To download more slides, ebook, solutions and test bank, visit

CHAPTER 17
QUESTIONS
mortality tables. The employer contribution is related to the guaranteed benefits defined in the plan. A defined
contribution pension plan provides employees pension benefits that are determined by the amount in the pension
fund. A periodic contribution amount is
agreed to by the employer, and the
contributions and investment earnings
determine the benefits to be received.
(b) A contributory pension plan is one in
which employees make contributions to
the pension fund in addition to those
made by the employer. Under noncontributory pension plans, the employer
pays the entire cost of the plan.
(c) A multiemployer pension plan is one
administered for the benefit of many
employers. Trade associations or similar groups often sponsor multiemployer
plans. Single-employer pension plans
are tailored to a specific employer.
Generally, they are administered by an
outside trustee, and the provisions are
designed to meet the specific needs of
the employees of the company involved.

1. Five taxes are based on gross payroll. The
costs of these taxes are borne by employees and employers as follows:
Employee Employer

Federal old-age,
survivors’,

and disability ............
Federal hospital insurance .........................
Federal unemployment insurance ........
State unemployment
insurance .................
Individual income tax ..

X

X

X

X
X
X

X

2. A compensated absence represents a liability that must be estimated. A liability
must be recognized for compensated absences that (a) have been earned through
services already rendered, (b) vest or can
be carried forward to subsequent years,
and (c) are estimable and probable.
The entry to record a liability for compensated absences would be a debit to an expense account and a credit to a payable
account for the estimated amount of the obligation.
3. In defining the meaning of bonus agreements, difficulties arise in determining the
intended meaning of the word profits. Profits may mean income before deductions for
bonus or income tax, income after deduction of bonus but before income tax, or net
income after deductions for both bonus and

income tax. To avoid any misunderstandings, the profit figure on which the bonus is
to be determined should be clearly defined
in the bonus agreement.

5. Vesting occurs when an employee retains
the right to receive pension benefits at retirement, even though employment with the
employer is terminated. Federal regulation
has reduced significantly the number of
years of service required before employees
are entitled to vested benefits.
6. In measuring future benefits, the actuaries
must consider many variables, including
the average age of current employees,
length of service, expected rate of turnover,
vesting privileges, and life expectancy.

4. (a) A defined benefit pension plan guarantees employees a retirement income
based on the plan’s benefit formula.
Many plans define benefits in terms of
an employee’s average salary over a
specified number of years. The amount
of the employer’s periodic contribution
to the pension fund is affected by such
variables as the interest rate, investment earnings, employee turnover, and

7. The four basic issues that the FASB addressed in relation to defined benefit pension plans were:
(a) the amount of net periodic pension expense
(b) the amount of pension liability or asset
to be reported on the balance sheet


759


To download more slides, ebook, solutions and test bank, visit
760

Chapter 17

(c) the accounting for pension settlements,
curtailments, and terminations
(d) disclosures needed to supplement the
amounts reported in the financial
statements
8. The principal difference between the accumulated benefit approach and the projected
benefit approach to determining pension
benefits is the salary level used. Under the
accumulated benefit approach, the present
employee salary level is used to measure
future benefits. Under the projected benefit
approach, expected future salary levels are
used in all computations.
9. Net periodic pension expense includes five
basic components as follows:
Service cost. The present value of additional future benefits attributable to services
rendered by employees during the period.
Interest cost. The increase in the projected
benefit obligation that occurs over time.
The interest component is computed on the
beginning balance of the obligation using
the settlement rate.

Actual return on plan assets. The return on
pension fund investments that is deducted
in computing net periodic pension expense.
This component is based on the actual return on plan assets. Differences between
the actual return and the expected return
are deferred and included with gains and
losses.
Amortization of prior service cost. Costs related to employee service in years preceding the adoption or amendment of a pension plan are referred to as prior service
cost. These costs are amortized over future
expected service periods of the employees.
Deferral and amortization of gains and
losses. The difference between the expected value of several variables and their
actual values is included in this component.
The impact of these gains and losses is
spread over several years through an amortization method that includes a minimum corridor amount that must be reached
before any gain or loss is recognized.
10. (a) When a pension plan is first adopted,
provision must be made to give credit
to current employees for prior services
rendered. Some employees may be
close to retirement but will still receive
full retirement benefits. The cost to the

employer of these future pension benefits, predicated on years of service already rendered, is determined by actuaries, who negotiate with the employer
as to how the additional benefits will be
funded.
(b) When a pension plan is amended to alter the formula used to compute retirement benefits, the impact of the new
formula on prior years’ service must be
determined and the additional benefits
funded as in the case of a plan’s adoption.

11. The service cost portion of net periodic
pension expense is the actuarial present
value of the benefits attributed by the plan’s
benefit formula to services rendered by
employees during a period. One way to
measure this cost is to compute the present
value of the expected future service benefits at both the beginning and end of a
period using uniform assumptions about
salary levels and discount rates and take
their difference. The present value of these
expected future benefits is defined as the
projected benefit obligation.
12. Pension expense includes the expected
return on plan assets; however, it is not reported as such directly. The actual return is
reported as a separate component of net
periodic pension expense, and the difference between the expected return and the
actual return is deferred as part of the gain
and loss components. The deferral becomes part of the deferred gains and
losses that are amortized over the future
service years of the employees to the extent that they exceed the corridor amount.
13. Prior service cost is NOT included in pension expense in the year in which it arises.
However, newly created prior service cost
is reported as a subtraction in the computation of comprehensive income.
14. The FASB specified that a market-related
value of the pension fund may be used to
compute the expected return on the pension fund and the corridor amount. This
value may be based on average values
over a period not to exceed five years, or,
alternatively, it may be the fair value of the
pension fund. A company must use the

same definition of market-related asset values from year to year. The fair value of the


To download more slides, ebook, solutions and test bank, visit
Chapter 17

pension fund is used for all other pension
measurements.
15. The following pension-related items impact
the reported amount of accumulated other
comprehensive income.
Prior service cost. The unamortized portion
of prior service cost, which has not yet
been recognized as part of net periodic
pension expense, is shown as a reduction
in the accumulated other comprehensive
income portion of equity in the balance
sheet.
Deferred gains and losses. The unamortized portion of net pension gain or loss,
which has not yet been recognized as part
of net periodic pension expense, is shown
as an increase (deferred gain) or reduction
(deferred loss) in the accumulated other
comprehensive income portion of equity in
the balance sheet.
16. The corridor amount provides a buffer to
reduce the volatility of pension costs. The
concept used by the FASB in accounting
for gains and losses permits employers to
spread the impact of fluctuations in key

pension variables across several future
time periods. The corridor established is
one method to help do this.
17. The primary function of the pension disclosure requirement is to provide information
that allows users to better understand the
extent and effect of an employer’s responsibility to provide employee pension benefits and related financial arrangements. The
disclosure is to include information about
the variables used in determining the liability and the reported value of the plan assets.
18. A pension settlement occurs when an employer takes an irrevocable action that relieves the employer of primary responsibility for all or part of the pension obligation.
An example of a settlement would be a
cash buyout of the employee’s vested benefits by the employer. A pension curtailment occurs when there is a significant reduction in, or elimination of, defined benefit
accruals for present employees’ future services. Curtailments include termination of
employees’ services earlier than expected

761

(e.g., as a result of a plant closing) and the
termination or suspension of a pension
plan.
19. Postretirement benefits include continuation of medical insurance programs, life insurance contracts, and other special corporate privileges, such as country club dues,
special transportation privileges, or special
discounts on items produced or sold by the
employer. The primary issue in accounting
for the costs of these benefits is whether
they should be accrued as pension costs
are or recognized as the benefits are paid.
20. Some differences between pension plans
and other postretirement benefit plans are
as follows:
(a) Unlike pension plans, postretirement

benefit plans other than pensions are
often informal.
(b) Most postretirement benefit plans other
than pensions are nonfunded, whereas
federal law requires pension plans to
be funded.
(c) Contributions to postretirement benefit
plans other than pensions are not tax
deductible to the extent that they exceed current period costs for employee
benefits. Most contributions to pension
plans are tax deductible.
(d) Historically, the cost of future health
care has been much more difficult to
estimate than the cost of future pension
benefits.
(e) The level of postretirement benefits
other than pensions is often unrelated
to the level of an employee’s salary or
length of service (beyond a certain
threshold length of service). Pension
benefits are usually tied to employee
salary and length of service.
21. The full eligibility date is the date an employee becomes eligible to receive the full
benefits from a postretirement plan. This often occurs several years before retirement.
It is important in accounting for postretirement benefits because the FASB has recommended that the attribution period end
with the full eligibility date rather than the
retirement date.


To download more slides, ebook, solutions and test bank, visit

762

Chapter 17

22. The major differences between the accounting for pensions and for other postretirement benefits are as follows:
(a) The cost of postretirement benefits
other than pensions is charged to the
years between when an employee is
hired and when the employee becomes
eligible for full benefits. The cost of

pension benefits is charged to all the
years of an employee’s service.
(b) The disclosure requirement for postretirement benefit plans other than pensions includes an analysis of how sensitive the reported amounts are to
changes in the growth rate in health
care costs.


To download more slides, ebook, solutions and test bank, visit
Chapter 17

763

PRACTICE EXERCISES
PRACTICE 17–1 WAGES AND WAGES PAYABLE
1.

December 31
Wages Expense ..............................................................
Wages Payable..........................................................


15,000
15,000

Wages are $5,000 ($25,000/5 days) per day. Three days (Monday, Tuesday, and
Wednesday) have elapsed during the week.
2.

January 5
Wages Payable ...............................................................
Wages Expense ..............................................................
Cash ...........................................................................

15,000
10,000
25,000

PRACTICE 17–2 ACCOUNTING FOR PAYROLL TAXES
Wages and Salaries Expense..............................................
FICA Taxes Payable (7.65%)..........................................
Employee Income Taxes Payable .................................
Cash.................................................................................

50,000

Payroll Tax Expense ............................................................
FICA Taxes Payable (employer portion) ......................
State Unemployment Taxes Payable (5.4%) ................
Federal Unemployment Taxes Payable (0.8%) ............


6,925

3,825
7,000
39,175
3,825
2,700
400

PRACTICE 17–3 COMPENSATED ABSENCES
1.
Employee
1
2
3
Total

2.

Average Wage
per Day
$160
200
250

Unused
Vacation Days
0
5
15


Accrued Vacation
Wages Payable
$
0
1,000
3,750
$4,750

Wages Expense....................................................................
Vacation Wages Payable ...............................................

4,750

Wages Expense....................................................................
Vacation Wages Payable .....................................................
Cash ($4,750 + 10% raise)..............................................

475
4,750

4,750

5,225


To download more slides, ebook, solutions and test bank, visit
764

Chapter 17


PRACTICE 17–4 EARNINGS-BASED BONUS
B = 0.05 ($200,000 – B)
B = $10,000 – 0.05 B
1.05 B = $10,000
B = $9,524
PRACTICE 17–5 POSTEMPLOYMENT BENEFITS
To record the impairment:
Impairment (or Restructuring) Loss...................................
Accumulated Depreciation..................................................
Building ...........................................................................

900,000
1,300,000
2,200,000

To record postemployment benefits:
Restructuring Loss ($8,800 × 32)........................................
Postemployment Benefits Payable...............................

281,600
281,600

Postemployment benefits per employee:
Job training.............................................................
Supplemental health and life ................................
Two months’ salary................................................
Total.........................................................................

$ 500

3,300
5,000
$8,800

PRACTICE 17–6 COMPUTING THE ACCUMULATED BENEFIT OBLIGATION (ABO)
1.

Highest salary = $50,000 (future salary increases ignored with ABO)
Annual pension payment = $10,000 (2% × 10 years × $50,000)
Number of pension payments to be received after retirement = 15
Length of time until retirement = 25 years
Present value of 15 pension payments at retirement date (in 25 years):
PMT = $10,000, N = 15, I = 8% → PV = $85,595
Present value of pension payments on January 1, 2013:
FV = $85,595, N = 25, I = 8% → PV = $12,498

2.

Present value of 15 pension payments at retirement date (in 25 years):
PMT = $10,000, N = 15, I = 12% → PV = $68,109
Present value of pension payments on January 1, 2013:
FV = $68,109, N = 25, I = 12% → PV = $4,006


To download more slides, ebook, solutions and test bank, visit
Chapter 17

765

PRACTICE 17–7 COMPUTING THE PROJECTED BENEFIT OBLIGATION (PBO)

1.

Estimated salary growth rate = 3%
Length of time until retirement = 25 years
Highest salary: PV = $50,000, N = 25, I = 3% → FV = $104,689
Annual pension payment = $20,938 (2% × 10 years × $104,689)
Number of pension payments to be received after retirement = 15
Present value of 15 pension payments at retirement date (in 25 years):
PMT = $20,938, N = 15, I = 8% → PV = $179,218
Present value of pension payments on January 1, 2013:
FV = $179,218, N = 25, I = 8% → PV = $26,169

2.

Present value of 15 pension payments at retirement date (in 25 years):
PMT = $20,938, N = 15, I = 12% → PV = $142,606
Present value of pension payments on January 1, 2013:
FV = $142,606, N = 25, I = 12% → PV = $8,389

PRACTICE 17–8 SIMPLE COMPUTATION OF THE NET PENSION ASSET OR
LIABILITY
1.

Projected benefit obligation..................................
Pension fund ..........................................................
Net pension-related liability ..................................

$ (10,000)
9,200
$ (800)


2.

Projected benefit obligation, January 1 ...............
Service cost ............................................................
Interest cost ($10,000 × 0.09) ................................
Benefits paid to retirees ........................................
Projected benefit obligation, December 31 .........

$ (10,000)
(1,200)
(900)
100
$ (12,000)

3.

Fair value of pension fund, January 1 .................
Actual return on pension fund..............................
Contribution to pension fund................................
Benefits paid to retirees ........................................
Fair value of pension fund, December 31............

$ 9,200
250
1,050
(100)
$ 10,400

PRACTICE 17–9 SIMPLE COMPUTATION OF PENSION EXPENSE

Service cost................................................................................
Interest cost ($10,000 × 0.09)....................................................
Expected return on pension fund ($9,200 × 0.10)...................
Pension expense .......................................................................

$ 1,200
900
(920)
$ 1,180


To download more slides, ebook, solutions and test bank, visit
766

Chapter 17

PRACTICE 17–10 BASIC PENSION JOURNAL ENTRIES
Pension Expense .................................................................
Other Comprehensive Income ............................................
Pension-Related Asset/Liability....................................

1,180
670
1,850

Service cost + Interest cost – Actual return on pension fund = $1,200 + $900 – $250 =
$1,850
Deferred loss = Actual return of $250 – Expected return of $920 = $670
Pension-Related Asset/Liability..........................................
Cash.................................................................................


1,050
1,050


To download more slides, ebook, solutions and test bank, visit
Chapter 17

767

PRACTICE 17–11 SIMPLE PENSION WORK SHEET
Financial Statement Accounts

Net
Pension
Expense
Balance, January 1
(a) Service cost
(b) Interest cost
(c) Actual return
(d) Benefits paid
(e) Deferred loss
(f) Pension contribution
Balance, December 31

Cash

PensionRelated
Asset/
(Liability)

(800)

Accumulated
Other
Comprehensive
Income
0

(1,600)

670

1,200
900
(250)
(670)
1,180

(1,050)
(1,050)

Note: Positive amounts are debits; negative amounts are credits.

Detailed Accounts
Pension Asset/Liability
AOCI
Fair
Deferred
Projected
Value of

Pension
Benefit
Pension
(Gain)/
Obligation
Fund
Loss
(10,000)
9,200
0
(1,200)
(900)
250
100
(100)
670
1,050
(12,000)
10,400
670


To download more slides, ebook, solutions and test bank, visit
768

Chapter 17

PRACTICE 17–12 AMORTIZATION OF PRIOR SERVICE COST
The total number of employee service years is computed as follows:
[10(10 + 1)/2] × 3 = 165 employee service years

Amortization of prior service cost for this year: $1,000,000 × (30/165) = $181,818
PRACTICE 17–13 DIFFERENCE BETWEEN ACTUAL AND EXPECTED RETURN ON
PENSION FUND
1.

2.

Service cost .......................................................................
Interest cost ($15,000 × 0.08) ...........................................
Expected return on pension fund ($17,000 × 0.10) ........
Pension expense...............................................................

$ 1,500
1,200
(1,700)
$ 1,000

Deferred net pension gain, beginning of year................
Deferred loss for the year:
($1,700 expected − $700 actual) .................................
Deferred net pension gain, end of year ..........................

$ (1,100)

Service cost .......................................................................
Interest cost ($15,000 × 0.08) ...........................................
Expected return on pension fund ($17,000 × 0.12) ........
Pension expense...............................................................

$ 1,500

1,200
(2,040)
$ 660

Deferred net pension gain, beginning of year................
Deferred loss for the year:
($2,040 expected − $700 actual) .................................
Deferred net pension loss, end of year...........................

$ (1,100)

1,000
$ (100)

$

1,340
240

PRACTICE 17–14 IMPACT OF CHANGES IN ACTUARIAL ESTIMATES
1.

Projected benefit obligation (PBO)..................................
Fair value of pension fund ...............................................
Pension-related liability....................................................

$ (26,169)
23,000
$ (3,169)


Deferred net pension (gain)/loss .....................................
Prior service cost ..............................................................
Accumulated other comprehensive income ..................

1,100
2,000
$ 3,100

The $3,100 accumulated other comprehensive income balance is a debit and is
shown as a subtraction from equity.
2.

From the solution to Practice 17–7: PBO using 12% is $8,389.

3.

Interest cost for 2013: $8,389 × 0.12 = $1,007


To download more slides, ebook, solutions and test bank, visit
Chapter 17

769

PRACTICE 17–14 (Concluded)
4.

Projected benefit obligation (PBO)..................................
Fair value of pension fund ...............................................
Pension-related asset .......................................................


$ (8,389)
23,000
$ 14,611

Deferred net pension (gain)/loss .....................................
Prior service cost ..............................................................
Accumulated other comprehensive income ..................

$ (16,680)
2,000
$ (14,680)

Deferred net pension (gain):
Initial loss balance ............................................................
Deferred (gain) from change in discount rate
($26,169 – $8,389) ........................................................

$ 1,100
(17,780)
$ (16,680)

The $14,680 accumulated other comprehensive income balance is a credit and
is shown as an addition to equity.


To download more slides, ebook, solutions and test bank, visit
770

Chapter 17


PRACTICE 17–15 PENSION WORK SHEET
Financial Statement Accounts

Net
Pension
Expense
Balance, January 1
(a) Service cost
(b) Interest cost
(c) Actual return
(d) Benefits paid
(e) PSC amortization
(f) Deferred gain
(g) Pension contribution
Balance, December 31

Cash

Pension- Accumulated
Related
Other
Asset/ Comprehensive
(Liability)
Income
(800)
1,300

1,200
800

(1,550)
400
538
1,388

(1,050)
(1,050)

(200)

362

Note: Positive amounts are debits; negative amounts are credits.

Detailed Accounts
Pension Asset/Liability
AOCI
Fair
Deferred
Projected Value of
Prior
Pension
Benefit
Pension Service (Gain)/
Obligation
Fund
Cost
Loss
(10,000)
9,200

2,000
(700)
(1,200)
(800)
1,550
300
(300)
(400)
(538)
1,050
(11,700)
11,500
1,600
(1,238)


To download more slides, ebook, solutions and test bank, visit
Chapter 17

771

PRACTICE 17–16 THE CORRIDOR AMOUNT
The corridor amount is $2,300 = $23,000 (greater of PBO and pension fund) × 0.10
Amortization: ($3,100 – $2,300)/6 years = $133
PRACTICE 17–17 RECONCILIATION OF BEGINNING AND ENDING PBO BALANCES
Projected benefit obligation, January 1 .......................
Service cost.....................................................................
Interest cost ($10,000 × 0.08).........................................
Benefits paid to retirees.................................................
Projected benefit obligation, December 31..................


$ (10,000)
(1,200)
(800)
300
$ (11,700)

PRACTICE 17–18 RECONCILIATION OF BEGINNING AND ENDING PENSION FUND
BALANCES
Fair value of pension fund, January 1 ..........................
Actual return on pension fund ......................................
Contribution to pension fund ........................................
Benefits paid to retirees.................................................
Fair value of pension fund, December 31 ....................

$ 9,200
1,550
1,050
(300)
$11,500


To download more slides, ebook, solutions and test bank, visit
Chapter 17

772

EXERCISES
17–19.


Wages Expense...................................................................
Employees Income Taxes Payable ($28,348 × 0.17) ..
FICA Taxes Payable ($28,348 × 0.0765).......................
Union Dues Payable......................................................
Cash................................................................................
To record weekly payroll.

28,348*

Payroll Tax Expense ...........................................................
FICA Taxes Payable ......................................................
State Unemployment Taxes Payable
($28,348 × 0.054)...........................................................
Federal Unemployment Taxes Payable
($28,348 × 0.008)...........................................................
To record weekly payroll taxes.

3,927

4,819
2,169
160
21,200

2,169
1,531
227

*Let X = Gross wages
X – 0.17X – 0.0765X – $160 = $21,200

0.7535X = $21,360
X = $28,348 (rounded)
17–20.

Salaries and Commissions Expense ................................
FICA Taxes Payable ......................................................
Employees Income Taxes Payable ..............................
Cash................................................................................

33,000*

Payroll Tax Expense ...........................................................
FICA Taxes Payable ......................................................
Federal Unemployment Taxes Payable.......................
State Unemployment Taxes Payable...........................

4,571

FICA Taxes Payable ............................................................
Federal Unemployment Taxes Payable ............................
State Unemployment Taxes Payable ................................
Employees Income Taxes Payable....................................
Cash................................................................................

5,050
264
1,782
9,900

COMPUTATIONS:

*Monthly payroll:
Frank 5.0% × $120,000 =
$6,000 + $1,000
×
$120,000 =
$6,000 + $1,000
Sally 5.0
×
$120,000 =
$6,000 + $1,000
Tina 5.0
×
$120,000 =
$4,800 + $1,000
Barry 4.0
×
$120,000 =
$3,000 + $1,000
Mark 2.5
×
$120,000 =
$1,200 + $1,000
Lisa 1.0
Total salaries and commissions expense

=
=
=
=
=

=

2,525**
9,900†
20,575
2,525
264§
1,782#

16,996

$ 7,000
7,000
7,000
5,800
4,000
2,200
$33,000


To download more slides, ebook, solutions and test bank, visit
Chapter 17

773

17–20. (Concluded)
**FICA taxes payable:
Payroll...................................................................
FICA rate ..............................................................
FICA taxes payable .............................................

†

§

#

$33,000
× 0.0765
$ 2,525

Employees income taxes payable:
Payroll...................................................................
Income tax rate ....................................................
Employees income taxes payable .....................

$33,000
× 0.30
$ 9,900

FUTA taxes payable:
Federal rate ..........................................................
State credit...........................................................
Total FUTA tax rate .............................................
Payroll...................................................................
FUTA rate .............................................................
FUTA taxes payable ............................................

0.062
0.054
0.008

$33,000
× 0.008
$ 264

State unemployment taxes payable:
Payroll...................................................................
State rate ..............................................................
SUTA taxes payable ............................................

$33,000
× 0.054
$ 1,782

17–21.

Total
Total
Total
Liability
Weeks
Weeks
Weeks
for
Vacation Vacation Vacation Weekly Vacation
Employee
Earned
Taken Liability Salary
Pay
Marci Clark ...................
21

14
7
$850 $ 5,950
Bradford Sayer.............
9
5
4
725
2,900
Sorena Williams ...........
3
0
3
650
1,950
Jonathan Beecher........
24
18
6
800
4,800
Brian Giles....................
6
1
5
450
2,250
Dale Murphy .................
0
0

0
500
0
Total liability for vacation pay, December 31, 2013................... $17,850

17–22.

1.
2.

B = 0.07 × $350,000 = $24,500
B=
B=
1.07B =
B=

0.07($350,000 – B)
$24,500 – 0.07B
$24,500
$22,897 (rounded)


To download more slides, ebook, solutions and test bank, visit
Chapter 17

774

17–23.

1. As of January 1, 2013, Derrald has put in 12 years of service for Francisco and, assuming that his 2012 salary of $75,000 is his highest salary

to date, the forecasted amount of Derrald’s annual pension payment can
be computed as follows:
(0.03 × $75,000) × 12 years = $27,000
This is the amount Francisco should use in computing the accumulated
benefit obligation as of January 1, 2013.
2. In computing the projected benefit obligation, Francisco must take into
account Derrald’s expected future salary increases. Derrald’s expected
future salary in 20 years is computed as follows:
PV = $75,000, N = 20, I = 4% → FV = $164,334
Using this amount as an estimate of Derrald’s highest salary, the forecasted amount of Derrald’s annual pension payment can be computed
as follows:
(0.03 × $164,334) × 12 years = $59,160 (rounded)
This is the amount Francisco should use in computing the projected
benefit obligation as of January 1, 2013.

17–24.

Projected benefit obligation, December 31, 2013...................
Projected benefit obligation, January 1, 2013 ........................
Increase in projected benefit obligation..................................
Less: Interest cost (0.10 × $4,780,000) ....................................
Plus: Benefits paid to retired employees ................................
Pension service cost for 2013 ..................................................

$5,425,000
4,780,000
$ 645,000
(478,000)
315,000
$ 482,000


17–25.
Case 1
Accumulated benefit obligation ..................................
Additional amounts related to projected
pay increases .............................................................
Projected benefit obligation ........................................
Fair value of pension assets .......................................
Pension-related liability ...............................................
Prior service cost..........................................................
Deferred net pension gain ...........................................
Accumulated other comprehensive income ..............

$ (750)
(250)
$ (1,000)
700
$ (300)
$
$

310
(70)
240

The $240 accumulated other comprehensive income balance is a debit and is
shown as a subtraction from equity.


To download more slides, ebook, solutions and test bank, visit

Chapter 17

775

17–25. (Concluded)
Case 2
Accumulated benefit obligation ..................................
Additional amounts related to projected
pay increases .............................................................
Projected benefit obligation ........................................
Fair value of pension assets .......................................
Pension-related asset...................................................
Prior service cost..........................................................
Deferred net pension gain ...........................................
Accumulated other comprehensive income ..............

$ (800)
(100)
$ (900)
1,300
$ 400
$ 190
(120)
$ 70

The $70 accumulated other comprehensive income balance is a debit and is
shown as a subtraction from equity.
Case 3
Accumulated benefit obligation ..................................
Additional amounts related to projected

pay increases .............................................................
Projected benefit obligation ........................................
Fair value of pension assets .......................................
Pension-related liability ...............................................
Prior service cost..........................................................
Deferred net pension gain ...........................................
Accumulated other comprehensive income ..............

$ (850)
(150)
$ (1,000)
900
$ (100)
$

50
(200)
$ (150)

The $150 accumulated other comprehensive income balance is a credit and is
shown as an addition to equity.
17–26. Using the formula discussed in the text:
N(N + 1)
2
× D = Total future years of service

where:
N = Number of years of remaining service
D = Decrease in number of employees working each year
5×6

2

× 1 = 15

Amortization amount:

2013:
2014:
2015:
2016:
2017:

5/15 × $620,000 = $206,667
4/15 × $620,000 = $165,333
3/15 × $620,000 = $124,000
2/15 × $620,000 = $82,667
1/15 × $620,000 = $41,333


To download more slides, ebook, solutions and test bank, visit
Chapter 17

776

17–27.

1. PV = $4,823,000; N = 10; I = 12% → PMT = $853,595 annual contribution
2. Denominator of amortization fraction:
N(N + 1)
×

2

D = Total future years of service

40( 41)
2

10 = 8,200

×

2013 amortization: 400/8,200 × $4,823,000 = $235,268
2015 amortization: 380/8,200 × $4,823,000 = $223,505
2020 amortization: 330/8,200 × $4,823,000 = $194,096

17–28.

1.

N(N + 1)
×
2

D = Total future years of service

15(16)
2

3


×

= 360

Average remaining service life: 360/45 = 8 years
Annual amortization of prior service cost: $1,262,000/8 = $157,750
2. Pension Expense ($460,000 + $157,750)........................... 617,750
Pension-Related Asset/Liability ....................................
460,000
Accumulated Other Comprehensive Income...............
157,750
To record net pension expense for the year.
Pension-Related Asset/Liability ........................................ 520,000
Cash .................................................................................
520,000
To record contribution to pension fund.
17–29.

Fair value of the pension fund—December 31, 2013 ............
Fair value of the pension fund—January 1, 2013 ..................
Increase in fair value of the pension fund—2013 ..................
Pension benefits paid...............................................................
Contributions made to the fund ..............................................
Actual return on the pension fund—2013 ..............................

$980,000
875,000
$105,000
62,000
(70,000)

$ 97,000


To download more slides, ebook, solutions and test bank, visit
Chapter 17

17–30.

777

Actual return on the pension fund..........................................
Expected return on the pension fund ($1,350,000 × 0.11) ....
Difference between actual and expected return....................

$ 110,000
148,500
$ 38,500

Because the expected return exceeds the actual return, the $38,500 difference is treated as a deferred loss. This amount is subtracted thereby reducing net pension expense for the period. Because the actual return is included in the return on the pension fund component, the net effect of combining the actual return and the deferred gain or loss is that the expected
return is reflected in pension expense, and the difference is amortized (if
the cumulative amount exceeds the corridor amount) over future years.
17–31.

Corridor amount: 10% of $2,050,000* ....................
*Higher of PBO or market-related value of the pension fund.
Amortization of gain—2013:
Deferred gain at beginning of the year..............
Less: Corridor amount........................................
Deferred gain in excess of corridor amount.....
Amortization ($220,000/10) .................................

*Deducted in computing net periodic pension expense.

$205,000

$425,000
205,000
$220,000
$ 22,000*


To download more slides, ebook, solutions and test bank, visit
778

Chapter 17

17–32.
A
Deferral of difference between actual
and expected return—deferred gain
or (loss).....................................................

B

$20,000

Deferred (gain) loss at beginning
of year ....................................................... $200,000
Corridor amount..........................................

$(30,000)

$275,000

100,000

150,000

Excess of (gain) or loss over corridor
amount ...................................................... $100,000

$125,000

Average service life ....................................

C

10 yrs.

D

$100,000
$(100,000)

$(50,000)
$ (175,000)

50,000

175,000

$ (50,000)


5 yrs.

$

8 yrs.

Amortization of (gain) or loss ....................

10,000

25,000

Amount added (deducted) as gain or
loss component of net pension expense

$30,000

$ (5,000)

0
12 yrs.

(6,250)
$ 93,750

0
$(50,000)

(Note: Parentheses indicate a deduction in computing net periodic pension expense. In the first line, a deferred gain adds to

current pension expense and a deferred loss reduces current pension expense.)


To download more slides, ebook, solutions and test bank, visit
Chapter 17

17–33.

779

Computation of pension expense:
Service cost .............................................................
Amortization of prior service cost .........................
Interest cost .............................................................
Actual return on the pension fund.........................
Deferral of difference between expected
return and actual return in 2013
(deferred loss) .....................................................
Amortization of deferred loss from prior years.......
Net periodic pension expense ..................................
Pension Expense ............................................................
Other Comprehensive Income ......................................
Pension-Related Asset/Liability................................
Accumulated Other Comprehensive Income ..........
To record pension expense.

$ 52,000
36,000
59,000
(81,000)


(15,000)
24,000
$ 75,000
75,000
15,000
30,000
60,000

Service cost + Interest cost – Actual return on pension fund = $52,000 + $59,000 –
$81,000 = $30,000
Deferred loss = Actual return of $81,000 – Expected return of $96,000 = $15,000
Reclassification from accumulated other comprehensive income to pension expense
through amortization: $36,000 + $24,000 = $60,000
Pension-Related Asset/Liability ....................................
Cash.............................................................................
To record pension fund contribution.
17–34.

Computation of pension expense:
Service cost ..........................................................
Interest cost ..........................................................
Actual return on the pension fund......................
Less: Deferred gain..............................................
Amortization of prior service cost ......................
Pension expense ..................................................

100,000
100,000


$ 750,000
1,000,000
$ (900,000)
68,000

(832,000)
25,000
$ 943,000


To download more slides, ebook, solutions and test bank, visit
780

Chapter 17

17–35.
Mascare Company
Pension Work Sheet for 2013
Financial Statement Accounts

Net
Pension
Expense

Cash

Balance, January 1, 2013
(a) Service cost
1,200
(b) Interest cost

900
(c) Actual return
(1,500)
(d) Benefits paid
(e) Deferred gain
620
(f) Pension contribution
Balance, December 31, 2013 1,220

(100)
(100)

PensionRelated
Asset/
(Liability)
2,000

Accumulated
Other
Comprehensive
Income
0

1,500

(620)

Note: Positive amounts are debits; negative amounts are credits.

Detailed Accounts

Pension Asset/Liability
AOCI
Fair
Deferred
Projected
Value of
Pension
Benefit
Pension
(Gain)/
Obligation
Fund
Loss
(9,000)
11,000
0
(1,200)
(900)
1,500
500
(500)
(620)
100
(10,600)
12,100
(620)


To download more slides, ebook, solutions and test bank, visit
Chapter 17


781

17–36.
Projected benefit obligation ..........................
Fair value of the pension fund ......................
Pension-related asset (liability) ....................
Deferred net (gain) or loss from prior
years.............................................................
Prior service cost ...........................................
Accumulated other comprehensive income

(in thousands)
Case 1
Case 2
$ (12,500) $ (6,290)
15,300
4,200
$ 2,800
$ (2,090)

$
$

(200)
800
600

$ (850)
2,300

$ 1,450

Case 3
$ (890)
650
$ (240)

$ 100
125
$ 225

The accumulated other comprehensive income balances are all debits and are
shown as a subtraction from equity.


To download more slides, ebook, solutions and test bank, visit
Chapter 17

782

PROBLEMS
17–37.
2013
Sept.30

Office Staff Salaries Expense........................................
Officer Salaries Expense ...............................................
Sales Salaries Expense..................................................
Salaries Payable .........................................................
To record accrual of September 30 payroll.


15,450
31,000
20,000
66,450*

*Alternatively, one may credit individual liability accounts
(i.e., FICA, $1,930; Federal Income Tax, $12,900;
State Income Tax, $2,140; Insurance, $1,390; Salaries
Payable, $48,090) for the total.
30

Payroll Tax Expense—Office......................................... 1,049.48*
Payroll Tax Expense—Officer .......................................
286.00**
Payroll Tax Expense—Sales.......................................... 1,578.00†
FICA Taxes Payable ...................................................
Federal Unemployment Taxes Payable....................
State Unemployment Taxes Payable........................

1,930.00§
126.90#
856.58***

COMPUTATIONS:
Schedule of Employer’s Payroll Taxes
Total
Office Staff Salaries:
FICA ..................................................
FUTA: 0.008 × $15,450 × 0.25 .........

SUTA: 0.054 × $15,450 × 0.25 .........
Officer Salaries:
FICA ..................................................
FUTA (all exempt) ...........................
SUTA (all exempt) ...........................
Sales Salaries:
FICA ..................................................
FUTA: 0.008 × $20,000 × 0.60 .........
SUTA: 0.054 × $20,000 × 0.60 .........
Total taxes .............................................

FICA

$ 810.00 $ 810.00
30.90
208.58
$1,049.48*
$ 286.00
0
0
$ 286.00**

FUTA

SUTA

$ 30.90
$208.58

286.00


$ 834.00
834.00
96.00
648.00
$1,578.00†
$2,913.48 $1,930.00§

0
0

96.00
648.00
$126.90#

$856.58***


To download more slides, ebook, solutions and test bank, visit
Chapter 17

783

17–38.
Jan. 6

6
6

Salaries and Wages Expense ........................................

FICA Taxes Payable ..................................................
Employees Income Taxes Payable..........................
Insurance Payable ....................................................
Union Dues Payable .................................................
Salaries and Wages Payable....................................

1,758.00*

Salaries and Wages Payable .........................................
Cash ...........................................................................

1,201.63

Payroll Tax Expense.......................................................
FICA Taxes Payable ..................................................
Federal Unemployment Taxes Payable ..................
State Unemployment Taxes Payable ......................

243.48

134.49**
354.70†
61.53§
5.65#
1,201.63
1,201.63
134.49
14.06***
94.93††


COMPUTATIONS:
*Payroll expense:
Richard........ 50
Denise ......... 40
Dale.............. 40
Bryan ........... 30
Albert........... 20

× $14.00
× $11.50
× $9.75
× $4.50
× $3.65

**FICA taxes payable:
Payroll ................................
FICA tax rate ......................

= $ 700.00
=
460.00
=
390.00
=
135.00
=
73.00
$1,758.00
$1,758.00
× 0.0765

$ 134.49

†

Employees income taxes payable:
Payroll: $700 × 0.28 ........... = $ 196.00
$1,058 × 0.15 ........ =
158.70
$ 354.70
(Note: Richard is the only hourly employee with an annual income over $29,500.)
§

Insurance payable:
Payroll ...................................... $1,758.00
Insurance rate .........................
× 0.035
$ 61.53

#

Union dues payable:
Dues per employee ................. $
Number of employees ............
$
Number of periods ..................
Union dues payable ................ $

5.65
×4
22.60

÷4
5.65