[Anonymous]

At the beginnning of year 1, a company amends its defined benefit pension plan for an additional $500,000 in prior service cost. The amendment covers employees with a 10-year average remaining service life. At the end of year 1, what is the net entry to accumulated other comprehensive income, ignoring tax effects?

A. a $450,000 debit

B. a $500,000 debit

C. a $5500,000 credit

D. a $450,000 credit

answer A

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Why are you debiting 450,000 to accumulated other comprehensive income? Shouldn’t it be just for 50,000?

[mrgriff21]

I assume by net entry they mean the 500K less the 50K amortization

A - 84
R - 81
B - 77
F - 81

[Anonymous]

Why are you removing 50,000, I thought you should add 50,000?

[Anonymous]

It's because the increase in prior service cost does not hit the income statement immediately, you need to “park it” temporarily in AOCI, and release it gradually to P&L.

Since the increase in prior service cost happened at the beginning of the period, amortization of $50,000 ($500,000/10 years) must be taken out of AOCI and expensed to income statement at the end of the period because now that amortized portion is ready to hit the income statement (time passed).

So at the end of the year net entry for AOCI would be the increase in prior service cost, net of amortization (500,000 – 50,000 = 450,000)..

Why would ever add an amortization expense to AOCI? that should never happen. Amortization is an expense that hits the P&L. Dude, never ever ever ever do that on exam day 😀

[Author]

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