FAR 2 Flashcards
List the five steps of revenue recognition.
Five Steps of Revenue Recognition Step 1—Identify the contract with a customer. Step 2—Identify the performance obligation(s) in the contract. Step 3—Determine the transaction price. Step 4—Allocate the transaction price to the performance obligation(s) in the contract. Step 5—Recognize revenue when the entity satisfies the performance obligation(s).
What are revenues?
“Inflows or other enhancements of assets of an
entity or settlements of its liabilities (or a
combination of the two) from delivering or
producing goods, rendering services, or other
activities that constitute the entity’s ongoing
major or central operations.” (606-10-20
Glossary
Describe the criteria used to identify separate
performance obligations.
A contract may include more than one
performance obligation. For a performance
obligation to be separate, the good or service
must be distinct from other goods or services in
the contract. A good or service is distinct if a
customer can benefit from the good or service
on its own.
What methods may be used to recognize
revenue when the performance obligation is
satisfied over time?
- Input method
2. Output method
How is a transaction price allocated across
multiple performance obligations?
The transaction price should be allocated to
the separate performance obligations
proportionately based on the stand-alone
pricing of the goods or services identified as
separate performance obligations.
A CPA has been asked by a client to describe revenue. Which of the following statements would be best for the CPA to use in his/her description?
Revenue is the inflows or other enhancements of assets of an entity or settlements of its liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
Correct! Revenue is generated by the entity engaging in its central operations, which may include the sale of goods or the providing of services. Revenue may result in an enhancement of assets (e.g., receiving cash for goods or services) or the reduction or settlement of a liability.
FASB ASC 606, commonly referred to as the revenue recognition standard, includes all of the following in its five-step process to recognize revenue except
Recognize revenue when (or as) the entity is paid for a performance obligation.
Recognizing revenue as an entity receives payment is not part of the revenue recognition process and is in conflict with accrual accounting. This is not a step in the revenue recognition standard.
The following information is available about a signed agreement between two entities:
The entities have agreed to specific performance obligations.
The entities have agreed on a price related to the performance obligations.
No work has begun on the performance obligations, and the contract is cancelable without payment of penalty or other consideration.
It is probable that the company completing the work will collect the agreed-upon consideration.
Does a contract exist between the entities to which the revenue recognition criteria may be applied?
A contract to which the revenue recognition criteria applies does not exist because it is cancelable without penalty and no work on the performance obligations has begun.
A contract to which the revenue standard may be applied does not exist at this time, because of the ability to cancel the contract without penalty or payment of consideration and because work has not begun on the contract performance obligations. At this point, the entities should disregard revenue guidance to contracts.
Stacy Company enters into a contract with Molly Company on February 5. The contract requires Stacy to deliver 100 units of Product A and 250 units of Product B to Molly by September 1. Stacy is entitled to payment for Product A after 125 units of Product B have been delivered. The following deliveries are made by Stacy to Molly:
On March 15, Stacy delivers 100 units of Product A.
On May 21, Stacy delivers 100 units of Product B.
On August 1, Stacy delivers an additional 150 units of Product B.
The amounts related to Product A to be reported on Stacy’s March 31 balance sheet, June 30 balance sheet, and September 30 balance sheet, respectively, should be presented as a:
Contract Asset with conditional rights; Contract Asset with conditional rights; Accounts Receivable.
Stacy reports a Contract Asset on March 31 because it delivered Product A, but payment is conditional upon delivery of 125 units of Product B. Stacy continues to report a Contract Asset related to Product A on the June 30 balance sheet because 125 units of Product B have not yet been delivered. Stacy reports Accounts Receivable on the September 30 balance sheet because it satisfied the performance obligation related to the delivery of Product B that entitles Stacy to payment for Product A.
Kinnamont Company manufactures farming equipment that includes navigational systems as part of the standard equipment package and offers optional training on any navigational systems for an additional fee. Smith Company enters into a contract with Kinnamont that includes a combine, a navigational system, and training. Identify the performance obligations to which Smith should allocate the transaction price:
The combine including the navigational system and the training as two separate performance obligations.
Because the navigational system comes standard on the combine, the navigational system is not distinct from the combine and would not have a stand-alone price. The training is optional and is an additional fee, thereby giving it a stand-alone price. The contract has two performance obligations.
What are the two methods of determining
transaction price when a contract includes
variable consideration?
- Expected value approach
2. Most likely amount approach
Provide an example of a constraint on
estimating revenue based on variable
consideration.
If earning the variable consideration is based
on an uncertainty that is out of the company’s
control, such as weather or the volatility of the
stock market, then variable consideration is
constrained.
Also, if it is probable that a significant reversal
of revenue would occur, then variable
consideration is constrained.
Describe the journal entry to record sales
revenue when noncash consideration is
received.
The company will debit an asset account
consistent with the noncash consideration
received (e.g., a patent or investment) and
credit sales revenue. The amount will reflect
the fair value of the noncash consideration.
What type of account is Sales Discounts
Forfeited and what is its natural balance?
Revenue account presented as “Other Income”
Natural credit balance
When a significant financing component is
present in a sales contract, what revenue in
addition to sales revenue does the company
record?
Interest Revenue
Holt Company enters into a contract to build a new plant facility for Segal Company for $2,500,000. In the contract, Segal will pay a performance bonus of $100,000 if Holt is able to complete the facility by October 1, 20X6. The performance bonus is reduced by 50% for each of the first two weeks after October 1, 20X6. If the completion is delayed more than two weeks, then Holt forfeits the entire performance bonus. Holt’s prior experience with performance bonuses on similar contracts indicates the following probabilities of completion outcomes:
The image shows the following text: Completed by October 1, 2006 and its probability is 80%, Completed by October 8, 2006 and its probability is 10%, Completed by October 15, 2006 and its probability is 5%, and Completed after October 15, 2006 and its probability is 5%.
How much should Holt record as the transaction price of the contract and why?
$2,586,250 because Holt should use the expected value method
Because Holt has prior experience with similar contracts, Holt should use the expected value method, also referred to as the probability-weighted method, to estimate the variable consideration associated with this contract. Holt determines the transaction price using the following probabilities and amounts:The slide shows the following calculation:
80% chance of $2,600,000 = $2,080,000. 10% chance of $2,550,000 = $255,000. 5% chance of $2,525,000 = $126,250. 5 chance of $2,500,000 = $125,000. The result is $2,586,250.
The total transaction price, using the probability-weighted method is $2,586,250.
What method does a company use to determine the transaction price for a contract that includes variable consideration when the company has numerous other contracts with similar characteristics and there are more than two possible results?
Expected value method
A company should use the expected value method when there are more than two possible outcomes and the company has experience with contracts with similar characteristics. The company can use its experience to appropriately weight the probability of each outcome to calculate the expected value of the variable consideration.
Foghorn Company entered into a sales transaction in which it agreed to receive common stock from Leghorn Corporation as payment for services provided to Leghorn Corporation. The journal entry to record the receipt of payment for the sales transaction will include a
Debit to Leghorn Investment.
Foghorn will record the noncash consideration to an asset account reflective of the type of asset received. In this case, Foghorn is receiving another company’s stock as consideration and will record the receipt of the common stock by debiting an investment account.
ClipClop Company sells horseshoes to customers at a discount of 4% if the customer orders more than 10,000 horseshoes in a year. The price per shoe is $2. In April, Oats Company orders 4,000 horseshoes from ClipClop. Based on past experience with Oats Company, ClipClop expects Oats to meet the volume threshold of 10,000 horseshoes by the end of the year. What amount of revenue should ClipClop record in connection with the April sale?
$7,680
ClipClop should factor in the 4% volume discount because, based on past experience, Oats will meet the volume threshold to qualify for the discount. If Oats does not meet the volume discount, then ClipClop will record Sales Discounts Forfeited at a future date.
Describe how a single total transaction price is
allocated to multiple separate performance
obligations.
The total transaction price is allocated based
on the proportion of the total standalone
selling price represented by each performance
obligation. The proportion is found by dividing
the standalone price for the performance
obligation by the total of the standalone prices
for the performance obligations. The
proportion for each performance obligation is
then multiplied by the total transaction price to
determine the amount of the total transaction
price that will be allocated to each
performance obligation
List the two criteria required for a performance
obligation to be considered distinct.
- The customer must be able to benefit
from the good or service on its own or
with resources readily available. - The good or service must be able to be
separately identified from other promises
in the contract.
How is the transaction price allocated for a
contract with performance obligations that are
not distinct from each other?
If a contract contains promises that are not
distinct from each other, then the goods or
service promised in the contract represent a
single performance obligation. The total
contract price is allocated to the single
performance obligation.
If the standalone selling prices for performance
obligations are not directly observable, what
steps should a company take?
When the standalone selling prices are not
directly observable, then a company should
estimate the standalone selling prices.
The total standalone selling price for three
separate performance obligations in a contract
is $100,000. The first performance obligation
has a standalone selling price of $45,000. What
proportion of the total contract transaction
price should be allocated to the first
performance obligation?
Performance obligation 1 = 45,000/100,000 =
.45 or 45%
Wolf Company produces large pieces of machinery for use in the manufacturing industry. Blue Jay Manufacturing Company purchases a large piece of machinery from Wolf for use in Blue Jay’s new production plant. Although Blue Jay could install the equipment on its own, management decides to include installation of the machinery in its contract with Wolf. Blue Jay agrees to a total contract price of $850,000 for both the equipment and the installation. Wolf does not offer a discount on the machinery if it completes the installation. The fair value of the equipment is $850,000, and its cost is $760,000. The fair value of the installation is $50,000, and the cost of the labor to Wolf is $40,000. How much of the contract price should Wolf allocate to the equipment and installation respectively? If a proportion is necessary, round to the nearest one hundredth of a percent (e.g..####) and round all answers to the nearest dollar.
The table shows the following costs for Equipment and Installation:
A’s equipment is worth $850,000 and installation is worth $0.
B’s equipment is worth $800,000 and installation is worth $50,000.
C’s equipment is worth $807,500 and installation is worth $42,500.
D’s equipment is worth $802,740 and installation is worth $47,260.
Row D
Wolf should allocate the total contract price of $850,000 to the equipment and the installation based on the proportion of fair value each component represents. The total fair value of the transaction is $900,000 ($850,000 fair value of the equipment plus $50,000 fair value of the installation). The equipment represents 94.44% ($850,000 / $900,000) of the fair value of the transaction, and the installation represents 5.56% ($50,000 / $900,000) of the fair value of the transaction. To allocate the transaction price to the equipment, multiply the total contract price by the proportion of the fair value the equipment represents ($850,000 × .9444). To allocate the transaction price to the installation, multiply the total contract price by the proportion of the fair value the installation represents ($850,000 × .0556). Wolf should allocate $802,740 to sales revenue from the sale of the equipment and $47,260 to service revenue from the installation.
Mott Company purchases a machine from Janelle Company. Installation of the machine requires specialized knowledge that Mott Company does not possess. Janelle Company regularly includes installation as part of its sales contracts. The machine has a stand-alone price of $50,000, and the value of the installation is estimated to be $5,000. Mott agrees to purchase the machine for $50,000. How much of the contract price should be allocated to the machine and installation respectively?
The table shows the following costs for Machine and Installation:
A’s machine is worth $50,000 and installation is worth $5,000.
B’s machine is worth $50,000 and installation is worth $0.
C’s machine is worth $45,000 and installation is worth $5,000.
D’s machine is worth $45,455 and installation is worth $4,545.
Row B
Because the machine and the installation are interdependent (installation requires unique knowledge that only Janelle Company possesses), there is only one performance obligation in this contract. Installation is not a separate performance obligation so it is not allocated a portion of the transaction price.
Allocating a transaction price to multiple performance obligations includes which of the following steps:
Identify distinct goods and/or services as separate performance obligations.
Separate performance obligations should be identified based on goods and services that are distinct from each other. Once the separate performance obligations have been identified, then the transaction price may be allocated.
For a good or service to be considered distinct and identified as a separate performance obligation, it must be
Able to be used by the customer on its own or with resources readily available to the customer and able to be separately identified from other promises in the contract.
To be considered distinct, a good or service must meet two criteria. The customer must be able to benefit from the good or service on its own or with resources readily available, and the good or service must be distinguishable from other goods or services in the contract.
For a contract that contains multiple performance obligations, revenue is allocated to each performance obligation by
Calculating the proportion of the total stand-alone price represented by each performance obligation and multiplying the proportion by the total transaction price to allocate the transaction price to the separate performance obligations.
The stand-alone prices for the performance obligations are totaled, and each stand-alone price per performance obligation is divided by the total of the stand-alone prices to calculate the proportion of the transaction price that will be assigned to each performance obligation. The total transaction price is multiplied by each proportion, and the resulting amount is allocated to the performance obligation.
What type of account is Sales Returns and
Allowances?
What is its natural balance?
Sales Returns and Allowances is a contra-revenue
account.
SR&A has a natural debit balance.
When a consignee sells goods on consignment
from a consignor, what type of revenue will the
consignee most likely record?
Commission revenue
How are nonrefundable upfront fees accounted
for?
Revenue from nonrefundable up-front fees
should be recognized over the period that the
goods or services are expected to be delivered.
If the customer is expected to use the services
for two years, then the revenue from the
nonrefundable upfront fees is recognized
evenly over the two-year period.
List the criteria that must be met for an
arrangement to qualify as a bill-and-hold
arrangement.
A bill-and-hold arrangement must meet the
following criteria:
1. Substantive reason for the arrangement
(e.g., customer’s facility is not ready to
receive the goods).
2. Seller separates the goods from other
inventory and identifies them as
belonging to the customer.
3. Goods are currently ready for transfer.
4. Goods cannot be used by or directed to
another customer.
In a principal-agent consideration, what service
does the agent provide?
The agent facilitates the sales of goods or
services to the customer. Goods or services are
provided by the principal directly to the
customer, and the agent facilitates the sale and
connection between the customer and the
principal. The agent will likely recognize
commission revenue for facilitating the sale.
Describe the journal entry to record a
customer’s purchase of a service-type warranty
at its inception and the journal entry to record
warranty revenue.
The journal entry at the inception of a servicetype warranty typically includes a: debit to cash or accounts receivable a credit to unearned warranty revenue (a liability account).
As the time covered by the servicetype
warranty passes, the entity recognizes
warranty revenue by:
debiting the unearned
warranty revenue account (this decreases the
liability account)
crediting warranty revenue
On January 1, 20X2, Dot Company sold a three-year, service-type extended warranty to Matrix Company for $36,000. The warranty took effect on the date of purchase (January 1, 20X2). What amount of Unearned Warranty Revenue should be reported on Dot’s December 31, 20X3, Balance Sheet?
$12,000
By December 31, 20X3, two out of three years covered by the warranty have passed. The Unearned Warranty Revenue account would have one-third of the original amount left in it because Dot would recognize $12,000 of warranty revenue in each of the previous two years. $36,000 – $24,000 = $12,000 OR $36,000 × 1/3 = $12,000. Therefore, $12,000 in unearned warranty revenue would remain at December 31, 20X3.
Lavender Corporation sells 100 jars of essential oil to Bed, Bath, and Relax on December 1, 20X5, for $10 each. Lavender offers a right to return the product for any reason. Based on past sales, Lavender expects Bed, Bath, and Relax to return 5 jars. What adjusting journal entry, if any, should Lavender record on December 31, 20X5, to reflect Bed, Bath, and Relax’s right of return?
Sales Returned and Allowances 50
Allowance for Sales Return and Allowances 50
Lavender expects 5 jars at $10 each ($50 total) to be returned. The adjusting journal entry on December 31 reflects the right of return by debiting Sales Returns and Allowances (a contra-revenue account) and crediting Allowance for Sales Returns and Allowances (a contra-asset account to Accounts Receivable).
A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month?
$190,000
The effect of estimated returns is recognized in the month of sale. Net sales to be reported for the current month equal $200,000 less the returns expected on those sales (5%, or $10,000), or $190,000. The actual returns granted in the current month on previous months’ sales were recognized as reductions in net sales in those previous months.
Sara consigns goods to Lee Company who charges a 10% commission on consignment sales. Lee sells $750 worth of goods on Sara’s behalf. Assuming no other costs of selling, what amount of Accounts Receivable should Sara record from Lee Company for the consignment sales?
$675
Sara will recognize the $75 (10% of $750) commission expense and record the account receivable net of the commission expense amount.
Sally collects a nonrefundable up-front fee of $192 when a new customer signs up for a 24-month contract for services. A monthly fee of $32 is also assessed for each customer. How much revenue does Sally record on the date the contract is signed?
$0
Sally does not recognize revenue until services have been provided. The nonrefundable up-front fee of $192 is recognized over the life of the contract, in this case, over 24 months.
For a contract modification to result in a new
separate contract, two criteria must be met.
Describe the two criteria.
- The goods or services covered in the
modification must be distinct from the
original goods or services. - The consideration for the additional
goods or services must reflect standalone
pricing.
When a contract modification does not result in
a new contract, describe how an entity should
calculate the price to recognize as revenue for
the remaining goods to be transferred to the
customer.
An entity may use a blended price approach. To
calculate the blended price per product, the
entity should multiply the remaining quantity
of products from the original contract by the
price from the original contract. Then the entity
should multiply the additional quantity by the
new price. The two resulting amounts are
added together to calculate the total revenue
left from the original contract and the contract
modification. The total is divided by the total
remaining quantity of product to be
transferred.
When are costs to fulfill a contract recorded as
an asset and amortized over the contract
period (i.e., the period that benefits from those
costs)?
Costs to fulfill a contract are recorded as an
asset that is amortized over the contract period
when the costs are directly traceable to the
contract and are incremental (i.e., the costs
would not have been incurred if the contract
had not occurred).
If a customer never uses a gift card, what
happens to the value?
A company may recognize “Forfeited Card
Revenue” when the gift card has expired or
when, based on past experience, the company
deems that the customer has effectively
forfeited the gift card.
In most cases, when will an initial franchise fee
be recognized as revenue?
In most cases, the initial franchise fee is
recognized over the time period when the
material services and conditions are provided
by the franchisor. The fee is recorded as
unearned revenue until the franchisor meets
the conditions under the franchise agreement
and recognizes the revenue.
On January 1, 20X5, Wren Co. leased a building to Brill under an operating lease for 10 years at $50,000 per year, payable the first day of each lease year. Wren paid $15,000 to a real estate broker as a finder’s fee. The building is depreciating $12,000 per year.
For 20X5, Wren incurred insurance and property tax expenses totaling $9,000. Wren’s net rental income for 20X5 should be
$27,500.
The finder’s fee benefits the entire lease term and therefore is allocated evenly over the 10-year lease term.
The finder’s fee represents a direct, incremental cost that benefits more than one period.
The slide shows the following calculation: Net rental income = rent revenue minus expenses associated with the property, that is 50,000 minus
($15,000/10 + $12,000 +$9,000) = $27,500.
North Co. entered into a franchise agreement with South Co. for an initial fee of $50,000. North received $10,000 at the agreement’s signing. The remaining balance was to be paid at a rate of $10,000 per year, beginning the following year. North’s services per the agreement were not complete in the current year. Operating activities will commence next year.
What amount should North report as franchise revenue in the current year?
$0
Before the franchisor (North) can recognize revenue, its activities pertaining to the franchise must be substantially complete. The earliest point at which substantial completion occurs is the commencement of operations by the franchisee. Operating activities will not begin until next year; therefore, North recognizes no fee revenue in the current year.
The $10,000 received is recorded in a liability account.
A new separate contract is created when:
The additional products included in the contract modification are distinct from the products in the original contract.
The blended price of the original and additional products is appropriately reflected in the recognition of revenue after the modification.
The consideration for the additional products reflects an appropriate standalone selling price.
I and III.
For a new separate contract to be formed, the additional products must be distinct and the consideration for the additional products must reflect appropriate standalone pricing.
A company enters into a contract to sell 50 products to a customer for $30 each. After the company transfers 30 of the 50 products, the customer wants an additional 25 products. The contract is modified and the additional 25 products are priced at $15 each, a price that is not reflective of the standalone selling price. What is the price per product for the remaining 45 products (20 products from the original contract and 25 products from the modification)?
$21.67, the blended price for the products from the original contract and the modification.
To calculate the blended price, 20 remaining products at $30 each represent revenue of $600 plus 25 additional products at $15 each represent revenue of $375. Total revenue left to be recognized over the remaining 45 products is $975. $975 divided by 45 products yields a blended price of $21.67 per product.
A company incurred costs to fulfill a contract that has a four-year life. The costs are a direct result of the contract and would not have been incurred had the contract not existed. How should the costs to fulfill the contract be accounted for?
Recorded as an asset and amortized over four years
The costs to fulfill the contract are a direct result of the contract so they are considered incremental. Because the contract is for four years, the company will benefit from the costs for a period exceeding one year. The costs should be recorded as an asset and amortized over the contract period of four years.
What is the effect on net assets of billing a
customer?
There is no effect.
When is the balance in construction in progress
the same for the percentage-of-completion
method and the completed contract method?
When an overall loss is expected on the
contract
Describe revenue recognition under the
completed contract method.
No revenue is recognized until the contract is
completed.
Why are billings on construction treated as a
contra to construction in progress?
To avoid double counting of assets
What is the accounting effect when a single
period loss occurs on a contract expected to be
profitable?
Total gross profit through the period is less
than the gross profit recognized in earlier
periods and the current period profit is
negative
Describe the revenue recognized under the
percentage-of-completion method for the
second year of a contract.
Total revenue through year 2 based on the
percentage of completion through year 2, less
revenue recognized for year 1
What is the contra account to construction in
progress?
The contra account is billings on contracts.
Describe the nature of the construction in
progress account.
It is an inventory account—a current asset.
What method is used under international
standards if the percentage-of-completion
method is not appropriate?
Cost recovery (zero-profit) method.
What is the amount of loss recognized in a
period under the percentage-of-completion
method when the estimated total project cost
exceeds the contract price and gross profit was
recognized in previous years?
Total project cost less contract price, plus gross
profit recognized in previous years
What is the percentage of completion of a
project when an overall loss on the contract is
expected?
Same as usual; total cost to date divided by
total estimated project cost
List the methods of revenue recognition for
long-term contracts.
Percentage of completion
Completed contract
What is the amount of loss recognized in a
period under the completed contract method
when estimated total project cost exceeds the
contract price?
Overall loss, which is the total project cost less
the contract price
Describe revenue recognition for the
percentage-of-completion method.
Recognize profit in proportion to the degree of
completion. This method is required if
estimates of the degree of completion at
interim points can be made and reasonable
estimates of the total project cost can be made.
Mill Construction Co. uses the percentage-of-completion method of accounting. During 20X5, Mill contracts to build an apartment complex for Drew for $20mn. Mill estimates that total costs would amount to $16mn over the period of construction.
In connection with this contract, Mill incurs $2mn of construction costs during 20X5. Mill bills and collects $3mn from Drew in 20X5.
What amount should Mill recognize as gross profit for 20X5?
$500,000
The project is 12.5% complete at the end of 20X5 ($2mn/$16mn). Total gross profit through the end of 20X5 is therefore $500,000 [= .125($20mn − $16mn)].
The $500,000 amount is the proportion of completion applied to the total contract profit of $4mn. 20X5 is the first year of construction; therefore no gross profit from previous years is subtracted. The entire $500,000 gross profit is recognized in 20X5.
Frame construction company’s contract requires the construction of a bridge in three years. The expected total cost of the bridge is $2mn, and Frame will receive $2.5mn for the project. The actual costs incurred to complete the project were $500,000, $900,000, and $600,000, respectively, during each of the three years. Progress payments received by Frame were $600,000, $1.2mn, and $700,000 in each year, respectively. Assuming that the percentage-of-completion method is used, what amount of gross profit should Frame report during the last year of the project?
$150,000
The gross profit recognized for the first two years must be computed first. Then, the difference between the $500,000 final total gross profit on the project (= $2.5mn − $2mn), and the gross profit for the first two years, is the amount of gross profit recognized in the last (third) year. The percentage of completion at the end of the first two years is 70% (= $500,000 + $900,000)/$2mn). The gross profit recognized through the end of year two is $350,000 [= .70($2.5mn − $2mn)]. Therefore, gross profit for year three is $150,000 (= $500,000 total gross profit on project − $350,000).
The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage of completion method includes the ratio of
Total costs incurred to date to total estimated costs.
The proportion of completion at the end of any year for a construction contract is the amount of work done, divided by the total amount of work required for the contract. Typically, cost is the measure of “work done.” At the end of year three, the numerator is the cost incurred for all three years. The denominator is the total estimated cost of the project, which is the sum of
(1) the cost incurred for all three years so far, plus
(2) estimated costs to complete as of the end of year three.
The percentage of completion changes each year, because both the numerator and denominator change. The gross profit to be reported for year three is the profit for all three years (using the proportion of completion just computed), less the profit already reported in the first two years.
The following information relates to a contract through its second year. The contract price is $50,000.
Year 1 Year 2 Cost incurred through end of $10,000 $34,000 Estimated cost remaining at end of 30,000 20,000
Under the completed contract method, by what amount will pretax income for the second year be affected?
Reduced $4,000
Total estimated project cost at the end of year 2 is $54,000 ($34,000 + $20,000). Note that this problem provides cumulative cost, rather than cost by year. There is an overall loss on this contract. Overall loss = $54,000 – $50,000 (contract price) = $4,000. Under the completed contract method, the overall loss is recognized immediately.
At the end of the third year of a contract, total estimated project cost exceeds the contract price. In both of the first two years, the firm recognized gross profit on the contract under percentage of completion. What is the ending balance in the construction-in-progress account at the beginning of year four on the contract under the percentage-of-completion method (PC), and under the completed-contract method (CC), had that method been used?
PC
CC
PC - Cost to date less overall loss
CC - Cost to date less overall loss
An overall loss is expected, because total estimated cost exceeds contract price. Under PC, the construction-in-progress account is increased by cost and gross profit. If the gross profit is negative (an overall loss), the loss is subtracted from construction in progress. The loss recognized in the year as overall loss becomes evident includes any previous profit. Therefore, the previously recognized gross profit is removed when the total loss is recognized. Under CC, the same idea applies, except that there is no gross profit from previous years to remove. The ending construction-in-progress balance is the same for both methods.
Falton Co. has the following first-year amounts related to its $9mn construction contract:
Actual costs incurred and paid $2mn
Estimated costs to complete $6mn
Progress billings $1.8mn
Cash collected $1.5mn
What amount should Falton recognize as a current liability at year end, using the percentage-of-completion method?
$0
The percentage of completion is ($2mn)/($2mn + $6mn) = 25%. This is the ratio of cost incurred to date, divided by the total project cost, which is the sum of cost to date and estimated remaining costs. Gross profit recognized is therefore .25($9mn − $2mn − $6mn) = $250,000. The contract price is $1mn more than the total estimated project cost. At 25% complete, the firm recognizes $250,000 of gross profit. The construction-in-progress balance is therefore $2mn + $250,000 = $2.25mn, the sum of cost to date, plus gross profit to date. With billings only $1.8mn so far, the firm reports a net asset equal to the difference between $2.25mn, the balance in construction in progress, and $1.8mn of billings. Billings are contra to construction in progress for reporting. This $450,000 difference is labeled “cost and profit in excess of billings on long-term contracts” in the balance sheet. No current liability is reported, because the asset balance (construction in progress) exceeds billings.
Choose the correct statement regarding accounting methods for revenue recognition on long-term contracts, for international and US accounting standards.
International standards require the cost recovery method when the percentage of completion method is not appropriate.
Contrary to US GAAP, international standards require a modified version of completed contract—the cost recovery method, when the percentage of completion method is not allowed.
A contractor recognized $42,000 of gross profit on a contract at the end of year one of the contract under the percentage-of-completion method. At the end of year two, total estimated project cost exceeded the contract price by $100,000. What amount of loss is to be recognized for year two alone under the percentage-of-completion method (PC), and also under the completed-contract method (CC), had that method been used?
PC
CC
PC - −$142,000
CC - −100,000
The overall loss on this contract is $100,000—the excess of total estimated cost and contract price, as given in the problem. Under PC, the previously recognized gross profit (year one) must be removed. The $142,000 loss recognized in year two yields a $100,000 combined loss for both years—the amount of the overall loss. For CC, the overall loss is recognized immediately. There is no year-one gross profit to remove, because CC recognizes no gross profit until completion of the contract.
Howard Co. had the following first-year amounts for a $7,000,000 construction contract:
Actual costs $2,000,000
Estimated costs to complete 6,000,000
Progress billings 1,800,000
Cash collected 1,500,000
What amount should Howard recognize as gross profit (loss) using the percentage-of-completion method?
($1,000,000)
With $2,000,000 actual costs incurred in year 1 and $6,000,000 of costs remaining, the firm expects to spend a total of $8,000,000 on this project. The contract price is $7,000,000. Therefore, the firm expects to lose $1,000,000 on this contract ($8,000,000 – $7,000,000). The entire loss is recognized even though the percentage of completion is only 25% ($2,000,000/($2,000,000 + $6,000,000)). With no previous years’ profit, the loss recognized in year 1 is the full $1,000,000 (negative gross profit).
Define “pension expense.”
The cost to the firm of providing the
pension benefits earned during the
year.
What fund is available for retirement
benefits?
Pension assets at market value
List the two important rates used in
pension accounting.
- Discount rate
2. Expected rate of return
List the two types of pension plans.
- Defined benefit
2. Defined contribution
List the two terms for pension plans
pertaining to whether employees
provide funds for their plan.
Plans can be contributory or
noncontributory.
How do we compute projected benefit
obligation (PBO) at the balance sheet
date using components?
Service cost to date + Interest cost to
date − Benefits paid to date + Prior
service cost +/− Net PBO gain or loss to
date
What is the pension liability balance for
a defined contribution plan?
Amount of required contribution not
paid
What is the basis of accounting for
defined benefit plans?
Accrual is the basis of accounting for
these plans.
List the outside entities that provide
services for a sponsoring firm’s defined
benefit pension plan.
Actuary
Trustee
List the three attributes of defined
benefit plan accounting.
- Delayed recognition
- Net reporting
- Offsetting
Define “projected benefit obligation
(PBO).”
Obligation for defined benefit plans;
present value of unpaid benefits as of
the balance sheet date
At what amount are plan assets
reported?
Fair value
Define “service cost” as it relates to
pension plans.
Amount of pension expense reported if
interest cost and expected return are
equal. It is the present value of benefits
earned for a period.
Define “interest cost” as it relates to
pension plans, and show the
computation.
Growth in pension obligation for a period. Interest cost is the product of the projected benefit obligation at the beginning of year and the discount rate.
List the formula for the amount of
return used in computing periodic
pension expense.
Expected return = Rate of return ×
Beginning plan assets
What accounting events affect the net
pension gain or loss at the beginning of
the year?
Recognition of gains and losses for
projected benefit obligation (PBO) and
assets; amortization of previous net
gain or loss
List the two sources of pension gains
and losses.
- Changes in projected benefit
obligation (PBO) - Difference between actual and
expected return
What is the effect of an increase in life
expectancy on a pension plan?
The projected benefit obligation (PBO)
increases (PBO loss)
Multiple components comprise Net Periodic Pension Cost. The component reported as part of compensation expense and included in the subtotal for income from operations is
Service cost
Service cost is included in compensation expense reported for the employees with whom the pension benefits are associated. Because the service cost component is included in the compensation expense line item, the subtotal for income from operations includes its effect.
What is the present value of all future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date only?
Accumulated benefit obligation.
Accumulated benefit obligation is the present value of all unpaid future retirement benefits as of the balance sheet date based on (1) service rendered to that date, and (2) current salary levels.
Even if the pension benefit formula incorporates future salaries, accumulated benefit obligation uses current salary levels only to provide a more current measure of the pension liability.
A defined benefit plan’s projected benefit obligation totaled $20mn at the end of the current year. Plan assets at market value totaled $23mn. Choose the correct statement concerning balance sheet reporting for this plan.
$3mn pension asset.
PBO and assets are netted for balance sheet reporting purposes. The firm has an overfunded plan and reports a $3mn asset ($23mn assets − $20mn PBO).
Data for a defined benefit pension plan for the current year are as follows:
PBO, January 1, $200mn
Assets, January 1, $160mn
Pension expense, $60mn
Funding contribution, $50mn
The ending pension liability balance is
$50mn
The beginning pension liability balance was $40mn ($200mn PBO − $160mn assets). With pension expense of $60mn and funding of $50mn, the pension liability increased an additional $10mn, yielding an ending pension-liability balance of $50mn ($40mn + $10mn). There is no information about amortization of PSC or net gain or loss, or difference between expected and actual return, or gain, loss or PSC during the period.
A company has a defined benefit pension plan for its employees. On December 31, year one, the accumulated benefit obligation is $45,900, the projected benefit obligation is $68,100, and the fair value of the plan assets is $62,000. What amount, if any, related to the defined benefit plan should be recognized in the balance sheet at December 31, year one?
A liability of $6,100.
The reported pension liability for a defined benefit pension plan is the difference between projected benefit obligation ($68,100) and the fair value of plan assets ($62,000), or $6,100. The two underlying amounts are reported in the footnotes, but are not recognized in the balance sheet. Only their difference, which is also the underfunded amount, is reported in the balance sheet as a liability.
How should plan investments be reported in a defined benefit plan’s financial statements?
At fair value.
Fair value represents the most representationally faithful amount to be applied to pension obligation. Fair value is the current amount available for payment of pension benefits.
The funded status of a defined benefit pension plan for a company should be reported in
The statement of financial position.
Funded status is the difference between projected benefit obligation and plan assets at fair value. Neither of these amounts is reported in the balance sheet (they appear in the notes only), but their difference is reported in the balance sheet as the reported pension liability for defined benefit plans. It is the amount the plan is “behind” in terms of having assets available for payment of benefits.
A company sponsors two defined benefit pension plans. The following information relates to the plans at year end:
Plan A Plan B Fair value of plan assets $ 800,000 $1,000,000 Projected benefit obligation 1,000,000 700,000
What amount(s) should the company report in its balance sheet related to the plans?
Liability of $200,000; asset of $300,000.
Within the same firm, overfunded plans are not offset with underfunded plans because a plan’s funds can be used only for the benefits payable under that plan. Plan A is underfunded $200,000 because its assets are less than its PBO—resulting in a pension liability. For plan B, the opposite occurs resulting in a pension asset of $300,000 ($1,000,000 plan assets − $700,000 PBO). Both amounts are reported separately.
At December 31, 2005, the following information was provided by the Kerr Corp. pension plan administrator:
Fair value of plan assets $3.45mn
Accumulated benefit obligation $4.3mn
Projected benefit obligation $5.7mn
What is the amount of the pension liability that should be shown on Kerr’s December 31, 2005 balance sheet?
$2.25mn
This answer is the underfunded projected benefit obligation—the plan’s funded status and most critical number for the pension plan. This is the amount shown in the balance sheet. It can also be an asset, if plan assets exceed projected benefit obligation.
The following information relates to a company’s defined benefit pension plan at December 31:
Accumulated benefit obligation $1,035,000 Projected benefit obligation 1,250,000 Prior service cost 113,000 Net gain on plan assets 167,000 Plan assets (fair value) 737,000
What amount should the company report as its pension liability at December 31?
$513,000
Reported pension liability is the difference between the projected benefit obligation (PBO) ($1,250,000) and the pension plan assets at fair value ($737,000). The difference is $513,000 and reflects the amount by which the pension plan is underfunded. This is shortfall of assets accumulated to pay benefits compared with the present value of those benefits or PBO, the main measure of the pension obligation. Only $737,000 of PBO is covered as of the balance sheet date.
What is the effect of recording the first
three components of pension expense
on pension liability?
Increase by the amount of pension
expense
What is the effect of recording funding
contributions on pension liability?
Decrease by the amount of
contribution
What is the effect of payment of
retirement benefits on pension
liability?
There is no effect.
Define “formal record” as it relates to
pension plans.
The pension information maintained in
the accounts.
What is the effect of future life
expectancy exceeding previous
estimates?
The projected benefit obligation (PBO)
increases (PBO loss)
On January 1 of the current year, a firm’s defined benefit pension plan is amended to increase the benefits for service already provided by employees through that date. The resulting immediate increase in projected benefit obligation (PBO) is $500 at January 1. The average remaining service period of employees covered by the amendment is ten years. Service cost for the year is $1,500. Actual and expected return on plan assets is $178. The discount rate is 10%. PBO at January 1, including the effect of the prior service grant, is $2,800. The funding contribution for the current year is $1,800. Compute pension expense for the current year.
$1,652
Pension expense = $1,500 service cost + $280 interest cost (= $2,800 × .10) − $178 expected return + $50 amortization of PSC (= $500/10) = $1,652. When PSC is initially recorded, another comprehensive income account is debited for $500. The amortization of $50 credits that account and debits pension expense for $50.
Which of the following is not subject to delayed recognition?
PBO.
Changes to PBO are recognized immediately. SC and interest cost are recognized as increases in pension expense and pension liability in the pension-expense entry. PSC, and PBO gains and losses are recognized immediately in the pension liability and other comprehensive income. PBO, however, is not recorded directly in one account; rather, it is reported in the notes to the financial statements.
An entity sponsors a defined-benefit pension plan that is underfunded by $800,000. A $500,000 increase in the fair value of plan assets would have which of the following effects on the financial statements of the entity?
A decrease in the liabilities of the entity.
The plan is currently underfunded and remains underfunded after the asset increase. Reported pension liability is the underfunded amount, the difference between PBO and plan assets. This firm’s reported pension liability decreased from $800,000 to $300,000 ($800,000 − $500,000) owing to the asset increase.
Which of the following would not cause a change in the net gain or loss at the beginning of a period?
Retroactive increase in benefits for employee service already performed.
This answer describes prior service cost (PSC). This increase in PBO is not merged with net gain or loss, but is rather treated separately, for purposes of computing pension expense. Amortization of PSC yields component 4; amortization of net gain or loss yields component 5.
The following information pertains to Seda Co.’s pension plan:
Actuarial estimate of projected benefit obligation at January 1, 2005 $72,000
Assumed discount rate 10%
Service costs for 2005 $18,000
Pension benefits paid during 2005 $15,000
If no change in actuarial estimates occurred during 2005, Seda’s projected benefit obligation at December 31, 2005 was
$82,200
Projected benefit obligation (PBO), January 1, 2005 $72,000
Plus interest cost (growth in PBO), .10($72,000) $7,200
Plus service cost $18,000
Less benefits paid in 2005 ($15,000)
PBO, December 31, 2005 $82,200
What is the formula for ending net gain
or loss subject to amortization in the
following period?
Beginning net gain or loss − Amortization of the beginning amount \+/− Projected benefit obligation (PBO) change in the period +/− Asset gain or loss
What amount is subject to amortization
for prior service grant amendments?
The initial present value of the
increased benefits for service already
rendered
What is the effect of recording funding
contributions on pension liability?
Decrease by the amount of
contribution
What method(s) are used to compute prior service cost (PSC) amortization?
Straight-line or service method
True or False: The amortization of the
net gain or loss at the beginning of the
year is a component of pension
expense.
This is a true statement.
What is the amount subject to periodic
amortization for pension gains and
losses?
Net gain or loss at the beginning of the
period
What is the effect of an increase in life
expectancy on a pension plan?
The projected benefit obligation (PBO)
increases (PBO loss)
What is the effect of recording the first
three components of pension expense
on pension liability?
Increase by the amount of pension
expense
How do we compute projected benefit
obligation (PBO) at the balance sheet
date using components?
Service cost to date + Interest cost to
date − Benefits paid to date + Prior
service cost +/− Net PBO gain or loss to
date
Define “formal record” as it relates to
pension plans.
The pension information maintained in
the accounts.
What is the prior service cost
amortization method that recognizes
more amortization in periods when
more employees are working?
Service method.
List the two significant changes to
which defined benefit plans are subject
and which are subject to delayed
recognition in pension expense.
- Prior service cost
2. Pension gains and losses
What is the effect of payment of
retirement benefits on pension
liability?
There is no effect.
What immediate changes in projected benefit obligation (PBO) will cause a change in pension liability?
Prior service cost (PSC) and PBO gains
and losses
What is the amortization method that
can result in no amortization even if
there is a beginning net gain or loss?
Corridor (minimum) method
What accounting events affect the net
pension gain or loss at the beginning of
the year?
Recognition of gains and losses for
projected benefit obligation (PBO) and
assets; amortization of previous net
gain or loss
In what accounts are prior service cost
and pension gains/losses recognized
immediately?
They are recognized in other
comprehensive income and pension
liability
List the two sources of pension gains
and losses.
- Changes in projected benefit
obligation (PBO) - Difference between actual and
expected return
What is the effect of future life
expectancy exceeding previous
estimates?
The projected benefit obligation (PBO)
increases (PBO loss)
At year end, a company has a defined benefit pension plan with a projected benefit obligation of $350,000; a net gain of $140,000 that was not previously recognized in net periodic pension cost; and prior service cost of $210,000 that was not previously recognized in net periodic pension cost. What amount should be reported in accumulated other comprehensive income related to the company’s defined benefit pension plan at year end?
A debit balance of $70,000.
Accumulated other comprehensive income (AOCI) is impacted by unexpected gains and losses from plan assets and unamortized portions of prior service costs from pension plan amendments. The net gain of $140,000 that has not previously been recognized in pension expense is reported as part of AOCI as a credit balance. The unamortized portion of prior service cost of $210,000 is reported as part of AOCI as a debit balance. The amount reported in AOCI related to the company’s defined benefit pension plan is a net debit balance of $70,000.
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Jan Corp. amended its defined benefit pension plan, granting a total credit of $100,000 to four employees for services rendered prior to the plan’s adoption. The employees, A, B, C, and D, are expected to retire from the company as follows:
A will retire after three years.
B and C will retire after five years.
D will retire after seven years.
What is the amount of prior service cost amortization in the first year?
$20,000
$20,000 is correct. Prior service cost is amortized over the average remaining life of the employees. The calculation of the average remaining service life of the employees is to add the remaining service lives of A (3 years), B (5 years), C (5 years), and D (7 years) for a total of 20 years and divide by the number of employees (20 years / 4 employees = 5 years). Therefore, the amortization of the prior service cost is $100,000 divided by 5 years, or $20,000.
On July 31, Year 5, Tern Co. amended its single employee defined benefit pension plan by granting increased benefits for services provided prior to Year 5. This prior service cost will be reflected in the financial statement(s) for
Year 5, and following years only.
Year 5 only is incorrect. Prior service costs are amortized over current (year 5) and future years.
Jamestown Corp. obtains the following information from its actuary. All amounts are as of January 1, Year 6 (beginning of the year).
Projected benefit obligation $1,530,000
Related fair value of asset $1,650,000
Unrecognized net loss $235,000
Average remaining service period 5.5 years
What amount of net loss should be recognized as part of net pension cost in Year 6 using the corridor approach ?
$12,727
$12,727 is correct. The requirement is to determine the amount of net loss to be recognized as a part of net pension cost in Year 6. Under the corridor approach, only the unrecognized net gain or loss in excess of 10% of the greater of the PBO or the related fair value of the asset is amortized.
In this case, the fair value ($1,650,000) is larger than the PBO ($1,530,000). The corridor is $165,000 (10% × $1,650,000). The unrecognized net loss ($235,000) exceeds the corridor by $70,000 ($235,000 – $165,000). This excess is amortized over the average remaining service period of active employees expected to participate in the plan ($70,000 / 5.5 = $12,727).
On January 1, Year 1, an entity has a projected benefit obligation of $3 million and plan assets of $2 million. On that date, the entity amends its pension contract to make the benefits larger, and this change creates a prior service cost of $400,000. The discount or interest rate in connection with the projected benefit obligation is 6%, and the expected earnings rate on plan assets is 4%. The average remaining service life of those employees impacted by the amendment is estimated to be 10 years. The service cost for the year is $290,000. No funding occurred during the year. What is the net pension cost (the pension expense figure) to be recognized for Year 1?
$454,000
$430,000 is incorrect. A defined benefit pension plan can have up to five components that must be used to determine net pension cost each year [service cost for the period, plus interest cost on the projected benefit obligation, minus expected return on plan assets, plus prior service cost amortization, and plus (or minus) amortization of actuarial unrealized losses (or gains)].
Here, there are four of these components. (1) The service cost for the year is $290,000. (2) The projected benefit obligation is increased from $3 million to $3.4 million by the prior service cost, so the interest on the projected benefit obligation is $3.4 million multiplied by 6%, or $204,000. (3) The income on the plan assets is $2 million multiplied by 4%, or $80,000. (4) The prior service cost is amortized to the net pension cost over the average remaining service life of the employees. That amortization increases the cost by $40,000 ($400,000 / 10 years). Hence, the net pension cost is $290,000 plus $204,000 less $80,000 plus $40,000, or $454,000.
Jefferson Corp. obtains the following information from its actuary. All amounts are as of January 1, Year 3 (beginning of the year).
Projected benefit obligation $5,000,000
Fair value of plan assets $5,500,000
Unrecognized net loss $675,000
Average remaining service period 5 years
What is the amount of corridor to be used to calculate corridor amortization?
$550,000
Under the corridor approach, the corridor amount is calculated as 10% of the greater of the beginning-of-year PBO or the beginning-of-year fair value of plan assets. In this case, the fair value of the plan assets ($5,500,000) is larger than the PBO ($5,000,000). Therefore, corridor should be calculated using the fair value of the plan assets. The corridor is $550,000 ($5,500,000 × 10%).
Madison Corp. obtains the following information from its actuary. All amounts are as of January 1, Year 4 (beginning of the year).
Projected benefit obligation $5,525,000
Fair value of plan assets $5,750,000
Unrecognized net loss $750,000
Average remaining service period 10 years
What is the amount of corridor amortization?
$17,500
The corridor approach is applied to determine the amount of net loss to amortize (recognize) as part of pension expense. Under the corridor approach, the unrecognized net gain or loss in excess of 10% of the greater of the beginning-of-year PBO or the beginning-of-year fair value of plan assets is amortized. In this case, the fair value of the plan assets ($5,750,000) is larger than the PBO ($5,525,000). Therefore, corridor should be calculated using the fair value of the plan assets. The corridor is $575,000 ($5,750,000 × 10%). To calculate corridor amortization, the amount in excess of corridor must be amortized over the remaining service period. $175,000 is the amount in excess of corridor ($750,000 – 575,000). This amount should be divided by the remaining service period to calculate the corridor amortization of $17,500 ($175,000 ÷ 10 years).
Adams Corp. obtains the following information from its actuary. All amounts are as of January 1, Year 3 (beginning of the year).
Projected benefit obligation $3,000,000
Fair value of plan assets $3,500,000
Unrecognized net loss $435,000
Average remaining service period 4 years
What is the amount in excess of corridor to be used in the calculation of corridor amortization?
$85,000
Under the corridor approach, the corridor amount is calculated as 10% of the greater of the beginning-of-year PBO or the beginning-of-year fair value of plan assets. In this case, the fair value of the plan assets ($3,500,000) is larger than the PBO ($3,000,000). Therefore, corridor should be calculated using the fair value of the plan assets, not the PBO. The corridor is $350,000 ($3,500,000 × 10%), and the amount in excess of corridor is $85,000 ($435,000 – $350,000).
Choose the correct statement regarding the treatment of prior service cost (PSC) for defined benefit plans under international accounting.
The entire PSC amount, at present value, is recognized immediately in pension expense.
PSC is recognized immediately in pension expense and DBO.
Distinguish between the rate used to
compute rate of return under IFRS and
U.S. GAAP.
Under IFRS, the discount rate used to compute interest cost must also be used to compute expected return on plan assets. Therefore, net interest cost is the difference between interest cost and expected return on plan assets. In contrast, under U.S. standards, expected return is based on any reasonable rate of return chosen by management. As a result, the asset gain or loss for IFRS will not be the same amount as per U.S. standards.
Explain how to account for past service
cost (IFRS).
We know this is in regard to IFRS because of the terminology “past service cost” instead of “prior service costs” (U.S. GAAP). Under international standards, past service costs are expensed immediately in pension expense as part of service cost.
The entity that administers pension
plans must report the following
separately for the plans it administers:
The entity that administers pension
plans is required to separately provide
accrual-based financial statements for
the plans it administers.
Under IFRS, how is pension expense
reported?
Under international standards, pension expense is reported in separate components rather than as a single amount on the income statement. These components are: service cost (including past service cost) and net interest cost (interest cost netted against expected return).
Under IFRS, what is the terminology is
used to refer to pension gains/losses
for U.S. standards?
Pension gains/losses for U.S. standards
are called “remeasurement
gains/losses” for international
standards.
A firm is applying international accounting standards to its defined-benefit pension plan and has pension gains and losses. As a result,
The firm’s earnings will not be affected.
Pension gains and losses are recognized immediately and in full in accumulated other comprehensive income. However, they are not subsequently amortized to earnings.
A firm is applying international accounting standards to its defined-benefit pension plan. At the end of the current year, the actuary informs the firm that the plan has experienced an actuarial gain of $2mn. The average remaining service period of plan participants is ten years. Therefore,
Other comprehensive income is immediately increased.
OCI is increased through the increase in pension gains/losses—OCI.
