Reference no: EM132573206

You are the auditor of Beaton and Gunter Inc., the Canadian subsidiary of a public multinational engineering company that offers a defined benefit pension plan to its eligible employees. Employees are permitted to join the plan after two years of employment, and benefits vest immediately.

You have received the following information from the fund trustee for the year ended December 31, 2020:

Discount rate 5%

Rate of compensation increase 3.5%

Defined Benefit Obligation Defined benefit obligation at January 1, 2020 $11,375,000

Current service cost 425,000

Interest cost 568,750

Benefits paid 756,250

Actuarial loss, end of period 631,250

Plan Assets Fair value of plan assets at January 1, 2020 9,062,500

Actual return on plan assets, net of expenses 1,125,000

Employer contributions 493,750

Employee contributions 81,250

Benefits paid 756,250

Other relevant information:

• The net defined benefit liability on January 1, 2020, is $2,312,500.
• Employee contributions to the plan are withheld as payroll deductions, and are remitted to the pension trustee along with the employer contributions.

Instructions

Question a. Prepare pension work sheet for the company.

Question b. Prepare the employer's journal entries to reflect the accounting for the pension plan for the year ended December 31, 2020.

Question c. Prepare schedule reconciling the plan's surplus or deficit with the pension amounts reported on the December 31, 2020 SFP.

Question d. Assume that interest rates are falling, and that the rate of compensation increase is expected to fall as well. Explain what effect this is likely to have on the surplus or deficit of the plan.