Question

Abbott and Abbott has a noncontributory, defined benefit pension plan. At December 31, 2018, Abbott and Abbott received the following information: Projected Benefit Obligation ($ in millions) Balance, January 1 $ 125 Service cost 22 Interest cost 15 Benefits paid (8 ) Balance, December 31 $ 154 Plan Assets Balance, January 1 $ 75 Actual return on plan assets 10 Contributions 2018 22 Benefits paid (8 ) Balance, December 31 $ 99 The expected long-term rate of return on plan assets was 12%. There was no prior service cost and a negligible net loss–AOCI on January 1, 2018. Required: 1. Determine Abbott and Abbott’s pension expense for 2018. 2. Prepare the journal entries to record Abbott and Abbott’s pension expense, funding, and payment for 2018.

Answer 1

Abbott and Abbott's pension expense for 2018 is calculated by adding the service and interest costs then subtracting the expected return on plan assets, for a total of $28 million. The journal entries would include debiting Pension Expense and crediting Pension Liability, Cash, and Pension Asset for the expense, contributions, and expected return; another entry debits Pension Liability and credits Pension Asset for the benefits paid.

Step-by-step explanation:

A student has asked how to determine Abbott and Abbott's pension expense for 2018 and to prepare the appropriate journal entries. The pension expense components for a noncontributory, defined benefit pension plan include the service cost, interest cost, actual return on plan assets, and possibly other factors such as amortization of prior service cost and gains or losses. However, in this case, there was no prior service cost and a negligible net loss–AOCI.

The pension expense for Abbott and Abbott in 2018 is calculated as:
Service cost: $22 million
Interest cost: $15 million
Less: Expected return on plan assets (12% of $75 million): $9 million
Pension Expense: $22M + $15M - $9M = $28 million

The journal entries to record the pension expense, funding, and payments are as follows:

• To record pension expense:
  Dr. Pension Expense $28 million
  Cr. Pension Liability $19 million
  Cr. Cash (for contributions) $22 million
  Cr. Pension Asset $9 million
• To record payment of benefits:
  Dr. Pension Liability $8 million
  Cr. Pension Asset $8 million

Answer 2

The Journal entries are as follows:

1.

Service Cost A/c Dr. $22

Interest cost A/c Dr. $15

To Expected return- Plan Assets $9

To Pension expense $28

(To record the pension expense for 2018)

Workings:

Expected return- Plan Assets = 12% of plan assets

= 0.12 × $75

= $9

2.

(i) Pension Expense A/c Dr. $28

Plan Assets (expected return on plan assets) A/c Dr. $9

To PBO (22 service cost + 15 interest cost) $37

(To record pension expense)

(ii) Plan assets A/c Dr. $22

To cash $22

(To record the funding)

(iii) PBO A/c Dr. $8

To plan assets $8

(To record PBO or plan assets)