. 132 Pension Note Disclosures

Change in benefit obligation

Benefit obligation at beginning of year –

Service cost 354.17

Interest cost 33.73

Adopton of plan 674.62

Benefit obligation at end of year 1,062.52

Change in plan assets

Fair value of plan assets at

beginning of year –

Actual return on plan assets 67.46

Employer contributions 1,028.79

Fair value of plan assets at end of year 1,096.25

Funded status 33.73

Unrecognized prior service cost 449.74

Prepaid benefit cost 483.47

Weighted-average assumptins as of 12/31

Discount rate 5.00%

Expected return on plan assets 10.00%

Components of net periodic benefit cost

Service cost 354.17

Interest cost 33.73

Expected return on plan assets (67.46)

Amortization of prior service costs 224.87

Net periodic benefit cost 545.31

Sheet2

Sheet3

Sheet1

Assumptions:

Employee Hire Date: 1/1/x1

Employee Retirement Date: 12/31/x5

Employee Death Date: 12/31/x7

Plan Adoption Date: 1/1/x3

Pension Formula: Number of service years, times 0.01 times,

Highest Salary Level.

Employee Annual Salary Schedule:

19×1 through 19×3 $10,000

19×4 through 19×5 $20,000

Plan Discount Rate: 5.00%

Market Return on Plan Assets: 10.00%

Prior Service Cost Amortization 3 Years

Other Plan Data: Plan counts work years from 1/1/x1 and pension credit

is given for service years prior to the plan adoption date.

Prior service cost is fully funded on 1/1/x3 and current

service cost is funded at the end of each year.

Step 1: Calculate Prior Service Cost (PSC) at Plan Adoption Date

Calculate Benefit Using Pension Formula:

Number of service years 2

Highest salary level $20,000

Pension Benefit $400 (Begins on 1/1/x6 when employee retires)

Calculate PBO:

Compute PV of employee’s pension benefit n 2 (x6 and x7)

until death, at the date of retirement interest rate 5.00%

FV 0

pmt $400

Solve for PV at retirement date PV $780.95 (Annuity Due)

Compute PV of retirement benefits at n 3 (x3 through x5)

date granted by the plan interest rate 5.00%

FV $780.95

pmt 0

Solve for PV at plan adoption date PV $674.62 (Regular PV, no annuity due)

This is the PBO. It also happens to be the

prior service cost (PSC) at the plan adoption date.

Step 2: Calculate the Service Cost for 19×3 (the first year of the plan)

Calculate Benefit Using Pension Formula:

Number of service years 1

Highest salary level $20,000

Pension Benefit $200 (Increase in annual retirement benefit for

one year of service)

Calculate increase in PBO or Service Cost:

Compute PV of increase in pension benefit n 2 (x6 and x7)

at the date of retirement interest rate 5.00%

FV 0

pmt $200

Solve for PV at retirement date PV $390.48 (Annuity Due)

Compute PV of the increase in retirement n 2 (x4 and x5)

benefit for additional service year interest rate 5.00%

FV $390.48

pmt 0

Solve for PV of increase in benefit PV $354.17 (Regular PV, no annuity due)

This is the service cost. It also is the increase

in PBO due to work performed in the current year.

Step 3: Calculate the Pension Benefit Obligation (PBO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Highest salary level $20,000

Pension Benefit $600 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $600

Solve for PV at retirement date PV $1,171.43 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $1,171.43

pmt 0

Solve for PV of total retirement benefits PV $1,062.52 (Regular PV, no annuity due)

This is the PBO at 12/31/x3.

Alternatively, you could get this PBO

by adding the following components:

Prior Service Cost $674.62

Service Cost $354.17

Interest on PBO at discount rate $33.73 ( 5.00% x $674.62 )

$1,062.52

Step 4: Calculate the Accumulated Benefit Obligation (ABO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Current salary level $10,000

Pension Benefit $300 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $300

Solve for PV at retirement date PV $585.71 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $585.71

pmt 0

Solve for PV of ABO retirement benefits PV $531.26 (Regular PV, no annuity due)

This is the ABO at 12/31/x3.

The ABO is 50% of PBO because of the salary

used in computation (10,000 vs. 20,000).

Pension Plan Funding to Trustee by Employer

Prior service cost funded on 1/1/x3 $674.62

Service cost funded on 12/31/x3 $354.17

Trustee Account Record

Initial funding at 1/1/x3 by employer 674.62

Annual return on assets held by trustee 67.46

Funding by employer at 12/31/x3 354.17

Funds held by trustee at 12/31/x3 1,096.25

Pension Expense Calculation for x3

Service Cost for x3 354.17

Interest on PBO 33.73

Amortization of Prior Service Cost 224.87

Less: Return on plan assets (67.46)

Total pension expense 545.31

Employer Journal Entries Prepaid Pension

Expense Cash

Prepaid Pension Expense 674.62 674.62 674.62

Cash 674.62 354.17 354.17

To record funding of plan on 1/1/x3. 545.31

483.47

Prepaid Pension Expense 354.17

Cash 354.17

To record funding of plan on 12/31/x3

Pension Expense 545.31

Prepaid Pension Expense 545.31

SFAS No. 132 Pension Note Disclosures

Change in benefit obligation

Benefit obligation at beginning of year –

Service cost 354.17

Interest cost 33.73

Adopton of plan 674.62

Benefit obligation at end of year 1,062.52

Change in plan assets

Fair value of plan assets at

beginning of year –

Actual return on plan assets 67.46

Employer contributions 1,028.79

Fair value of plan assets at end of year 1,096.25

Funded status 33.73

Unrecognized prior service cost 449.74

Prepaid benefit cost 483.47

Weighted-average assumptins as of 12/31

Discount rate 5.00%

Expected return on plan assets 10.00%

Components of net periodic benefit cost

Service cost 354.17

Interest cost 33.73

Expected return on plan assets (67.46)

Amortization of prior service costs 224.87

Net periodic benefit cost 545.31

Sheet2

Sheet3

Sheet1

Assumptions:

Employee Hire Date: 1/1/x1

Employee Retirement Date: 12/31/x5

Employee Death Date: 12/31/x7

Plan Adoption Date: 1/1/x3

Pension Formula: Number of service years, times 0.01 times,

Highest Salary Level.

Employee Annual Salary Schedule:

19×1 through 19×3 $10,000

19×4 through 19×5 $20,000

Plan Discount Rate: 5.00%

Market Return on Plan Assets: 10.00%

Prior Service Cost Amortization 3 Years

Other Plan Data: Plan counts work years from 1/1/x1 and pension credit

is given for service years prior to the plan adoption date.

Prior service cost is fully funded on 1/1/x3 and current

service cost is funded at the end of each year.

Step 1: Calculate Prior Service Cost (PSC) at Plan Adoption Date

Calculate Benefit Using Pension Formula:

Number of service years 2

Highest salary level $20,000

Pension Benefit $400 (Begins on 1/1/x6 when employee retires)

Calculate PBO:

Compute PV of employee’s pension benefit n 2 (x6 and x7)

until death, at the date of retirement interest rate 5.00%

FV 0

pmt $400

Solve for PV at retirement date PV $780.95 (Annuity Due)

Compute PV of retirement benefits at n 3 (x3 through x5)

date granted by the plan interest rate 5.00%

FV $780.95

pmt 0

Solve for PV at plan adoption date PV $674.62 (Regular PV, no annuity due)

This is the PBO. It also happens to be the

prior service cost (PSC) at the plan adoption date.

Step 2: Calculate the Service Cost for 19×3 (the first year of the plan)

Calculate Benefit Using Pension Formula:

Number of service years 1

Highest salary level $20,000

Pension Benefit $200 (Increase in annual retirement benefit for

one year of service)

Calculate increase in PBO or Service Cost:

Compute PV of increase in pension benefit n 2 (x6 and x7)

at the date of retirement interest rate 5.00%

FV 0

pmt $200

Solve for PV at retirement date PV $390.48 (Annuity Due)

Compute PV of the increase in retirement n 2 (x4 and x5)

benefit for additional service year interest rate 5.00%

FV $390.48

pmt 0

Solve for PV of increase in benefit PV $354.17 (Regular PV, no annuity due)

This is the service cost. It also is the increase

in PBO due to work performed in the current year.

Step 3: Calculate the Pension Benefit Obligation (PBO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Highest salary level $20,000

Pension Benefit $600 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $600

Solve for PV at retirement date PV $1,171.43 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $1,171.43

pmt 0

Solve for PV of total retirement benefits PV $1,062.52 (Regular PV, no annuity due)

This is the PBO at 12/31/x3.

Alternatively, you could get this PBO

by adding the following components:

Prior Service Cost $674.62

Service Cost $354.17

Interest on PBO at discount rate $33.73 ( 5.00% x $674.62 )

$1,062.52

Step 4: Calculate the Accumulated Benefit Obligation (ABO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Current salary level $10,000

Pension Benefit $300 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $300

Solve for PV at retirement date PV $585.71 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $585.71

pmt 0

Solve for PV of ABO retirement benefits PV $531.26 (Regular PV, no annuity due)

This is the ABO at 12/31/x3.

The ABO is 50% of PBO because of the salary

used in computation (10,000 vs. 20,000).

Pension Plan Funding to Trustee by Employer

Prior service cost funded on 1/1/x3 $674.62

Service cost funded on 12/31/x3 $354.17

Trustee Account Record

Initial funding at 1/1/x3 by employer 674.62

Annual return on assets held by trustee 67.46

Funding by employer at 12/31/x3 354.17

Funds held by trustee at 12/31/x3 1,096.25

Pension Expense Calculation for x3

Service Cost for x3 354.17

Interest on PBO 33.73

Amortization of Prior Service Cost 224.87

Less: Return on plan assets (67.46)

Total pension expense 545.31

Employer Journal Entries Prepaid Pension

Expense Cash

Prepaid Pension Expense 674.62 674.62 674.62

Cash 674.62 354.17 354.17

To record funding of plan on 1/1/x3. 545.31

483.47

Prepaid Pension Expense 354.17

Cash 354.17

To record funding of plan on 12/31/x3

Pension Expense 545.31

Prepaid Pension Expense 545.31

SFAS No. 132 Pension Note Disclosures

Change in benefit obligation

Benefit obligation at beginning of year –

Service cost 354.17

Interest cost 33.73

Adopton of plan 674.62

Benefit obligation at end of year 1,062.52

Change in plan assets

Fair value of plan assets at

beginning of year –

Actual return on plan assets 67.46

Employer contributions 1,028.79

Fair value of plan assets at end of year 1,096.25

Funded status 33.73

Unrecognized prior service cost 449.74

Prepaid benefit cost 483.47

Weighted-average assumptins as of 12/31

Discount rate 5.00%

Expected return on plan assets 10.00%

Components of net periodic benefit cost

Service cost 354.17

Interest cost 33.73

Expected return on plan assets (67.46)

Amortization of prior service costs 224.87

Net periodic benefit cost 545.31

Sheet2

Sheet3

Calculate Pension Benefit Obligation (PBO) at 12/31/x3

20×4
20×5
20×6
20×7
12/31/x5
12/31/x7
Employee Retires
Employee Dies
20×1
20×2
20×3
12/31/x3
Balance Sheet Date

1/1/x1
1/1/x3
Hire Employee
Adopt Plan
PSC is $674.61

Service Cost is $354.17

*

Step 3: Calculate PBO at 12/31/X3

Compute PV of employee benefits (annuity due) at 1/1/X6:

N = 2 (X6 and X7), I = 5%, FV = 0, PMT = $600 (400+200), Solve for PV: $1,171.43.

Next, calculate the present value of the retirement benefits at 12/31/X3.

N = 2 (X4 and X5), I = 5%, FV = $1,171.43, PMT = 0, Solve for PV: $1,062.52.

PBO = $1,062.52 at 12/31/X3. Alternatively, it is the sum of $674.61 (PSC), $354.17 (Service Cost), and $33.73 (Interest on PBO at 5% or 5% * $674.61).

Sheet1

Assumptions:

Employee Hire Date: 1/1/x1

Employee Retirement Date: 12/31/x5

Employee Death Date: 12/31/x7

Plan Adoption Date: 1/1/x3

Pension Formula: Number of service years, times 0.01 times,

Highest Salary Level.

Employee Annual Salary Schedule:

19×1 through 19×3 $10,000

19×4 through 19×5 $20,000

Plan Discount Rate: 5.00%

Market Return on Plan Assets: 10.00%

Prior Service Cost Amortization 3 Years

Other Plan Data: Plan counts work years from 1/1/x1 and pension credit

is given for service years prior to the plan adoption date.

Prior service cost is fully funded on 1/1/x3 and current

service cost is funded at the end of each year.

Step 1: Calculate Prior Service Cost (PSC) at Plan Adoption Date

Calculate Benefit Using Pension Formula:

Number of service years 2

Highest salary level $20,000

Pension Benefit $400 (Begins on 1/1/x6 when employee retires)

Calculate PBO:

Compute PV of employee’s pension benefit n 2 (x6 and x7)

until death, at the date of retirement interest rate 5.00%

FV 0

pmt $400

Solve for PV at retirement date PV $780.95 (Annuity Due)

Compute PV of retirement benefits at n 3 (x3 through x5)

date granted by the plan interest rate 5.00%

FV $780.95

pmt 0

Solve for PV at plan adoption date PV $674.62 (Regular PV, no annuity due)

This is the PBO. It also happens to be the

prior service cost (PSC) at the plan adoption date.

Step 2: Calculate the Service Cost for 19×3 (the first year of the plan)

Calculate Benefit Using Pension Formula:

Number of service years 1

Highest salary level $20,000

Pension Benefit $200 (Increase in annual retirement benefit for

one year of service)

Calculate increase in PBO or Service Cost:

Compute PV of increase in pension benefit n 2 (x6 and x7)

at the date of retirement interest rate 5.00%

FV 0

pmt $200

Solve for PV at retirement date PV $390.48 (Annuity Due)

Compute PV of the increase in retirement n 2 (x4 and x5)

benefit for additional service year interest rate 5.00%

FV $390.48

pmt 0

Solve for PV of increase in benefit PV $354.17 (Regular PV, no annuity due)

This is the service cost. It also is the increase

in PBO due to work performed in the current year.

Step 3: Calculate the Pension Benefit Obligation (PBO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Highest salary level $20,000

Pension Benefit $600 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $600

Solve for PV at retirement date PV $1,171.43 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $1,171.43

pmt 0

Solve for PV of total retirement benefits PV $1,062.52 (Regular PV, no annuity due)

This is the PBO at 12/31/x3.

Alternatively, you could get this PBO

by adding the following components:

Prior Service Cost $674.62

Service Cost $354.17

Interest on PBO at discount rate $33.73 ( 5.00% x $674.62 )

$1,062.52

Step 4: Calculate the Accumulated Benefit Obligation (ABO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Current salary level $10,000

Pension Benefit $300 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $300

Solve for PV at retirement date PV $585.71 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $585.71

pmt 0

Solve for PV of ABO retirement benefits PV $531.26 (Regular PV, no annuity due)

This is the ABO at 12/31/x3.

The ABO is 50% of PBO because of the salary

used in computation (10,000 vs. 20,000).

Pension Plan Funding to Trustee by Employer

Prior service cost funded on 1/1/x3 $674.62

Service cost funded on 12/31/x3 $354.17

Trustee Account Record

Initial funding at 1/1/x3 by employer 674.62

Annual return on assets held by trustee 67.46

Funding by employer at 12/31/x3 354.17

Funds held by trustee at 12/31/x3 1,096.25

Pension Expense Calculation for x3

Service Cost for x3 354.17

Interest on PBO 33.73

Amortization of Prior Service Cost 224.87

Less: Return on plan assets (67.46)

Total pension expense 545.31

Employer Journal Entries Prepaid Pension

Expense Cash

Prepaid Pension Expense 674.62 674.62 674.62

Cash 674.62 354.17 354.17

To record funding of plan on 1/1/x3. 545.31

483.47

Prepaid Pension Expense 354.17

Cash 354.17

To record funding of plan on 12/31/x3

Pension Expense 545.31

Prepaid Pension Expense 545.31

SFAS No. 132 Pension Note Disclosures

Change in benefit obligation

Benefit obligation at beginning of year –

Service cost 354.17

Interest cost 33.73

Adopton of plan 674.62

Benefit obligation at end of year 1,062.52

Change in plan assets

Fair value of plan assets at

beginning of year –

Actual return on plan assets 67.46

Employer contributions 1,028.79

Fair value of plan assets at end of year 1,096.25

Funded status 33.73

Unrecognized prior service cost 449.74

Prepaid benefit cost 483.47

Weighted-average assumptins as of 12/31

Discount rate 5.00%

Expected return on plan assets 10.00%

Components of net periodic benefit cost

Service cost 354.17

Interest cost 33.73

Expected return on plan assets (67.46)

Amortization of prior service costs 224.87

Net periodic benefit cost 545.31

Sheet2

Sheet3

Sheet1

Assumptions:

Employee Hire Date: 1/1/x1

Employee Retirement Date: 12/31/x5

Employee Death Date: 12/31/x7

Plan Adoption Date: 1/1/x3

Pension Formula: Number of service years, times 0.01 times,

Highest Salary Level.

Employee Annual Salary Schedule:

19×1 through 19×3 $10,000

19×4 through 19×5 $20,000

Plan Discount Rate: 5.00%

Market Return on Plan Assets: 10.00%

Prior Service Cost Amortization 3 Years

Other Plan Data: Plan counts work years from 1/1/x1 and pension credit

is given for service years prior to the plan adoption date.

Prior service cost is fully funded on 1/1/x3 and current

service cost is funded at the end of each year.

Step 1: Calculate Prior Service Cost (PSC) at Plan Adoption Date

Calculate Benefit Using Pension Formula:

Number of service years 2

Highest salary level $20,000

Pension Benefit $400 (Begins on 1/1/x6 when employee retires)

Calculate PBO:

Compute PV of employee’s pension benefit n 2 (x6 and x7)

until death, at the date of retirement interest rate 5.00%

FV 0

pmt $400

Solve for PV at retirement date PV $780.95 (Annuity Due)

Compute PV of retirement benefits at n 3 (x3 through x5)

date granted by the plan interest rate 5.00%

FV $780.95

pmt 0

Solve for PV at plan adoption date PV $674.62 (Regular PV, no annuity due)

This is the PBO. It also happens to be the

prior service cost (PSC) at the plan adoption date.

Step 2: Calculate the Service Cost for 19×3 (the first year of the plan)

Calculate Benefit Using Pension Formula:

Number of service years 1

Highest salary level $20,000

Pension Benefit $200 (Increase in annual retirement benefit for

one year of service)

Calculate increase in PBO or Service Cost:

Compute PV of increase in pension benefit n 2 (x6 and x7)

at the date of retirement interest rate 5.00%

FV 0

pmt $200

Solve for PV at retirement date PV $390.48 (Annuity Due)

Compute PV of the increase in retirement n 2 (x4 and x5)

benefit for additional service year interest rate 5.00%

FV $390.48

pmt 0

Solve for PV of increase in benefit PV $354.17 (Regular PV, no annuity due)

This is the service cost. It also is the increase

in PBO due to work performed in the current year.

Step 3: Calculate the Pension Benefit Obligation (PBO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Highest salary level $20,000

Pension Benefit $600 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $600

Solve for PV at retirement date PV $1,171.43 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $1,171.43

pmt 0

Solve for PV of total retirement benefits PV $1,062.52 (Regular PV, no annuity due)

This is the PBO at 12/31/x3.

Alternatively, you could get this PBO

by adding the following components:

Prior Service Cost $674.62

Service Cost $354.17

Interest on PBO at discount rate $33.73 ( 5.00% x $674.62 )

$1,062.52

Step 4: Calculate the Accumulated Benefit Obligation (ABO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Current salary level $10,000

Pension Benefit $300 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $300

Solve for PV at retirement date PV $585.71 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $585.71

pmt 0

Solve for PV of ABO retirement benefits PV $531.26 (Regular PV, no annuity due)

This is the ABO at 12/31/x3.

The ABO is 50% of PBO because of the salary

used in computation (10,000 vs. 20,000).

Pension Plan Funding to Trustee by Employer

Prior service cost funded on 1/1/x3 $674.62

Service cost funded on 12/31/x3 $354.17

Trustee Account Record

Initial funding at 1/1/x3 by employer 674.62

Annual return on assets held by trustee 67.46

Funding by employer at 12/31/x3 354.17

Funds held by trustee at 12/31/x3 1,096.25

Pension Expense Calculation for x3

Service Cost for x3 354.17

Interest on PBO 33.73

Amortization of Prior Service Cost 224.87

Less: Return on plan assets (67.46)

Total pension expense 545.31

Employer Journal Entries Prepaid Pension

Expense Cash

Prepaid Pension Expense 674.62 674.62 674.62

Cash 674.62 354.17 354.17

To record funding of plan on 1/1/x3. 545.31

483.47

Prepaid Pension Expense 354.17

Cash 354.17

To record funding of plan on 12/31/x3

Pension Expense 545.31

Prepaid Pension Expense 545.31

SFAS No. 132 Pension Note Disclosures

Change in benefit obligation

Benefit obligation at beginning of year –

Service cost 354.17

Interest cost 33.73

Adopton of plan 674.62

Benefit obligation at end of year 1,062.52

Change in plan assets

Fair value of plan assets at

beginning of year –

Actual return on plan assets 67.46

Employer contributions 1,028.79

Fair value of plan assets at end of year 1,096.25

Funded status 33.73

Unrecognized prior service cost 449.74

Prepaid benefit cost 483.47

Weighted-average assumptins as of 12/31

Discount rate 5.00%

Expected return on plan assets 10.00%

Components of net periodic benefit cost

Service cost 354.17

Interest cost 33.73

Expected return on plan assets (67.46)

Amortization of prior service costs 224.87

Net periodic benefit cost 545.31

Sheet2

Sheet3

Sheet1

Assumptions:

Employee Hire Date: 1/1/x1

Employee Retirement Date: 12/31/x5

Employee Death Date: 12/31/x7

Plan Adoption Date: 1/1/x3

Pension Formula: Number of service years, times 0.01 times,

Highest Salary Level.

Employee Annual Salary Schedule:

19×1 through 19×3 $10,000

19×4 through 19×5 $20,000

Plan Discount Rate: 5.00%

Market Return on Plan Assets: 10.00%

Prior Service Cost Amortization 3 Years

Other Plan Data: Plan counts work years from 1/1/x1 and pension credit

is given for service years prior to the plan adoption date.

Prior service cost is fully funded on 1/1/x3 and current

service cost is funded at the end of each year.

Step 1: Calculate Prior Service Cost (PSC) at Plan Adoption Date

Calculate Benefit Using Pension Formula:

Number of service years 2

Highest salary level $20,000

Pension Benefit $400 (Begins on 1/1/x6 when employee retires)

Calculate PBO:

Compute PV of employee’s pension benefit n 2 (x6 and x7)

until death, at the date of retirement interest rate 5.00%

FV 0

pmt $400

Solve for PV at retirement date PV $780.95 (Annuity Due)

Compute PV of retirement benefits at n 3 (x3 through x5)

date granted by the plan interest rate 5.00%

FV $780.95

pmt 0

Solve for PV at plan adoption date PV $674.62 (Regular PV, no annuity due)

This is the PBO. It also happens to be the

prior service cost (PSC) at the plan adoption date.

Step 2: Calculate the Service Cost for 19×3 (the first year of the plan)

Calculate Benefit Using Pension Formula:

Number of service years 1

Highest salary level $20,000

Pension Benefit $200 (Increase in annual retirement benefit for

one year of service)

Calculate increase in PBO or Service Cost:

Compute PV of increase in pension benefit n 2 (x6 and x7)

at the date of retirement interest rate 5.00%

FV 0

pmt $200

Solve for PV at retirement date PV $390.48 (Annuity Due)

Compute PV of the increase in retirement n 2 (x4 and x5)

benefit for additional service year interest rate 5.00%

FV $390.48

pmt 0

Solve for PV of increase in benefit PV $354.17 (Regular PV, no annuity due)

This is the service cost. It also is the increase

in PBO due to work performed in the current year.

Step 3: Calculate the Pension Benefit Obligation (PBO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Highest salary level $20,000

Pension Benefit $600 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $600

Solve for PV at retirement date PV $1,171.43 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $1,171.43

pmt 0

Solve for PV of total retirement benefits PV $1,062.52 (Regular PV, no annuity due)

This is the PBO at 12/31/x3.

Alternatively, you could get this PBO

by adding the following components:

Prior Service Cost $674.62

Service Cost $354.17

Interest on PBO at discount rate $33.73 ( 5.00% x $674.62 )

$1,062.52

Step 4: Calculate the Accumulated Benefit Obligation (ABO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Current salary level $10,000

Pension Benefit $300 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $300

Solve for PV at retirement date PV $585.71 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $585.71

pmt 0

Solve for PV of ABO retirement benefits PV $531.26 (Regular PV, no annuity due)

This is the ABO at 12/31/x3.

The ABO is 50% of PBO because of the salary

used in computation (10,000 vs. 20,000).

Pension Plan Funding to Trustee by Employer

Prior service cost funded on 1/1/x3 $674.62

Service cost funded on 12/31/x3 $354.17

Trustee Account Record

Initial funding at 1/1/x3 by employer 674.62

Annual return on assets held by trustee 67.46

Funding by employer at 12/31/x3 354.17

Funds held by trustee at 12/31/x3 1,096.25

Pension Expense Calculation for x3

Service Cost for x3 354.17

Interest on PBO 33.73

Amortization of Prior Service Cost 224.87

Less: Return on plan assets (67.46)

Total pension expense 545.31

Employer Journal Entries Prepaid Pension

Expense Cash

Prepaid Pension Expense 674.62 674.62 674.62

Cash 674.62 354.17 354.17

To record funding of plan on 1/1/x3. 545.31

483.47

Prepaid Pension Expense 354.17

Cash 354.17

To record funding of plan on 12/31/x3

Pension Expense 545.31

Prepaid Pension Expense 545.31

SFAS No. 132 Pension Note Disclosures

Change in benefit obligation

Benefit obligation at beginning of year –

Service cost 354.17

Interest cost 33.73

Adopton of plan 674.62

Benefit obligation at end of year 1,062.52

Change in plan assets

Fair value of plan assets at

beginning of year –

Actual return on plan assets 67.46

Employer contributions 1,028.79

Fair value of plan assets at end of year 1,096.25

Funded status 33.73

Unrecognized prior service cost 449.74

Prepaid benefit cost 483.47

Weighted-average assumptins as of 12/31

Discount rate 5.00%

Expected return on plan assets 10.00%

Components of net periodic benefit cost

Service cost 354.17

Interest cost 33.73

Expected return on plan assets (67.46)

Amortization of prior service costs 224.87

Net periodic benefit cost 545.31

Sheet2

Sheet3

Sheet1

Assumptions:

Employee Hire Date: 1/1/x1

Employee Retirement Date: 12/31/x5

Employee Death Date: 12/31/x7

Plan Adoption Date: 1/1/x3

Pension Formula: Number of service years, times 0.01 times,

Highest Salary Level.

Employee Annual Salary Schedule:

19×1 through 19×3 $10,000

19×4 through 19×5 $20,000

Plan Discount Rate: 5.00%

Market Return on Plan Assets: 10.00%

Prior Service Cost Amortization 3 Years

Other Plan Data: Plan counts work years from 1/1/x1 and pension credit

is given for service years prior to the plan adoption date.

Prior service cost is fully funded on 1/1/x3 and current

service cost is funded at the end of each year.

Step 1: Calculate Prior Service Cost (PSC) at Plan Adoption Date

Calculate Benefit Using Pension Formula:

Number of service years 2

Highest salary level $20,000

Pension Benefit $400 (Begins on 1/1/x6 when employee retires)

Calculate PBO:

Compute PV of employee’s pension benefit n 2 (x6 and x7)

until death, at the date of retirement interest rate 5.00%

FV 0

pmt $400

Solve for PV at retirement date PV $780.95 (Annuity Due)

Compute PV of retirement benefits at n 3 (x3 through x5)

date granted by the plan interest rate 5.00%

FV $780.95

pmt 0

Solve for PV at plan adoption date PV $674.62 (Regular PV, no annuity due)

This is the PBO. It also happens to be the

prior service cost (PSC) at the plan adoption date.

Step 2: Calculate the Service Cost for 19×3 (the first year of the plan)

Calculate Benefit Using Pension Formula:

Number of service years 1

Highest salary level $20,000

Pension Benefit $200 (Increase in annual retirement benefit for

one year of service)

Calculate increase in PBO or Service Cost:

Compute PV of increase in pension benefit n 2 (x6 and x7)

at the date of retirement interest rate 5.00%

FV 0

pmt $200

Solve for PV at retirement date PV $390.48 (Annuity Due)

Compute PV of the increase in retirement n 2 (x4 and x5)

benefit for additional service year interest rate 5.00%

FV $390.48

pmt 0

Solve for PV of increase in benefit PV $354.17 (Regular PV, no annuity due)

This is the service cost. It also is the increase

in PBO due to work performed in the current year.

Step 3: Calculate the Pension Benefit Obligation (PBO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Highest salary level $20,000

Pension Benefit $600 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $600

Solve for PV at retirement date PV $1,171.43 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $1,171.43

pmt 0

Solve for PV of total retirement benefits PV $1,062.52 (Regular PV, no annuity due)

This is the PBO at 12/31/x3.

Alternatively, you could get this PBO

by adding the following components:

Prior Service Cost 674.62 $674.62

Service Cost 354.17 $354.17

Interest on PBO at discount rate 33.73 $33.73 ( 5.00% x $674.62 )

1,062.52 $1,062.52

Step 4: Calculate the Accumulated Benefit Obligation (ABO) at 12/31/x3

Calculate Benefit Using Pension Formula:

Number of service years 3

Current salary level $10,000

Pension Benefit $300 (Benefits due to employee based on service

years and salary level at 1/1/x6)

Calculate increase in PBO or Service Cost:

Compute PV of retirement benefit n 2 (x6 and x7)

at 12/31/x3 interest rate 5.00%

FV 0

pmt $300

Solve for PV at retirement date PV $585.71 (Annuity Due)

Compute PV of retirement benefits n 2 (x4 and x5)

at 12/31/x3 interest rate 5.00%

FV $585.71

pmt 0

Solve for PV of ABO retirement benefits PV $531.26 (Regular PV, no annuity due)

This is the ABO at 12/31/x3.

The ABO is 50% of PBO because of the salary

used in computation (10,000 vs. 20,000).

Pension Plan Funding to Trustee by Employer

Prior service cost funded on 1/1/x3 $674.62

Service cost funded on 12/31/x3 $354.17

Trustee Account Record

Initial funding at 1/1/x3 by employer 674.62

Annual return on assets held by trustee 67.46

Funding by employer at 12/31/x3 354.17

Funds held by trustee at 12/31/x3 1,096.25

Pension Expense Calculation for x3

Service Cost for x3 354.17

Interest on PBO 33.73

Amortization of Prior Service Cost 224.87

Less: Return on plan assets (67.46)

Total pension expense 545.31

Employer Journal Entries Prepaid Pension

Expense Cash

Prepaid Pension Expense 674.62 674.62 674.62

Cash 674.62 354.17 354.17

To record funding of plan on 1/1/x3. 545.31

483.47

Prepaid Pension Expense 354.17

Cash 354.17

To record funding of plan on 12/31/x3

Pension Expense 545.31

Prepaid Pension Expense 545.31

SFAS No. 132 Pension Note Disclosures

Change in benefit obligation

Benefit obligation at beginning of year –

Service cost 354.17

Interest cost 33.73

Adopton of plan 674.62

Benefit obligation at end of year 1,062.52

Change in plan assets

Fair value of plan assets at

beginning of year –

Actual return on plan assets 67.46

Employer contributions 1,028.79

Fair value of plan assets at end of year 1,096.25

Funded status 33.73

Unrecognized prior service cost 449.74

Prepaid benefit cost 483.47

Weighted-average assumptins as of 12/31

Discount rate 5.00%

Expected return on plan assets 10.00%

Components of net periodic benefit cost

Service cost 354.17

Interest cost 33.73

Expected return on plan assets (67.46)

Amortization of prior service costs 224.87

Net periodic benefit cost 545.31

Sheet2

Sheet3

Pension Accounting under ASC 715-30
Employer Journal Entries:

Defined Benefit Pension Plan
Employer Journal Entries (cont.)

Defined Benefit Pension T-Accounts

Pension Note Disclosure for 20X3

Pension Note Disclosure (cont.)

Pension Note Disclosure (cont.)

ASC 715-30
ASC 715-30, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.
Financial Statement Requirements:
Requires recognition of the funded status of a benefit plan—measured as the difference between the present value of the projected benefit obligation and the plan assets at fair value—on the Statement of Financial Position (Balance Sheet).
Requires recognition of the following as a component of accumulated other comprehensive income: gains or losses and prior service costs or credits that arise during the period but are not yet recognized on the income statement as components of net periodic benefit cost; any existing transition asset or obligation.

Requires recognition of current service cost as an operating expense on the Statement of Comprehensive Income or Income Statement (ASU 2017-07).
Requires recognition of interest cost, return, gains, losses, and amortization of prior service cost as other income (expense) on the Statement of Comprehensive Income or Income Statement (ASU 2017-07).
Plan assets and benefit obligations must be measured as of the date of an employer’s fiscal year-end statement of financial position.

*

ASC 715-30
Required footnote disclosures:

Change in PBO.
Change in Plan Assets.
Funded Status
Amounts not yet recognized as components of net periodic pension cost as of year end—includes all pension-related itemized list of components in accumulated OCI.
Disclosure of the estimated portions of items in accumulated OCI that will be recognized as part of net periodic benefit cost for the next fiscal year. These items include gains or losses, prior service costs or credits, and any transition asset or obligation.
Types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods.
Weighted Average Assumptions for discount rate, expected return on plan assets, and compensation increases.
Components of net periodic benefit cost.

Calculate Benefit Using Pension Formula:
Number of service years 2
Highest salary level$20,000
Pension Benefit$400(Begins on 1/1/x6 when employee retires)
Compute PV of employee’s pension benefitn2(x6 and x7)
until death, at the date of retirementinterest rate5.00%
FV0
pmt$400
Solve for PV at retirement datePV$780.95(Annuity Due)
Compute PV of retirement benefits at n3(x3 through x5)
date granted by the planinterest rate5.00%
FV$780.95
pmt0
Solve for PV at plan adoption datePV$674.62(Regular PV, no annuity due)
This is the PBO. It also happens to be the
prior service cost (PSC) at the plan adoption date.
Step 1: Calculate Prior Service Cost at Plan
Adoption Date
Benefit:
2 yrs. * 1/100 * $20,000 = $400/yr.
Begins on 1/1/X6 when employee retires.
PBO:
Compute the PV of employee’s benefits until
death at the date of retirement.
N = 2 (X6 and X7), I = 5%, FV = 0, PMT =
$400, Solve for PV:
$780.95
.
Next, calculate the present value of the
retirement benefits at the date granted by the
plan.
N = 3 (X3, X4, and X5), I = 5%, FV =
$780.95, PMT = 0, Solve for PV:
$674.61
PBO = $674.61 or the present value of the
retroactive benefits granted in the plan. So
PBO = PSC at the plan adoption date. Amount
funded on 1/1/X3.
Calculate Benefit Using Pension Formula:
Number of service years 1
Highest salary level$20,000
Pension Benefit$200
Compute PV of increase in pension benefitn2(x6 and x7)
at the date of retirementinterest rate5.00%
FV0
pmt$200
Solve for PV at retirement datePV$390.48(Annuity Due)
Compute PV of the increase in retirementn2(x4 and x5)
benefit for additional service yearinterest rate5.00%
FV$390.48
pmt0
Solve for PV of increase in benefitPV$354.17(Regular PV, no annuity due)
Step 2: Calculate the Service Cost for 19X3
(the first year of the plan)
Benefit:
1
yr * 1/100 * $20,000 = $200/yr.
Increase in annual retirement benefit for one
year of service.
Service Cost (Increase in PBO):
Compute the PV of the increase in the
employee’s benefits at the date of retirement.
N = 2 (X6 and X7), I = 5%, FV = 0, PMT =
$200, Solve for PV:
$390.48
.
Next, calculate the present value of the
increase in retirement benefits earned by the
employee for an additional year of service.
N = 2 (X4 and X5), I = 5%, FV = $390.48,
PMT = 0, Solve for PV:
$354.17
Service Cost = $354.17 or the increase in PBO
due to work performed in the current year.
Amount funded at the end of 19X3.
Calculate Benefit Using Pension Formula:
Number of service years 3
Highest salary level$20,000
Pension Benefit$600
Compute PV of retirement benefitn2(x6 and x7)
at 12/31/x3interest rate5.00%
FV0
pmt$600
Solve for PV at retirement datePV$1,171.43(Annuity Due)
Compute PV of retirement benefitsn2(x4 and x5)
at 12/31/x3interest rate5.00%
FV$1,171.43
pmt0
Solve for PV of total retirement benefitsPV$1,062.52(Regular PV, no annuity due)
Prior Service Cost674.62
Service Cost354.17
Interest on PBO at discount rate33.73
1,062.52
Step 3: Calculate PBO at 12/31/X3
Compute PV of employee benefits (annuity
due) at 1/1/X6:
N = 2 (X6 and X7), I = 5%, FV = 0, PMT =
$600 (400+200), Solve for PV:
$1,171.43
.
Next, calculate the present value of the
retirement benefits at 12/31/X3.
N = 2 (X4 and X5), I = 5%, FV = $1,171.43,
PMT = 0, Solve for PV:
$1,062.52.
PBO = $1,062.52 at 12/31/X3. Alternatively,
it is the sum of $674.61 (PSC), $354.17
(Service Cost), and $33.73 (Interest on PBO at
5% or 5% * $674.61).
11/1/X3Accumulated OCI674.62
Pension Liability674.62
To record unamortized PSC for 20X1-20X2 service.
21/1/X3Pension Liability450.00
Cash450.00
To record payment to trustee to partially fund PSC.
312/31/X3Pension Liability375.00
Cash375.00
To record payment to trustee to fund 20X3 service cost.
412/31/X3Pension Liability224.87
Accumulated OCI224.87
To record 20X3 amortization of PSC (3 year life).
512/31/X3Pension Service Cost354.17
Pension Liability354.17
To record 20X3 service cost.
612/31/X3Other Net Periodic Benefit Costs213.60
Pension Liability213.60
To record 20X3 interest cost, return and amortization of PSC.
2450.00 674.62 1
3375.00 354.17 5
4224.87 213.60 6
192.52
From Pension Footnote Disclosure:
Pension Benefit Obligation(1,062.52)$
Plan Assets870.00
Pension Liability(192.52)$
1674.62 224.87 4
449.75
Pension Liability
Accumulated OCI (before tax)
Change in projected benefit obligation
Benefit obligation at beginning of year $ 0.00
Adoption of the plan (prior ser vice cost) (674.62)
Interest cost (33.73)
Service cost (354.17)
Benefit obligation at end of year ($1,062.52)

Change in plan assets
Fair value of plan assets beginning of year $ 0.00
Employer contribution to fund PSC at January 1 450.00
Actual return on plan assets 45.00
Employer contribution at year end 375.00
Fair value of plan assets end of year $ 870.00

Funded Status ($ 192.52)

Items not yet recognized as a component of
net periodic pension cost:
Unrecognized prior service cost $ 449.75
Weighted-average assumptions as of 12/31
Discount rate 5.0%
Expected return on plan assets 10.0%
Expected increase in compensation 5.0%

Components of net periodic benefit cost
Service cost $ 354.17
Interest cost on benefit obligation 33.73
Amortization of prior service cost (3 years) 224.87
Expected return on plan assets (45.00)
Net periodic benefit cost $ 567.77

Other changes in plan assets an d benefit obligations recognized in
Other Comprehensive Income
Prior service cost $674.62
Amortization of prior service cost (224.87)
Total recognized in other comprehensive income $449.75

Total recognized in Net Periodic Benefit C ost and
Other Comprehensive Income $1,017.52

Plan assets are invested in bonds (35%), mutual funds (40%) and cash
equivalents (25%). Prior service costs of $224.87 will be included in
the net periodic benefit cost next fiscal year.