You are the auditor of Beaton and Gunter Inc., the Canadian subsidiary of a multinational engineering company that offers a defined benefit pension plan to its eligible employees. Employees are permitted to join the plan after two years of employment, and benefits vest two years after joining the plan. You have received the following information from the fund trustee for the year ended December 31, 2011:
Discount rate .....................5%
Expected long-term rate of return on plan assets ........6.5%
Rate of compensation increase ..............3.5%
Accrued Benefit Obligation
Accrued benefit obligation at Jan. 1, 2011 ........$11,375,000
Current service cost ....................425,000
Interest cost .......................568,750
Benefits paid .....................756,250
Actuarial loss for the period.................631,250
Plan Assets
Market value of plan assets at Jan. 1, 2011.........9,062,500
Actual return on plan assets, net of expenses........1,125,000
Employer contributions.................493,750
Employee contributions..................81,250
Benefits paid.....................756,250
Other relevant information:
1. The accrued pension liability on January 1, 2011, is $1,601,875.
2. There is an unrecognized past service cost of $1,991,875 on January 1, 2011.
3. There is an unrecognized net actuarial gain of $1,281,250 on January 1, 2011.
4. Employee contributions to the plan are withheld as payroll deductions, and are remitted to the pension trustee along with the employer contributions.
5. The average vesting period for all employees whose pension has not vested is 20 years.
6. The EARSL is 20 years.
Instructions
(a) Prepare a pension work sheet for the company.
(b) Prepare the employer’s journal entries to reflect the accounting for the pension plan for the year ended December 31, 2011.
(c) Prepare a schedule reconciling the plan’s funded status with the pension amounts reported on the December 31, 2011 balance sheet.
(d) Assume that interest rates are falling. Explain what effect this is likely to have on the funded status of the plan.
(e) Discuss any options available to Beaton and Gunter Inc. in accounting for the actuarial gains or losses.