Hello and welcome everyone to our lesson today. In today's lesson, I am going to continue with this simplified version of the pension model, focusing on the pension expense itself. We're going to go through some basic transactions, like the service cost, the interest cost, and the return on plan assets plus the benefits and the contribution. Five main transactions of components in the model simplified version. We will articulate the information of those transactions among the three main account; pension obligation, PBO, plan assets, and the pension expense. We'll take a look at a bigger picture and will articulate how those transactions interrelate together. Let's get started. As I said, with driving those in T accounts. I am going to use today, a method that I will show you the T-accounts to articulate the transaction and show you how do we account for it. As you can see on the screen in front of you, we're building three accounts, projected benefit obligation, plan assets on the right-hand side, and in the middle below is the pension expense. Those are the three main accounts that constitute the bulk. Not all obviously, but the bulk of the transactions for pension accounting. As you can see, we're in the credit side. The projected benefit obligation will have a beginning balance hypothetical number. While on the debit side of the plant, assets will have a beginning balance. That is the obligation that was accumulated over in the projected benefit obligation. While the beginning balance in the plan asset is obviously the accumulation of all the funds and the earnings on those funds in the plan assets. You notice that on the pension expense no beginning balanced, neither in the debit nor on the credit. Why? Because pension expense is a nominal temporary account that gets closed at the end of each period, so we do not have a beginning balance. Let's get started by the simple transactions. The first transaction is the service cost. You will see that the service cost now is credited to the projected benefit obligation and is debited to the pension expense. Increasing the pension expense, increasing the obligation. Very good. Similarly, with the interest cost. The interest cost, which is calculated as a percentage using the interest rate on the beginning balance of the projected benefit obligation will be considered. The second component of the pension expense will be debited to the pension expense and will increase the projected benefit obligation, that's why it's showing up as a credit in the projected benefit obligation. Very good. The return. As you can see in the return, it is adding to the plan asset. I'm debiting the plan assets and because you are assuming that there is, again, there is a return. Actually, it's decreasing the pension expense. That is why it's showing up on the credit side of the pension expense, timeout. I see ACT returned. I EXP, return. That means that in the plan assets, it's the actual return that will be debit while the pension expense will be credited, will be reduced by the expected return. Obviously, those numbers for this lesson will be assumed as if they are equal. But otherwise, then obviously it will add complications to the model which we will cover later. But for now, we are going to assume that the actual return equals the expected return. That's why they're showing in the same color so that you can see that that link, whether it's not one journal entry, but it's just that we are assuming that they are each. Now, there are two main transactions, the benefits and as you can see, the benefits now is showing up as a reduction in the projected benefit obligation. Because if I'm paying benefits to my retired employees, then obviously the benefits will decrease my projected benefit obligation while it is credit to the plan assets because I'm taking those funds from the plant assets and paying it out to my employees, reducing my plan assets. Finally, which can be one of the main transactions at the beginning. Those are not ordered in high-end chronological order. Contributions because the contributions can be made at the beginning of the period or at the end of the period, depending on the assumption. Their contributions will increase the plant assets. Obviously, if those contributions are limited to the plant asset, they will be credit to cash, which I'm not showing that account on the screen in front of you. This is the map for the T-accounts. Let's take the structure of the journal entries. Obviously now you can tie each transaction by each, once you put it in a T-account, you can see that debits and credit. Service costs we talked about, what is the journal for recording service cost? As you can see, pension expense, debit, and credit, projected benefit obligation. What about the interest costs? Similarly, debit to pension expense and credit to projected benefit obligation. Here is the entry that I wanted to warn you and I warned you earlier, that here we are assuming that the expected return on plan assets equal the actual return on plan assets. That's why it's recorded in one journal this way, the debit and the credit. The debit is plan assets and the credit is the pension expense. Otherwise, if they are not different, there will be a plugin number that needs to be accounted for in this particular journal entry. But assuming that they are equal, now I'm debiting the plant assets and I record the credit to pension expense. Contributions to the pension plan. Obviously that is one, as I said, the main transaction that I debit the plan assets and credit the cash and finally, benefits when they are paid, I actually decrease both the obligation and the plan assets. In summary, this is how the main transactions for pension accounting are journalized in the general journal and posted to the corresponding accounts in the general ledger. Obviously this is a very simplified form, we made strong assumptions that can be released and obviously once they're released, the model will get more complicated. But we're happy with the very simplified version of the pension model for now. Thank you.
