Well then let me begin. I'll copy and past as much of the question as I can below:
AmeriGene Inc. reported net periodic pension cost of $400,000 in the current year, calculated as follows:
Service cost $ 300,000
+ Interest cost 175,000
+ Expected return on plan assets (100,000)
+ Amortization of prior service cost 40,000
+ Amortization of net gain (15,000)
= Net periodic pension cost $ 400,000 –TOTAL
AmeriGene has an overfunded pension plan. The company's effective tax rate is 30%. How will the amortization of the net gain affect the current year balance sheet under U.S. GAAP?
The correct answer is as follows: $15,000 decrease in accumulated other comprehensive income.
Explanation (given in problem once answered):
Choice “b” is correct. U.S. GAAP requires that net gains and losses be reported as a component of accumulated other comprehensive income until recognized in net periodic pension cost through amortization. The current year amortization of the net gain would be recorded as a reclassification adjustment from accumulated other comprehensive income with the following journal entry:
Debit (Dr) – Other comprehensive income $ 15,000
Credit (Cr) – Net periodic pension cost $ 15,000
Debit (Dr) – Deferred tax expense – net income 4,500
Credit (Cr) – Deferred tax expense – OCI 4,500
MY QUESION: can someone explain the reasoning as to why the answer is? if OCI is increased by crediting the account then OCI would have a debit balance of 10,500 and DTE – Net Income as a debit balance of 4,500 thus no income was be recognized?
Thanks for any help and I do apologize for the long post.
B
The reclassification adjustment affects net income and retained earnings on an after-tax basis.
AUD: 73, 4/14
FAR: TBD
REG: TBD
BEC: TBD
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