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 Topic: Pension cost ( Topic Closed)
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to_be_cpa
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Joined: 23 Jun 2009
Location: United States
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Posts: 34
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| Posted: 09 Apr 2010 at 22:00 | IP Logged
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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 1,400,000
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?
a. $187,400
b. $193,400
c. $205,000
d. $211,000
Explanation
Choice "c" is correct. The 20X7 net periodic pension cost should be calculated as follows:
S Service cost $220,000
I Interest cost 90,000 = $1,500,000 x 6% = Beg PBO x discount rate
R Expected return on plan assets (112,000) = $1,400,000 x 8% = Beg FV x expected rate
A Amortization of prior service cost 10,000 = $200,000 / 20 years
G Amortization of (gains)/losses 0
E Amortization of transition asset (3,000) = $60,000 / 20 years
Net periodic pension cost $205,000
My question is: why they have taken amortization of gain or loss as zero?
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gottobecpa
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Joined: 10 Feb 2010
Location: United States
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Posts: 262
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| Posted: 10 Apr 2010 at 07:03 | IP Logged
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Because we cannot calculate the difference actual return and expected return as we do not have enough information. We know that the expected return on plan assets is $112,000. However, we cannot compute the actual return on plan assets because we do not know the benefits paid in 2007. The problem tells us that the benefits paid in 2008 total $170,000. But this number is not necessarily equal to the benefits paid in 2007. However, the fact that we do not know the difference between the expected and actual return in 2007 does not impact our calculation of 2008 pension cost. This is because the amortization of the difference between the expected and actual return on plan assets is based on the balance in the unrecognized net gain/loss account at the BEGINNING OF THE PERIOD. In this problem, there is no unrecognized gain/loss at the beginning of 2007 (end of 2006). Therefore, there is no gain/loss to amortized in 2007. The difference between the expected and actual return that arises in Year 2007 will be amortized starting in Year 2008
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16-April-10-FARE-77!
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31-Aug-10-BEC-87 (unbelievable because studied the least for this, 15 days)
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to_be_cpa
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| Posted: 10 Apr 2010 at 12:41 | IP Logged
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thanx gottobecpa..:)
really appreciate.
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