[Anonymous]

Becker Question –

Hello, everyone-

I was going through F7 SIM 1 (#3 and 5), and I for the life of me don’t understand why when they are recording the net periodic pension cost they are crediting the asset???? I went through F7-M2 over again yesterday and today and it clearly is credit to the liability.
Dr Net periodic pension cost
Cr Pension liability

Then why the heck is the SIM crediting the asset? Is it a mistake???? If anyone has done these or has access to Becker to look at the solutions, can you please reply? Also, of course the solution doesn’t offer an explanation, just JEs…. Thank you!

[Anonymous]

anyone? 🙂

[Jen-J]

A plan isn't going to have both a pension asset and a pension liability at the same time. Either the plan assets exceed the PBO (in which case there is an asset) or the PBO exceeds the plan assets (in which case there's a liability). In the first case, you are crediting the pension asset to reduce it and bring it closer to zero. In the second case, you are crediting the pension liability to make it larger (bringing it further down below zero).

In Becker F7, Sim 1, module 3, you are starting with a pension asset of 80K. In module 5, you are starting with a pension asset of 800K. Both of them have an asset.

Page F7-15 has the definitions. Notice in F7, M2 that some of the entries say “Pension plan asset/liability” as the journal entry – it depends whether the plan is overfunded or underfunded as to which one you use.

AUD: 87

BEC: 90

FAR: 93

REG: 84

CPA license issued September 2018

[Anonymous]

@Jen J-thank you so much! I suspected that it had to do with overfunded/underfunded-but it's maddening that Gearty doesn't mention it once when he explains the entries. Are you saying if the pension is overfunded and has an asset, you credit the asset to bring it closer to zero? and if it's underfunded you credit the liability? It makes sense for Sim 3, because it's overfunded by 105,000, but not for SIM 5, it's underfunded… 🙂 It's so counterintuitive that it would be nice if they actually explained it-thank you so much, it's been driving me nuts since yesterday! 🙂

[Anonymous]

I think I understand, based on this….

the company must adjust the balance in the accrued/prepaid pension cost to properly reflect the funded status of the pension plan. In effect, the company compares the underfunded (or overfunded) amount to the balance in the
accrued/prepaid pension cost and makes a journal entry for the difference.

So what you are saying, because the beginning funding status was “overfunded” we start with an asset and reduce it to get to the liability. If we started with the underfunded, we would have adjusted the liability up or down depending on what the ending result is? I think that's how I understand it but want to make sure I am not missing anything! 🙂

[Jen-J]

SIM 5 is underfunded at the end of the year, not at the beginning (it was overfunded then). It starts the year with a Pension Benefit Asset. It gets confusing since there's Pension Benefit Asset, Pension Benefit Liability – current, and Pension Benefit Liability – non-current. In my assumption, all 3 are separate GL codes, each mapped to a separate section of the balance sheet.

Since it started the year with a plan asset, in practice I'd probably book everything against the asset GL code and then figure out at the end of the year if I was over or under funded. If I was underfunded at the end (like in SIM 5), I'd guess that I'd have to figure out the split between current and non-current liability and book entries to move the amounts there. If it were still overfunded, I'd be fine at that point.

The SIM could have done a much better job on that, but I don't think that's what they were testing with the question. I honestly missed the distinction when I did the question a month ago.

AUD: 87

BEC: 90

FAR: 93

REG: 84

CPA license issued September 2018

[Anonymous]

Thank you Jen! I think I get correctly-because we started off with the asset, that's where we book it, but it's not apparent in any of the Becker explanations. It's just normally if you have the expense you book it against a liability not an asset, and I was frustrated:) I appreciate all your help!

[Wannafree]

Becker is wrong .
NPPC is clearly given 277K ( Exp )
Service cost is 275K
Interest is 68
Contribution (this year ) is 110K.
the difference is current year liabilities.
So one JE should be

NPPC Dr 277300
Cash Cr 110000
Pension benefits liabilities Current Cr 67300

Break up of NPPC is 275k + 68K etc.
Regarding over funded underfunded etc that's non current or current ,that's a separate disclosure.

WannaB

[Anonymous]

@Wannafree, are you sure? From what I have read, the above explanation Jen gave as to why you book the Net period pension cost to liability or asset makes sense. I got my numbers correct, it was just the asset side of the entry (not the amount) that was tripping me up.

[Wannafree]

@ANYATVER, JnJ has said most of things right.
Now come back of Becker's JE
Pension asset/liabilities dr
Cash Cr
When co contribute it either increases the asset of reduce the liabilities.When it reduces the liab ? when it's underfunded and it's contributing more than current obligation.In that case
Dr liabilities
cr Cash ( reduce the liab)
but when it's increasing the asset then Dr asset ,that explains the asset/liabilities JE.
There is case when asset may be credited ( OCI Debited ).
Rule of thumb for je ,
Dr Expense (service cost .interest ) 100
Cr Cash
If cash is less than 100 it will be liabilities and if more than debit liab as most likely it's covering under funded.
I am going to write this to Becker's ,let us see what they say.

WannaB

[Wannafree]

one more thing to make it simple.
NPPC DR
Cr Pension benefits liabilities
Cr OCI

When you make the payment
Dr Pension benefits liabilities
Cr Cash

The above entry is rule as per Becker's.
The JE for service cost and Interest cost is just breakdown of above.

WannaB

[Author]

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