Actuary and trustee reports indicate the following changes in the PBO and plan assets

of Douglas-Roberts Industries during 2021:

 
   
Prior service cost at Jan. 1, 2021, from plan
amendment at the
$ 56 million
beginning of 2018 (amortization: $8 million per
year)
Net loss—AOCI at Jan.1, 2021 (previous losses
$270 million
exceeded previous gains)
Average remaining service life of the active
  10 years
employee group
Actuary's discount rate   7%

 
($ in millions)   
Plan     
PBO Assets  
Beginning of 2021 $900  Beginning of 2021  $700  
Service cost   76  Return on plan assets,      
        8% (10% expected)    56  
Interest cost, 7%   63          
Loss (gain) on PBO  (22) Cash contributions   109  
Less: Retiree benefits (43) Less: Retiree benefits  (43) 
End of 2021 $974  End of 2021  $822  

  
Required:
1-a. Determine Douglas-Roberts's pension expense for 2021.
Pension Expense
Service cost $76
Interest cost $63
Amortization of prior service cost $8
Expected return on the plan assets $(70)
Amortization of net loss $18

Pension expense $95

1-b, 2. to 4. Prepare the appropriate journal entries to record the pension expense, to
record any 2021 gains and losses, to record the cash contribution to plan assets and to
record retiree benefits.

No Event General Journal Debit Credit

 1 1 Pension expense 95
Plan assets 70
Amortization of net loss - OCI 18
Amortization of prior service cost - OCI 8
PBO 139

2 2 Loss - OCI 14
Plan assets 14

3 3 PBO 22
Gain - OCI 22

4 4 Plan assets 109

Cash 109

5 5 PBO 43
Plan assets 43

rev: 01_29_2020_QC_CS-197871, 02_24_2020_QC_CS-201980

Explanation
1.
Amortization of net loss—OCI (current amortization)** = $18
Amortization of prior service cost—OCI (current amortization)** = $8
PBO ($76 service cost + $63 interest cost) = $139
 
Pension expense:
   
Service cost $ 76  
Interest cost   63  
Expected return on the plan assets ($56 actual, plus $14
 (70) 
loss)
Amortization of prior service cost   8  
Amortization of net loss   18  
Pension expense $ 95  

    
Computation of net loss amortization:

   
Net loss—AOCI (previous losses exceeded previous
$270   
gains)
10% of $900 PBO (greater than $700 plan assets)  (90) 
Amount to be amortized $180  
  ÷ 10  years
Amortization $ 18  
The amortization amounts are reported as other comprehensive income in the statement of comprehensive
income.
The service cost component of pension expense ($76M) is reported in the income statement as part of the
total compensation costs arising from services rendered by the employees during the period, separate from the
other (non-service cost) components of pension expense. This presentation reflects the nature of service cost
being different from that of the other elements of pension cost. The non-service cost components of pension
expense ($14M) are presented in the income statement also, but separate from the service cost component and
outside the subtotal of income from operations.

**Because Prior service cost—AOCI and Net loss—AOCI have debit balances, we amortize them with a
credit. We would amortize a Net gain—AOCI (credit balance) with a debit. After the two amortization
amounts are reported as OCI in this year’s statement of comprehensive income, the respective AOCI amounts
in the balance sheet are reduced.

Note: At first glance, it may appear that the Prior service cost—AOCI and Net loss—AOCI are being
amortized over different time periods since the balance in the PSC is $56 and the amortization is $8 and $56 ÷
8 = 7. Actually, though, both the PSC and the net loss are amortized in 2021 using 10 years. Remember, the
PSC arose 3 years ago, so 3 year’s amortization would be 3 x $8 = $24. Added to the current balance of $56,
we see the original PSC was $70. Amortizing that balance by 10 years (same as used to amortize the net loss)
gives us the $7.00. (It’s also possible that the average remaining service life three years ago could have been
slightly different than now, since that number can change over time, but not by much.)
 
2.
Loss—OCI ($56 actual return on assets − $70 expected return) = $14