Beale Management has a noncontributory, defined benefit pension plan.

On December
31, 2021 (the end of Beale's fiscal year), the following pension-related data were
available:
 
($ in
Projected Benefit Obligation
millions)
Balance, January 1, 2021   $ 780   
Service cost    80   
Interest cost, discount rate, 5%     39   
Gain due to changes in actuarial assumptions in
    (23)  
2021
Pension benefits paid     (39)  
Balance, December 31, 2021   $ 837   

 
Plan Assets ($ in millions)
Balance, January 1, 2021   $ 800   
Actual return on plan assets     49   
(Expected return on plan assets, $54)         
Cash contributions     90   
Pension benefits paid     (39)  
Balance, December 31, 2021   $ 900   

 
($ in
January 1, 2021, balances:
millions)
Pension asset $ 20  
Prior service cost—AOCI (amortization $9 per
  45  
year)
Net gain—AOCI (any amortization over 10 years)   120  

  
Required:
1. to 3. Prepare the 2021 journal entries to record pension expense, to record any 2021
gains and losses and the contribution to plan assets and benefit payments to retirees.

No Event General Journal Debit Credit

2 2 PBO 23
 Gain - OCI 23

3 3 Loss - OCI 5
Plan assets 5

4 4 Plan assets 90
Cash 90

5 5 PBO 39
Plan assets 39

4. Determine the balances at December 31, 2021, in the PBO, plan assets, the net gain
—AOCI, and prior service cost—AOCI [Hint: You might find T-accounts useful.]

Balances on Dec. 31, 2021

5. What amount will Beale report in its 2021 balance sheet as a net pension asset or
net pension liability for the funded status of the plan?
Balance Sheet as of 2021
Net pension asset $63 million

Explanation
1.
Amortization of net gain—OCI (current amortization)** = 4
Amortization of prior service cost—OCI (current amortization)** = 9
PBO ($80 service cost + $39 interest cost) = $119
 
Pension expense:
($ in
 
millions)
 Service cost   $ 80   
Interest cost     39   
Expected return on the plan assets ($49 actual,
    (54)  
plus $5 loss)
Amortization of prior service cost     9   
Amortization of net gain     (4)  
Pension expense   $ 70   

 
**Because Prior service cost–AOCI has a debit balance, we amortize it with a credit. We
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.

Computation of net gain amortization:

($ in
 
millions)
Net gain—AOCI (previous gains exceeded previous
  $ 120   
losses)
10% of $800 plan assets (greater than $780 PBO)     (80)  
Amount to be amortized   $ 40   
    ÷ 10  years
Amortization   $ 4   

 
Companies report the service cost component of pension expense ($80M) 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 (− $10M [gain])
are presented in the income statement also, but separate from the service cost component and
outside the subtotal of income from operations.

2.
Loss—OCI ($49 actual return on assets − $54 expected return) = $5
 
4.
PBO
    780 Jan. 1 balance
    80 Service cost
    39 Interest cost
New gain 23    
Benefits paid 39    
    837 Dec. 31 balance  
 
 Plan Assets
Jan. 1 balance 800    
Expected
54    
return
    5 New loss
Cash funding 90    
    39 Benefits paid
Dec. 31
900    
balance
 
SHAREHOLDERS' EQUITY: ACCUMULATED OTHER COMPREHENSIVE INCOME

Net Gain—AOCI
    120 Jan. 1 balance
    23 New gain
New loss 5    
Amortized in
4    
2021
    134 Dec. 31 balance 
 
Prior Service Cost—AOCI
Jan. 1 balance 45   
      
      
    9 Amortized in 2021
Dec. 31 balance 36   
 
5.
The pension plan is overfunded. Beale will report a net pension asset of $63 million in its 2021
balance sheet:
 
  Plan assets− PBO =Net pension asset
2020 $ 800  −$780 = $ 20 
2021 $ 900  −$837 = $ 63