[Runklug]

I’m going down the rabbit hole with this one. Will somebody please explain-it-like-I’m-five how his process works from beginning to end? The two examples my book gives amortizes gains by reducing pension expense (debit OCI and credit expense) – so OCI is reduced because we’re using the balance to offset? Then amortizing a loss debits expense and credits OCI. Why are we adding back to OCI? The second I think I understand, I’m derailed by the next example. Like how a gain debits a liability and credits OCI (which makes sense if I’m correct in how I think OCI is used), but then the very next example for recording pension expense debits the expense and credits a pension liability and OCI for amortization of a loss. How can OCI be increased by both a gain and amortization of a loss? What am I missing. I’ve basically spent the last 2.5 hours on one page trying to figure this out. I’m so sick of FAR.

[OdellBj]

Underlying info 1) : OCI is an income account so credit increases it and debit decreases it
Underling info 2) : Gain is a good thing and loss is bad

When you initially have the gain (before amortizing), you debit to pension asset / liability and you credit to OCI (because gain increases OCI). But this gain is basically “parked” in OCI, that's not its final destination, so you have to amortize it to the income statement via the pension expense account. To amortize the gain, you have to gradually take it out from OCI. Therefore, you debit OCI with the amortization amount ( to remove it from OCI ) and credit pension expense (because gain reduces pension expense)

Example : Company A has $50,000 in actuarial gains that needs to be amortized over a 5 year basis.

The original entry : Debit. Pension Asset / Liablity. $50,000 Credit OCI. $50,000

In the first year of amortization (and other years of amortization) : Debit OCI. $10,000. Credit Pension expense $10,000

The entries for loss are the opposite. Hope this helps! Feel free to ask any more questions about this and I'll try my best to help.

[OdellBj]

And you debit the gain to either pension asset / liability (depending on which you get) because you are either increasing the pension asset / decreasing the pension liability (which are both good things!)

Loss is also initially debited to OCI , so to amortize / take it out from OCI, you have to do the opposite entry whcih is Credit OCI

[Runklug]

Odellbj, the gain explanation makes total sense (thank you so much!). Essentially, it's a savings account that you make deposits to and then make payments from? You build up a balance and use it later. My brain is having a hard time getting the loss side though, mostly, I think, because it's to the contrary of gain treatment (you don't have a balance to work with in the same sense as my savings account analogy). Using the same example though, could you look at losses as a credit card? You are borrowing against OCI and have to pay it back when amortizing the loss?

[OdellBj]

I never actually looked at it like that but I think that's great way to look at it. I only understood pensions this week but I usually understand things better in terms of Journal entries and not real world examples. But I think if you understand it using that analogy and can apply it to a question then that's perfect!

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