f years of service that qualify for pension credit, subject to a maximum of 30 years. Pension credit is given for years of service prior to the plans adoption. John is 22 years away from retirement Johns retirement period is 15 years Johns expected salary upon retirement is $95,000 Service credit 2%/year of service Settlement rate = 9% Contribution to pension plan is $6,000 Actual return on plan assets = 10%

Calculate pension expense for 2011.

The components of pension expense are:

1. Service Cost2. Interest on PBO3. Return on Plan Assets4. Amortization of PSC5. Amortization of Net Gain/Loss

Find the amount of past/prior service cost (PSC) that will be recognized as part of pension expense for 2011:

Calculate the PV of PSC when the plan was adopted. This also represents the PBO on 1/1/2011.

2%of $95,000 x 8 = $15,200. This amount will be paid upon retirement for 15 years.

Find the PV of Ordinary Annuity:

N = 15I = 9%

$15,200 x 8.06069 = $122,522.48

Find the PV of this amount (single sum 22 years before Johns retirement):

N = 22I = 9%

$122,522.48 x 0.15018 = $18,401.This represents the PV of PSC & PBO at 1/1/2011.

The PV of PSC is amortized over the service period, 22 years before retirement.

$18,401 / 22 years = $836/year.This is one element of the pension expense for 2011.

Find service cost for 2011:

0.02 x $95,000 = $1,900

Find PV of Ordinary Annuity:N = 15I = 9%

$1,900 x 8.06069 = $15,315.30

Find PV of single sum n = 21 (HintService cost is computed at the end of each year, so 21 years before retirement)

N = 21I = 9%

$15,315.30 x 0.1637 = $2,507

Find the Interest on PBO = $18,401 x 0.09 = $1,656

For the remainder of the computation, see Pension Schedule

Journal Entry on December 31, 2011:

Pension Expense$4,999Pension Liability$17,565Cash$6,000OCI Prior Service Cost$16,564

Disclosures:

Income Statement:

Pension Expense$4,999

Balance Sheet:

L-T LiabilitiesPension Obligation$16.564

Calculate pension expense for 2012:

1. PSC = $8362. Service Cost:

2% of $95,000 = $1,900$1,900 x 8.06069 (N = 15 I = 9%) = $15,315$15,315 x 0.17843 (N = 20 I = 9%) = $2,733

3. Interest Cost: 9% of $22,564 = $2,0314. Actual Return: 10% of $6,000 = $600