On December 31, 2016, Robey Company accumulated the following information for 2016 in regard to its defined benefit pension plan: Service cost $110,830 Interest cost on projected benefit obligation 11,470 Expected return on plan assets 10,390 Amortization of prior service cost 2,140 On its December 31, 2015, balance sheet, Robey had reported an accrued/prepaid pension cost liability of $13,000.Required: 1. Compute the amount of Robey’s pension expense for 2016. 2. Prepare all the journal entries related to Robey’s pension plan for 2016 if it funds the pension plan in the amount of (a) $114,050, (b) $113,010, and (c) $118,030. 3. Next Level Assuming Robey’s beginning 2016 Accumulated Other Comprehensive Income: Prior Service Cost balance was $54,940 what would be its ending balance? 4. Next Level How much would Robey need to fund its pension plan for 2016 in order to report an accrued/ prepaid pension cost asset of $4,690 at the end of 2016? Next Level: Assuming Robey’s beginning 2016 Accumulated Other Comprehensive Income: Prior Service Cost balance was $54,940 what would be its ending balance? How much would Robey need to fund its pension plan for 2016 in order to report an accrued/ prepaid pension cost asset of $4,690 at the end of 2016?
In the world of corporate finance, managing employee pension plans is a critical aspect of ensuring the well-being of retirees while maintaining financial stability for the company. In this essay, we delve into Robey Company’s defined benefit pension plan for the year 2016. We will explore key financial aspects, including the calculation of pension expense, journal entries related to pension plan funding, the treatment of Accumulated Other Comprehensive Income (AOCI) – Prior Service Cost, and how to fund the pension plan to achieve specific financial objectives.
Robey Company’s pension expense for 2016 is a fundamental financial consideration. It comprises various components, including service cost, interest cost, expected return on plan assets, and amortization of prior service cost. These components collectively determine the total pension expense for the year.
Service Cost: This represents the cost of pension benefits earned by employees during the year, which amounted to $110,830 for Robey in 2016.
Interest Cost: The interest cost pertains to providing pension benefits for one additional year. It is influenced by the projected benefit obligation and the discount rate and stood at $11,470 in 2016.
Expected Return on Plan Assets: This factor reflects the anticipated return on the assets earmarked to cover pension obligations. For Robey, it was $10,390.
Amortization of Prior Service Cost: Changes made to the pension plan in the past contribute to this cost. In 2016, Robey recorded an amortization expense of $2,140.
The formula for calculating pension expense for 2016 can be expressed as:
Pension Expense = Service Cost + Interest Cost – Expected Return on Plan Assets + Amortization of Prior Service Cost
After calculation, Robey’s pension expense for 2016 is $114,050.
Robey’s financial decisions regarding pension plan funding directly affect the company’s balance sheet. In 2016, Robey considered three different funding amounts: (a) $114,050, (b) $113,010, and (c) $118,030.
Funding of $114,050 (Scenario A): The journal entry involves debiting Pension Expense with $114,050 and crediting Cash or Pension Asset with the same amount.
Funding of $113,010 (Scenario B): Here, Robey records a debit to Pension Expense of $114,050 and a credit to Cash or Pension Asset of $113,010. The difference of $1,040 creates an entry called “Unfunded Accrued Pension Cost.”
Funding of $118,030 (Scenario C): Robey debits Pension Expense with $114,050 and credits Cash or Pension Asset with $118,030. The excess funding of $3,980 results in a debit to “Overfunded Accrued Pension Asset.”
Robey’s AOCI balance for Prior Service Cost at the beginning of 2016 was $54,940. To determine the ending balance, we need to consider the amortization expense for the year. The ending AOCI is calculated by adding the beginning balance to the amortization expense. In Robey’s case, the ending AOCI for Prior Service Cost was $57,080.
Robey Company desired an accrued/prepaid pension cost asset of $4,690 at the end of 2016. To achieve this financial objective, the company must fund its pension plan accordingly. The formula for calculating the necessary funding is:
Funding Needed = Pension Expense – Accrued/Prepaid Pension Cost Asset
In this case, the funding required would be $109,360.
In summary, Robey Company’s defined benefit pension plan for 2016 involved several financial considerations. The calculation of pension expense, journal entries for different funding scenarios, treatment of AOCI – Prior Service Cost, and funding to achieve specific accrued/prepaid pension cost assets are all integral aspects of managing pension plans. Understanding these components is essential for companies like Robey to strike a balance between ensuring their employees’ financial security in retirement and maintaining a healthy financial position. Proper accounting and funding are key elements in this endeavor.
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