Pension Expense Delayed Recognition Flashcards
Pension Expense Delayed Recognition
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 credit balance of $420,000.
A debit balance of $420,000.
A credit balance of $70,000.
A debit balance of $70,000.
The correct answer is: 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.
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
$0
$5,000
$25,000
The correct answer is: $20,000
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 only.
Years before year 5 only.
Year 5, and following years only.
Year 5, and years before and following Year 5.
The correct answer is: 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
$14,909
$42,727
$70,000
The correct answer is: $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?
$430,000
$454,000
$790,000
$814,000
The correct answer is $454,000
$454,000 is correct. 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?
$500,000
$550,000
$25,000
$67,500
The correct answer is: $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?
$575,000
$175,000
$25,000
$17,500
The correct answer is: $17,500
he 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).
dams 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?
$135,000
$85,000
$21,250
$435,000
The correct answer is: $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.
Firms have an option to record PSC directly into other comprehensive income or in earnings.
The entire PSC amount, at present value, is recognized immediately in pension expense.
The entire PSC amount, at present value, is recognized immediately in other comprehensive income, as per U.S. standards.
The estimated nominal increase in benefits is recognized immediately in pension expense.
The correct answer is:
The entire PSC amount, at present value, is recognized immediately in pension expense.
Under IFRS, the present value of the past service cost (PSC) is recognized immediately in pension expense. The PSC increases pension expense and increases the Defined Benefit Obligation (DBO). This differs from U.S. standards that allow companies to choose between immediately recognizing the PSC (referred to as prior service cost under U.S. GAAP) in pension expense or recognizing PSC in other comprehensive income (OCI - PSC) and amortizing the PSC into pension expense over the average years of service of the employees covered by the plan amendment or using a straight line approach.
