FAR - F6: Pension and Income Tax Accounting Flashcards
Q: Pension Plans
At the beginning of the year, Rhino’s PBO exceeds the fair value of the plan assets, so the net loss amortization is calculated as:
A: $3,500
**Under U.S. GAAP, unrecognized pension gains or losses are amortized over the average remaining service period if, at the beginning of the year, the gain or loss exceeds 10% of the greater of the beginning of the year PBO or the beginning of the year market related value of plan assets.
**At the beginning of the year, Rhino’s PBO exceeds the fair value of the plan assets, so the net loss amortization is calculated as:
Unrecognized net loss: $420,000
Less: 10% of greater of Beg. PBO/Plan Assets: (350,000) = 3,500,000 x 10%
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Excess: $70,000 / 20 year = $3,500
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Q: Defined Benefit Pension Plans
How would these pension plans be reported on Big Sports’ December 31, consolidated balance sheet under U.S. GAAP?
Answer: Noncurrent Asset - $625,000
Current Liability - $45,000
Non-current liability - $1,155,000
**U.S. GAAP requires that all overfunded (FV plan Assets > PBO) pension plan be aggregated and reported as a noncurrent asset, and that all underfunded (FV Plan asssets
Q: What amount would Zen report in accumulated other comprehensive income related to its pensions plan on its December 31 balance sheet under U.S. GAAP?
A: $460,000 x (1 - 40%) = $276,000
**Under U.S. GAAP, unrecognized prior service cost, unrecognized transition obligations and unrecognized net gains or losses must be reported in accumulated other comprehensive income, net of tax, until recognized as a component of net periodic pension cost through amortization.
**Unrecognized prior service cost, transition obligations and net losses all increase pension expenses when recognized and are therefore recorded as a debit to accumulated OCI.
**Unrecognized transition assets and get gains decrease pension expense when recognized and ar therefore recorded as a credit to accumulated OCI.
**For Zen, the total pension related amount to be reported in accumulated OCI (before tax) is:
Unrecognized prior service cost: $375,000
Unrecognized transition obligation: $135,000
Unrecognized net gain: (50,000)
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$460,000
**U.S. GAAP requires that this amount be reported on an after-tax basis: $460,000 x (1. - 40%) = $276,000
**Note that this would be a $276,000 offset (debit) to accumulated OCI.
Q: AmeriGene has an overfunded pension plan. The company’s effective tax rate is 30%. How will the service cost component of the current year net periodic pension cost affect the current year balance sheet?
Answer: $90,000 increase in deferred tax asset.
**Deferred taxes must be considered when recording net periodic pension cost and changes in pension plan funded status due to prior service cost, net gains and losses, and let transition assets and obligations.
**Therefore, the service cost component of AmeriGene’s net periodic cost would be recorded with the following JE:
Dr. Net periodic pension cost: $300,000
Cr Pension benefit asset: $300,000
Dr. Deferred tax asset: $90,000
Cr. Deferred tax benefit - Income statement $90,000
Q: AmeriGene has an overfunded pension plan. The company’s effective tax rate is 30%. How will he amortization of the net gain affect the current year balance sheet under U.S. GAAP?
A: $10,500 increase in retained earnings
**U.S. GAAP requires that net gains and losses be reported as a component of accumulated other comprehensive income until recognized in net periodic pension cost through amortization.
**The current year amortization of the net gain would be recorded as a reclassification adjustment from accumulated other comprehensive income with the following JE:
Dr. OCI - $15,000
Cr. Net Periodic pension cost - $15,000
Dr. Deferred tax expense - net income $4,500
Cr. Deferred tax expense -OCI $4,500
**The reclassification adjustment affects net income and retained earnings on an after-tax basis.
Q: What is Parker’s unrecognized prior service cost amortization for the year under U.S. GAAP?
A: Under U.S GAAP, the prior service cost is booked to other comprehensive income and then amortized to the income statemnt (Net periodic pension cost) by assigning an equal amount to each future period of service of each employee who is active at the date of the amendment.
**In this problem, prior service cost will be assigned equally to each service year provided by the company’s employees as follows:
$600,000 x (350/2000) = $105,000
**Note that under IFRS, the prior service cost would be reported on the income statement, not in other comprehensive income, and therefore would not be amortized.
