Intermediate Accounting

Ninth Edition

By Nikolai and Bazley

Errata Sheet

  • Change to P3-10:

Stockholders’ equity at the end of 2005 is $179,000, not $178,400.

  • Change to E12-20:

On page 537, the “Required” section should be changed to read: “Show how the $600,000 notes payable will be classified on Carrboro Textile Company’s balance sheet on December 31, 2004.”

  • Change to P13-1:

The first sentence should read: “On January 1, 2003 the Baker Corporation issued $100,000 of 5-year bonds due December 31, 2007 for $103,604.79 less bond issue costs of $3,000.

  • Due to some necessary numerical corrections,revised versions ofproblems P19-10 and P19-11 are given below. For the new solutions to these problems, see the Updates to Solutions document under the Solutions ManualVolume IIsection above.

P19-10Comprehensive The Jay Company has had a defined benefit pension plan for several years. At the beginning of 2004, the company amended the plan; this amendment provided for increased benefits to employees based on services rendered in prior periods. The unrecognized prior service cost related to this amendment totaled $88,000; as a result, both the projected and accumulated benefit obligation increased.

The company decided not to fund the increased obligation at the time of the amendment, but rather to increase its periodic year-end contributions to the pension plan. In the past, the company has never had an additional pension liability at year-end.

The following information for 2004 has been provided by the company’s actuary and funding agency, and obtained from a review of its accounting records:

Accumulated benefit obligation (12/31) / $740,000
Service cost / 183,000
Discount rate / 9%
Cumulative unrecognized net loss (1/1) / 64,500
Company contribution to pension plan (12/31) / 200,000
Projected benefit obligation (1/1)* / 513,000
Plan assets, fair value (12/31) / 728,000
Prepaid pension cost (asset) (1/1) / 31,500
Expected (and actual) return on plan assets / 48,000
Plan assets, fair value (1/1) / 480,000
*Before the increase of $88,000 due to the unrecognized prior service cost from the amendment.

The company decided to amortize the unrecognized prior service cost and any excess cumulative unrecognized net loss by the straight-line method over the average remaining service life of the participating employees. It has developed the following schedule concerning these 50 employees:

Employee Numbers / Expected Years of Future Service* / Employee Numbers / Expected Years of Future Service*
1-5 / 2 / 26-30 / 12
6-10 / 4 / 31-35 / 14
11-15 / 6 / 36-40 / 16
16-20 / 8 / 41-45 / 18
21-25 / 10 / 46-50 / 20

*Per employee

Required

  1. Compute the average remaining service life and prepare a schedule to determine the amortization of the unrecognized prior service cost of the Jay Company for 2004.
  2. Prepare a schedule to compute the net gain or loss component of pension expense for 2004.
  3. Prepare a schedule to compute the pension expense for 2004.
  4. Prepare a schedule to determine the additional pension liability (if any) at the end of 2004.
  5. Prepare all the December 31, 2004 journal entries related to the pension plan.

P19-11Comprehensive The TAN Company has a defined benefit pension plan for its

@employees. The plan has been in existence for several years. During 2003, for the first time, the company experienced a difference between its expected and actual projected benefit obligation. This resulted in a cumulative unrecognized loss of 29,000 at the beginning of 2004, which did not change during 2004. The company amortizes any excess unrecognized loss by the straight line method over the average remaining service life of its active participating employees. It has developed the following schedule concerning these 40 employees:

Employee Numbers / Expected Years of Future Service* / Employee Numbers / Expected Years of Future Service*
1-5 / 3 / 21-25 / 15
6-10 / 6 / 26-30 / 18
11-15 / 9 / 31-35 / 21
16-20 / 12 / 36-40 / 24

*Per employee

The company makes its contribution to the pension plan at the end of each year. However, it has not always funded the entire pension expense in a single year. As a result, it had a accrued pension cost liability of $36,000 on December 31, 2003. Furthermore, the company’s accumulated benefit obligation exceeded the fair value of the plan assets at the end of 2003, so that the company also had an additional pension liability (and excess of additional pension liability over unrecognized prior service cost) of $2,300 on December 31, 2003.

In addition to the preceding information, the following sets of facts for 2004 and 2005 has been assembled, based on information provided by the company’s actuary and funding agency, and obtained from its accounting records:

2004 / 2005
Plan assets, fair value (12/31) / $620,500 / $859,550
Cumulative unrecognized net loss (1/1) / 29,000 / 29,000
Expected (and actual) return on plan assets / 40,500 / 62,050
Company contribution to pension plan (12/31) / 175,000 / 177,000
Projected benefit obligation (1/1) / 470,000 / 686,000
Discount rate / 10% / 10%
Accumulated benefit obligation (12/31) / 660,000 / 903,000
Service cost / 169,000 / 175,000
Plan assets, fair value (1/1) / 405,000 / 620,500

Required

  1. Calculate the average remaining service life of the TAN Company’s employees. Compute to one decimal place.
  2. Prepare a schedule to compute the net gain or loss component of pension expense for 2004 and 2005. For simplicity, assume the average remaining life calculated in Requirement 1is applicable to both years.
  3. Prepare a schedule to compute the pension expense for 2004 and 2005.
  4. Prepare a schedule to determine the adjustment (if any) to additional pension liability required at the end of 2004 and 2005.
  5. Prepare all the December 31, 2004 and December 31, 2005 journal entries related to the pension plan.