Joined: 26 Nov 2009 Location: United States
Online Status: Offline Posts: 42
Posted: 26 Nov 2009 at 09:30 | IP Logged
When there is a positive balance in the prepaid pension cost account, why is it added to Minimum Liability required to get Additional Pension Liability? Shouldn't it be an offset to the liability since the prepaid pension cost is an overfunding of the contribution by the employer? See below part of problem in bold...
* Minimum Liability required $40,000 Plus balance in prepaid pension cost 10,000 Additional Pension Liability $50,000
If you can post the entire problem it will be better. I agree with you and am confused as well all I can think of is something like this.
The minimum they are referring could be factoring in what the assets did that year. Assume the assets lost 40,000 in value or were just 40,000 worse off than what they projected them to be. But you added 10,000 that year to to fund via a contribution so your assets growth/loss actual looks better than it should. Your assets lost 40,000 in value but if you hadn't pumped in 10,000 it would be 50,000 in loss.
So maybe they are saying you need to increase the liability by this amount of real loss.
---I could be wayyyy off base here....post the whole question if you can
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Joined: 26 Nov 2009 Location: United States
Online Status: Offline Posts: 42
Posted: 27 Nov 2009 at 08:05 | IP Logged
Okay, I spent all Thanksgiving morning trying to hash through this and I think that I figured it out. It's because when you net the "Prepaid/Accrued Pension Cost" and "Add'l Pension Liability" the result has to be the amount of the "Minimum Liability." So if you have a $10,000 debit in the Prepaid account and the Minimum Liability is a credit of $40,000, the Add'l Pension Liability has to be a credit of $50,000 because you have to wind up with the Minimum Liability. Therefore, x + 10K = (40K) and x = (50K).
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Topic: Prepaid pension cost
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