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cpa_ca
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Joined: 19 Mar 2009
Online Status: Offline
Posts: 40

Posted: 21 Apr 2009 at 19:05 \| IP Logged

Here is a question from Becker:

Big Books, Inc. has the following information related to
its defined benefit pension plan:

December 31, 20X6:
Projected benefit obligation     $1,500,000
Fair value of plan assets     1,200,000
Unrecognized prior service cost     200,000
Unrecognized net transition asset     60,000

December 31, 20X7:
Projected benefit obligation     $1,740,000
Fair value of plan assets     1,800,000
Service cost      220,000

Assumptions:
Discount rate     6%
Expected return on plan assets     8%

Big Books makes an annual pension plan contribution of
$200,000. The company's employees had an average
remaining service life of 20 years on 12/31/X6 and the
company expects to pay benefits totaling $170,000 to
retired employees in 20X8. Big Books has an effective
tax rate of 30%. What would Big Books report as net
periodic pension cost on its December 31, 20X7, income
statement?

******************************************************
My question is: in Becker's answer, net gain
amortization is 0. However, since the actual return on
asset is different from the expected return, should
there be a gain to be considered?

Thanks a lot!

divyagovil1
Major Contributor

Joined: 30 Jan 2009
Location: India
Online Status: Offline
Posts: 1456

Posted: 21 Apr 2009 at 19:14 \| IP Logged

Yes, there is the difference but it would be considered as unrecognized gain for the current year.

Amortization is always for any unrecognized gain/loss outstanding at the beginning of the year !

In above question, there is no unrecognized gain/loss OS at the beginning of 2007.

Thus, unrecognized gain/loss recognized in the current year would be amortized from next year.

__________________
Divya - CO State

Passed using Becker Review :
FAR - 04/11/09 - 94
BEC - 05/30/09 - 86
REG - 08/29/09 - 95
AUD - 11/21/09 - 92
Ethics - 2011

cpa2bsoon
Major Contributor

Joined: 25 Mar 2009
Location: United States
Online Status: Offline
Posts: 263

Posted: 22 Apr 2009 at 00:51 \| IP Logged

great question and splendid answer, i had the same doubt during my revision today!

__________________
Michelle/New Hampshire
BEC-80
REG-85
FAR-80
AUD-78

cpa2bsoon
Major Contributor

Joined: 25 Mar 2009
Location: United States
Online Status: Offline
Posts: 263

Posted: 22 Apr 2009 at 02:00 \| IP Logged

Are there any simluations on Pensions in the Becker software? I haven't been able to find any.

__________________
Michelle/New Hampshire
BEC-80
REG-85
FAR-80
AUD-78

divyagovil1
Major Contributor

Joined: 30 Jan 2009
Location: India
Online Status: Offline
Posts: 1456

Posted: 22 Apr 2009 at 09:47 \| IP Logged

You would find one simulation on Pensions in the "Final exam 1 - Sim#2"

It's a good practice... There were 2-3 mistakes which I did in this sim. It would reinforce the concepts you studied for pensions very well !

Good Luck !

__________________
Divya - CO State

Passed using Becker Review :
FAR - 04/11/09 - 94
BEC - 05/30/09 - 86
REG - 08/29/09 - 95
AUD - 11/21/09 - 92
Ethics - 2011

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