Financial Accounting: Liabilities & Equities (FA3) Exam Review

FA3 Exam Review notes Barbara Wyntjes, CGA, MBA, B.Sc.
Question 4 (16 marks)
On January 1, 2003, Rhonda’s Roofing Inc. (RR), improved the non-contributory defined
benefit pension plan for its employees. An actuary has indicated that the amendment
resulted in past service costs (PSC) of $1,200,000. The employees’ period to vesting and
expected average remaining service life is both 8 years.
On July 1, 2003, the actuary advised you that the projected benefit obligation increased
$75,000 as a result of a change in the assumptions used.
Other details of note in 2003 are as follows:
• Employer’s contribution (paid to the pension trustee) at the end of the year $400,000
• Current service cost $150,000
• Deferred pension liability as at January 1, 2003 $300,000
• Accrued benefit obligation at the beginning of the year (excluding the PSC) $800,000
• Plan assets at the beginning of the year $500,000
• Benefits paid out during 2003 $100,000
• Expected return on plan assets 11%
• Actual return on plan assets $60,000
• The actuarial interest rate 10%
Required
4 a. Calculate the pension expense recognized in 2003.
2 b. Calculate the accrued benefit obligation as at December 31, 2003.
4 c. Prepare the journal entries to reflect RR’s accounting for the pension plan for 2003.
6 d. Pension legislation currently permits three different methods of funding defined
benefit pension plans. Identify the three methods and briefly describe each.
Note: the table is not required for marks.
Deferred Accrued Unamortized
Date and Pension Pension Benefit Plan Unamortized Actuarial
Details exp. Cash Asset/Liab Obligation Asset PSC Loss
12/31/02 $ $ $300,000C $800,000C $500,000D $ $
01/01/03 1,200,000C 1,200,000D
01/01/03 300,000C 2,000,000C 500,000D 1,200,000D
Actuarial loss 75,000C 75,000D
Service cost 150,000D 150,000C
Interest 200,000D 200,000C
Exp Return 55,000C 55,000D
Actual ret. 60,000D 60,000C
Amortize PSC 150,000D 150,000C
Pension payments 100,000D 100,000C
12/31/03 400,000C 400,000D
445,000D 400,000C 45,000C
$345,000C $2,325,000C $860,000D $1,050,000D $70,000D
Next year amortization of net actuarial gain/loss? $70,000 < ($2,325,000 x 10%) thus no
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