Crash Course in Accounting and Financial Statement Analysis, Second Edition

Accounting for Defined Benefit Plans

Pension expense (typically buried within the SG&A category) is determined and created on the income statement. The offsetting balance sheet entry (in order to make the balance sheet balance) appears in one of the following forms:

• A liability, if the amount of cash contribution on the behalf of a company is smaller than the pension expense recorded on the income statement

• Prepaid expense asset, if the amount of cash contribution on the behalf of a company is greater than the pension expense recorded on the income statement

13. Lemonade Stand

Exercise Q1: Recall that during 2005, the lemonade stand recorded SG&A expense of $15 on its income statement. Let’s assume that $5 consisted of pension expense (stemming from a company’s defined benefit plan); however, the company made only a $2 cash contribution. Based on the information, create the appropriate T-account for the transaction.

13. Lemonade Stand

Solution 1:   Debit Credit Pension expense (SE) 5   Cash (A)   2 Pension liability (L)   3