Skysong Co Has The Defined Benefit Pension Plan

Skysong Co Has The Following Defined Benefit Pension Plan Balances On

Skysong Co. has a defined benefit pension plan with specific balances on January 1, 2020, including a projected benefit obligation (PBO) of $4,619,000, which equals the fair value of plan assets at $4,619,000. The plan is subject to an interest (settlement) rate of 10%. On January 1, 2021, the company amends its pension agreement, resulting in prior service costs of $595,000. Additional data for 2020 includes service costs, amortizations, contributions, benefits paid, actual return on plan assets, and expected return rates. The task involves preparing a pension worksheet for 2020, journal entries at December 31, 2020, a pension worksheet for 2021, journal entries for 2021, and reporting pension-related amounts in the 2021 financial statements, including net income, balance sheet, and comprehensive income.

Paper For Above instruction

The management of Skysong Co. is committed to properly accounting for its defined benefit pension plan, recognizing the associated expenses and obligations accurately in its financial statements. The pension plan's accounting involves assessing the projected benefit obligation (PBO), plan assets, the recognition of prior service costs, and the associated actuarial gains and losses, managed through other comprehensive income (OCI). This comprehensive analysis encompasses the preparation of detailed pension worksheets for 2020 and 2021, journal entries to record pension-related transactions, and disclosures required under generally accepted accounting principles (GAAP).

Introduction

Defined benefit pension plans require corporations to estimate future obligations based on employees’ service and salary levels, with funding and accounting adjustments reflecting actuarial assumptions, experience, and plan amendments. The importance of accurate pension accounting stems from its substantial impact on a company's financial position and performance. Skysong Co. provides a pertinent case study showcasing the intricacies involved in pension accounting, illustrating how to prepare pension worksheets, journal entries, and financial statement disclosures correctly.

2020 Pension Worksheet and Journal Entries

The beginning balances on January 1, 2020, indicate a fully funded plan with no prior period adjustments. The service cost for 2020 was $151,000, reflecting the increasing pension liability due to employee service. The interest cost, derived by multiplying the beginning PBO by the 10% interest rate, was $461,900. The actual return on plan assets was $253,000, which was lower than the expected return (at 6%), indicating potential actuarial losses that need recognition in OCI. Contributions totaling $201,000 were made, while benefits paid out amounted to $220,000, reducing the plan's obligation.

In preparing the pension worksheet, the journal entries involve debiting pension expense and recognizing OCI components, with credits to pension liability and plan assets. The key entries include recording service cost, interest cost, actual return on plan assets, and benefits paid. The amortization of prior service costs influences pension expense, and any actuarial gains or losses also impact OCI.

2021 Pension Worksheet and Journal Entries

The amendment to the pension plan on January 1, 2021, introduces prior service costs of $595,000, which increases the prior service cost component recognized in OCI. The 2021 service cost is projected at $169,000, with interest and actual return adjustments based on updated assumptions. Additional contributions of $186,000 and benefits paid of $283,000 further impact the pension obligation and plan assets.

Journal entries for 2021 must record the increase in prior service cost, the pension expense, actuarial gains or losses, and contributions. The amortization of prior service costs over the remaining service lives affects pension expense calculations. These entries ensure that the company's financial statements accurately reflect the pension obligation and related expenses.

Reporting Pension Amounts in 2021 Financial Statements

The financial statements must disclose the pension expense, accumulated OCI (including prior service cost and actuarial gains/losses), pension liabilities, and plan asset balances. The net income for 2021 includes pension expense adjusted for amortized prior service costs and OCI components. The balance sheet reports pension liabilities net of plan assets. The comprehensive income statement consolidates net income with OCI components, providing a full picture of the pension-related impacts.

Conclusion

Effective pension accounting requires meticulous calculation, documentation, and disclosure. Skysong Co.'s case exemplifies the complexities of handling amendments, actuarial assumptions, and plan adjustments identified through detailed worksheets and journal entries. Accurate reporting ensures transparency for investors and compliance with accounting standards, highlighting the importance of diligent pension plan management and reporting.

References

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