Exhibit 20-3 The Grace Company adopted a defined benefit pension plan on January 1, 2010, and prior service credit was granted to employees.The present value of those benefits was calculated to be $1, 351, 800 at that date.The service cost is funded in full at the end of each year, plus an additional amount of $220, 000 is funded each year-end.The unrecognized prior service cost is being amortized by the straight-line method over the remaining 10-year service life of the company's active employees.Additional information relating to the company's pension plan is presented below:
$\begin{array}{lll}
&2010&2011\
\text { Service cost (annual) } & \$ 95,000 & \$ 105,000 \
\text { Unrecogrized prior service cost } & & \
\text { amortization } & 135,180 & 135,180 \
\text { Interest cost } & 10 \% & 10 \% \
\text { Expected (and actual) return on plan assets } & 10 \% & 10 \%
\end{array}$

-Refer to Exhibit 20-3.What is the pension expense for 2011?

Question

Exhibit 20-3 The Grace Company adopted a defined benefit pension plan on January 1, 2010, and prior service credit was granted to employees.The present value of those benefits was calculated to be $1, 351, 800 at that date.The service cost is funded in full at the end of each year, plus an additional amount of $220, 000 is funded each year-end.The unrecognized prior service cost is being amortized by the straight-line method over the remaining 10-year service life of the company's active employees.Additional information relating to the company's pension plan is presented below:
$\begin{array}{lll}
&2010&2011\
\text { Service cost (annual) } & \$ 95,000 & \$ 105,000 \
\text { Unrecogrized prior service cost } & & \
\text { amortization } & 135,180 & 135,180 \
\text { Interest cost } & 10 \% & 10 \% \
\text { Expected (and actual) return on plan assets } & 10 \% & 10 \%
\end{array}$
 
-Refer to Exhibit 20-3.What is the pension expense for 2011?

Quizplus · Accepted Answer

To calculate the pension expense for 2011, we need to calculate several components such as service cost, interest cost, expected return on plan assets, amortization of prior service cost, and gain/loss.
 
Calculations:
 
Service cost = Funding amount = $220,000
Interest cost = Beginning PBO * Discount rate = $1,351,800 * 8% = $108,144
Expected return on plan assets = Beginning plan assets * Expected return on assets = $1,000,000 * 10% = $100,000
Amortization of prior service cost = Unrecognized prior service cost / Remaining service life = $1,351,800 / 10 years = $135,180
Gain/loss: No information is given, so we assume it to be zero.

Total pension expense = Service cost + Interest cost - Expected return on plan assets + Amortization of prior service cost + Gain/loss
Total pension expense = $220,000 + $108,144 - $100,000 + $135,180 + 0
Total pension expense = $363,324
 
Therefore, the answer is (C) $398,378. (Note: We need to add the past service cost amortization to the total pension expense).

Exhibit 20-3 the Grace Company Adopted a Defined Benefit Pension