[Anonymous]

Hi everyone, I can’t seem to fully understand this question or Wiley’s explanation:

Effective Jan 1, 2010, Flood Co. established a defined benefit pension plan with no retroactive benefits. The first of the required equal annual contributions was paid on December 31, 2010. A 10% discount rate was used to calculate service costs and a 10% rate of return was assumed for plan assets. All the information on covered employees for 2010 and 2011 is the same. How should the service cost for 2011 compare with 2010, and should the 2010 balance sheet report a pension asset or a pension liability?

a) service cost 2011 = service cost 2010; 2010 bs reports pension liability

b) service cost 2011 = service cost 2010; 2010 bs reports pension asset

c) service cost 2011 > service cost 2010; 2010 bs reports pension liability

d) service cost 2011 > service cost 2010; 2010 bs reports pension asset

I understand that service cost 2011 must be > service cost 2010 because it is being discounted over fewer periods… but HOW CAN YOU DETERMINE WHETHER THERE’S A PENSION ASSET OR LIABILITY?

Help greatly appreciated.

PS Correct answer is (d)

[goodluck2everyone]

the reason there would be an asset in general is because the plan is overfunded, meaning

FMV of plan assets> PBO

this question is tricky, not sure how one can determine that based on the question

BEC- 80
REG- 68, 71, July
AUD- 61 , 84
FAR- -- 75 🙂

[Author]

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