Pension Expense Basics Flashcards
Pension Expense Basics
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.
$1,372
$1,652
$1,602
$2,102
The correct answer is: $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.
Actual return less than expected return.
Increase in life expectancy.
PSC.
The correct answer is: 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?
An increase in the assets of the entity.
An increase in accumulated other comprehensive income of the entity for the full amount of the increase in the value of the assets.
A decrease in accumulated other comprehensive income of the entity for the full amount of the increase in the value of the assets.
A decrease in the liabilities of the entity.
The correct answer is:
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?
Actual return on assets different from expected return.
Amortization of the beginning-of-year net gain or loss.
Increase in estimated employee turnover.
Retroactive increase in benefits for employee service already performed.
The correct answer is:
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
$64,200
$75,000
$79,200
$82,200
The correct answer is: $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
