On January 1, 20X1, Cello Co. established a defined benefit pension plan for its employees. At January 1, 20X1, Cello estimated the service cost for 20X1 to be $45,000. At January 1, 20X2, it estimated 20X2 service cost to be $49,000. On the plan inception date, prior service credit was granted to employees for 5 years, the period of time between the company’s formation and plan inception. The prior service cost was estimated to be $650,000 at January 1, 20X1. Cello uses a 10% discount rate and assumes a return on plan assets of 9%. The average remaining service life of employees is 20 years, and the company will fund at the end of each year an amount equal to service cost plus interest cost for 20X1 and 20X2.

Required:

1. Compute the amount of prior service cost to be included as a component of pension expense for 20X1.

2. Compute pension expense for 20X1.

3. Compute the fair value of plan assets at December 31, 20X1.

4. Compute the PBO balance at December 31, 20X1.

5. Prepare the company’s required journal entries to record the effects of its pension plan in 20X1.

6. Repeat requirements 1 through 5 for 20X2.

7. Prepare T-accounts for Pension asset (liability), OCI—prior service cost, and OCI—net actuarial (gain) loss to show the effects of the entries made in requirements 5 and 6. Label the effects.

Transcribed Image Text:

December 31, 20X2 20X1 PBO ? ? Benefits paid at 12/31 Fair value of plan assets Contributions at 12/31 Actual return on plan assets 2,000 -0- ? -0- ? ? 3,200 -0-