Reading 24- LOS d ～ Q6－8

6．ime Doors has recorded a net pension liability of $1.5 million on its balance sheet. Which of the following statements regarding a minimum liability allowance is most accurate? Prime Doors is required to:

A)   record $375,000 as additional pension expense on its income statement.

B)   adjust the pension liability account by $375,000 on its balance sheet, with a corresponding entry as on the asset side to the minimum liability allowance account.

C)   disclose the $375,000 as a minimum liability allowance in the pension plan footnotes.

D)   record $375,000 as additional pension liability on its balance sheet, with a corresponding entry on the asset side to an intangible asset or contra-equity account.

The correct answer was D)

U.S. GAAP requires that if ABO exceeds the fair market value of the plan assets, the difference must appear on the balance sheet as a liability. The existing pension asset or liability must be adjusted by recording an additional pension liability, the minimum liability allowance, which is offset by an intangible asset.

7．ich of the following statements regarding the treatment of pension plan amendments under U.S. GAAP standards is most accurate? A plan amendment results in:

A)   an immediate increase in the net pension liability and pension expense.

B)   the establishment of an additional pension liability account on the balance sheet, with a corresponding entry to an intangible asset account.

C)   the disclosure in the pension plan footnotes of the nature of the amendment and the projected future financial impact.

D)   an unrecognized prior service cost that is amortized over the expected remaining service life of the affected employees.

The correct answer was D)

A plan amendment that increases promised future benefits to employees immediately increases the PBO account. The net pension liability and pension expense do not immediately increase by the entire amount. The unrecognized loss is held “off the financial statements” as unrecognized prior service cost and amortized over time as an increase in pension expense and an increase in the net pension liability.

8．nsion expense as reported by a firm is routinely adjusted by analysts to derive a more accurate measure of a firm’s true economic pension cost. Adjusted pension expense is calculated as:

A)   service cost + interest cost – actual return on plan assets.

B)   reported pension cost – actual return on plan assets.

C)   reported operating income + reported pension cost – service cost.

D)   reported pension expense – service cost + interest cost.

The correct answer was A)

Adjusted pension expense is calculated without reflecting the amortized items normally included in pension expense and using “actual” instead of “expected” return on assets.