 Hello, and welcome to this session in which we would learn how to use a pension worksheet to compute pension expense. Pension expense is composed of five components, service costs for the year, amortization of a prior service cost, interest liability, actual return on plan asset gain slash loss. In the prior session, we looked at each one of those components. I'm going to go over them briefly because to compute the pension expense, we're going to be using a tool called the pension worksheet. So you won't understand what each one of these components represent. So briefly, I'm going to go over the one that I'm going to be using in this example. Starting with service cost for the year. What is service cost for the year? Service cost increases pension expense. Why? Service costs represent the amount of expense you incurred this period because the employee put an additional year of service. So for every year or for every time the employee worked for a day, two, week, a year, we assume it's a year, what's going to happen? It's going to increase your pension expense. And by increasing your pension expense, if you're not paying it, you're increasing also your liability. We're not going to talk about amortization of a prior service cost because I'm not going to be using this in this example. Interest on liability. Remember we have something called PBO, projected benefit obligation. The obligation is a liability. It's a long-term liability and all liabilities will incur interest. So we have to account for the interest. Any interest cost is added to the pension expense, therefore notice the plus. Actual return on plan asset. Now we're going to be using the actual return later on. We'll learn about the expected return. The actual return on plan asset is a negative. It's going to reduce your pension expense. Now remember you have a projected benefit obligation, but you also have plan assets. Plan assets are assets. Those assets include stocks, bonds, investments, various types of investments. Those investments will earn you dividend, interest, capital gains, and capital losses. As a result, when they do those earnings, when they earn the actual return, they're going to reduce your pension expense because they are contributing to your plan asset. Then we're going to have something called gain slash losses. They could be an increase or a decrease. We will not even be using them in this example because we're going to have a whole session about what do we need to do with gains slash losses when it comes to pension expense. So those are the five components of a pension expense and this is basically a quick review. In this session, we're going to be working with a pension worksheet to see how this whole picture fits together. To do so, we have to work an example. On January 1, X1, Adam company provides the following information related to expansion plan for the year 20X1. They started the year with a plan asset of 200,000. Well what does that mean? It means they have assets of 200,000. Now how does the plan asset fits into this pension worksheet? Let's take a look at the pension worksheet. The pension worksheet will have an item, which is a list of the item that you are dealing with. You will keep track of what increases, decreases your pension expense. If you paid any cash or received cash, you're going to be paying cash. A section called OCI, other comprehensive income, which will have a prior service cost and gains and losses, which I will not use for the sake of this example. And the reason is this. When I introduce a new topic, I prefer to start easy, simple, show you what a pension worksheet is in a simple example. Then in the next example, I will add the prior service cost. I will add gains and losses. So it's easier for you as a student to follow with me. Then we'll have what's called the pension asset slash liability. It could be an asset, could be a liability. And those will represent my journal, actually the right here. Those would represent my general journal entries. Also the company will keep track of their obligation through the PBO and they will keep track of their plan asset. So for this example, we have plan asset of 200,000. That's fine. The year we have plan, we have PBO of 200,000. We have projected benefit obligation of 200,000. We have plan assets of 200,000. If I ask you, is the plan overfunded or underfunded? The plan is fully funded. It's not overfunded. It's not underfunded. Why? Because those two are equal to each other. If we have more plan assets, then projected benefit obligation, then we are overfunded. It means we have more. Let's assume we have 250,000 in assets. On the other side, if we have less assets than projected benefit obligation, we are underfunded. Let's assume we have 250,000 of liabilities while we have 200,000 of assets. So you want to make sure when is the plan overfunded or underfunded. Those questions will appear on the exam. And you will service cost is 11,000. It means for this year, the employee earned 11,000. What would that do? That will increase my pension expense. Settlement rate is 5%. I'm going to be using the settlement rate to compute my interest cost for this example, for this pension obligation. My actual return on plan asset is 12,000, which is good. It might represent dividend interest, so on and so forth. My funding contribution are $8,000. It means I contributed to the plan. I wrote a check. This is the company. I wrote a check for $8,000. Benefit paid to retirees during the year, $6,000. It means the company, it means not the company, not the company that's employing the employees. It's the pension plan trustee. The bank, the financial institution paid $6,000 to our retirees. Now we're going to take a look and see how all these figures fit in the pension worksheet in order to prepare the journal entry that relate to the pension expense. Before we proceed any further and prepare the journal entry, please take a look at my website farhatlectures.com. Whether you are an accounting student or a CPA candidate, I provide lectures, multiple choice through false. The reason you're watching is because you are looking for some help and I can help you. Access my material. It will help you. It will provide you additional resources. Invest in yourself. Don't shortchange yourself. Accounting is an important. It will pay you dividend down the road. Invest in yourself. Also connect with me on LinkedIn. Like this recording. If you're watching and you are benefiting, please like it. It's not going to cost you anything. It will help others. Share it with others. Connect with me on Instagram, Facebook, Twitter, Reddit. So let's start. The first item was the balances. So the balances were giving us $200,000 and $200,000. Those were part of the memo. Keep in track of the PBL and keep in track of the plan asset. Service cost for the year was $11,000. Well this is going to increase your pension expense and it's going to be added. Notice this is a negative but this is a negative adding to a negative. Basically you owe now $11,000. Your PBL is increasing. Your interest cost is $10,000 which is your PBL times the settlement rate of 5%. That's going to increase your pension expense and that's going to increase your PBL because part of your PBL is interest. It's a liability. Long-term liability. Actual return. The actual return for this example is $12,000. Therefore it's going to reduce your annual pension expense because the dividend, the interest that you received on those plan investment that you received on those plan investment they're going to increase your plan investment and help in your interest expense means reduce your interest expense. Contribution. Now the company wrote a check to the plan asset. So they wrote a check to the first pension plan of America, $8,000. You reduce our cash $8,000 and that $8,000 will increase the plan assets. Then benefit paid $6,000. So notice this benefit paid does not affect the journal entry. As I told you those benefit paid are paid from the company that's administering the pension plan which could be a bank, a financial institution. As a result we are going to reduce our PBL because we paid $6,000 of our obligation and we are going to reduce our plan asset because we paid out of our plan asset. Now if my math is right, if I net those out my pension expense will be $9,000 for this period. My cash I paid $8,000, hold on a second. I have an expense of $8,000. I funded $8,000 out of it. What does that mean? It means I still owe $1,000. Therefore we're going to see the entry on the next slide. I am going to have increased my pension obligation by $1,000. And notice if I net my PBO and I net my plan asset. Remember when I started the net was zero. I was not overfunded. I was not underfunded. By year end I looked at my PBO it's $215,000. I look at my plan asset from the beginning till the end. Now I have only $214,000. Now I'm short $1,000. Now my plan is underfunded by $1,000. So let's take a look at the journal entry. I debit pension expense, credit cash, and credit pension asset liability. Basically I'm crediting a liability. So this is the journal entry. This one here, the journal entry. Now remember my balance now is $1,000. So when I start next period, and this is important because when you start next period, this $215,000 will be up here. This $214,000 will be up here. Then we'll start again accounting for service cost interest cost and I will add maybe some prior, not maybe I will add prior service, prior service costs and gains and losses. What should you do now? Go to forhatlectures.com and work multiple choice questions, true, false, and exercises. This is how you learn. This is how you became competent in your field. Good luck, study hard, and don't short change yourself. Subscribe.