Question: As the accountant for Sunlight City, you determine the following with respect to the citys pensions in PROBLEMS a particular year. Service cost 356,000 Interest on total pension liability 400,000 Actual earnings on pension plan investments 500,000 Projected earnings on pension plan investments 450,000 Employer contribution to the plan 180,000 Benefits paid to retirees 211,000 1. Based on the information provided, what should the city report as its pension expense for the year?

Answer:

Pension expense would be computed as follows:

Service cost $356,000

Interest on total pension liability 400,000

Projected earnings on pension plan investments (450,000)

One-fifth of difference between actual and projected

earnings on plan assets -- ($500,000-$450,000)/5 ( 10,000)^*

Pension expense $296,000

^*The actual earnings of $500,000 reduced the pension expense by that amount. This amount was $50,000 greater than the projected earnings of $450,000. However, of this $50,000, only one-fifth would be incorporated into the pension expense (that is, would reduce the pension expense.) Therefore, either $40,000 could be subtracted from the actual earnings or (as done here) $10,000 could be added to the projected earnings.

How was 1/5th calculated?