Inter Acct Chapter_17_day_two_solutions

Inter Acct Chapter_17_day_two_solutions - Chapter 17 Day...

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Chapter 17 Day two: Question 17-8 The pension expense reported on the income statement is a composite of periodic changes that occur in both the pension obligation and the plan assets. These include service cost, interest cost, return on the plan assets, and the amortization of prior service cost and of net gains or losses. Question 17-9 The service cost in connection with a pension plan is the present value of benefits attributed by the pension formula to employee service during the period, projecting future salary levels (i.e., the projected benefits approach). Question 17-10 The interest cost is the projected benefit obligation outstanding at the beginning of the period multiplied by the actuary's interest (discount) rate. This is the “interest expense” that accrues on the PBO and is included as a component of pension expense rather than being separately reported. Question 17-11 SFAS 87 specifies that the actual return be included in the determination of pension expense. However, the actual return is adjusted for any difference between actual and expected return, meaning that the expected return is really the amount reflected in the calculation of pension expense. This “investment revenue” is deducted as a component of pension expense rather than being separately reported. The difference between actual and expected return on plan assets is combined with gains and losses from other sources for possible future amortization to pension expense. Question 17-12 Prior service cost is the obligation (present value of benefits) due to giving credit to employees for years of service provided before either the date of an amendment to (or initiation of) a pension plan. Prior service cost is recognized as other comprehensive income as incurred and then as a component on accumulated other comprehensive income in the company’s balance sheet. The account is allocated (amortized) to pension expense over the service period of affected employees. The straight-line method allocates an equal amount of the prior service cost to each year. The service method recognizes the cost each year in proportion to the fraction of the total remaining “service years” worked in each of these years.
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Answers to Questions (continued) Question 17-13 Gains or losses related to pension plan assets represent the difference between the return on investments and what the return had been expected to be. They are recognized as other comprehensive income as incurred and then as a component on accumulated other comprehensive income in the company’s balance sheet: either a net loss–AOCI or a net asset– AOCI depending on whether cumulative losses have exceeded gains, or vice versa. The account is amortized to pension expense only if the net loss–AOCI or net asset–AOCI exceeds a defined threshold. Specifically, a portion of the excess is included in pension expense only if it exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher. The amount
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Inter Acct Chapter_17_day_two_solutions - Chapter 17 Day...

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