[ysun29]

Big Books makes an annual pension plan contribution of $200,000. The company’s employees had an average

remaining service life of 20 years on 12/31/Year 6. The company paid benefits of $70,000 in Year 7 and expects to

pay benefits totaling $170,000 to retired employees in Year 8. Big Books has an effective tax rate of 30%. The actual

return on plan assets was 10%. What would Big Books report as U.S. GAAP net periodic pension cost on its

December 31, Year 7, income statement?

a. $193,400

b. $205,000

c. $187,400

d. $211,000

Explanation

Choice “b” is correct. The Year 7 U.S. GAAP net periodic pension cost should be calculated as follows:

S Service cost $220,000

I Interest cost 90,000 = $1,500,000 x 6% = Beg PBO x discount rate

R Expected return on plan assets (112,000) = $1,400,000 x 8% = Beg FV x expected rate

A Amortization of prior service cost 10,000 = $200,000 / 20 years

G Amortization of (gains) / losses 0

E Amortization of transition asset (3,000) = $60,000 / 20 years

Net periodic pension cost $205,000

My question is why we not using the formula given in the Becker book to calculate the Amortization of existing net obligation or net asset?
The formula is (Projected benefit obligation – FV plan asset)/15 yrs or avg employee job life? Thank you very much!

[Operation_CPA]

I remember wondering this as well. In the Becker text it explains that “most companies no longer report an unrecognized existing net obligation or net asset because this amount has been fully amortized to pension expense.” If I recall, I actually searched the forum on this and came to the conclusion that some review courses do not even include the “E” part of the mnemonic of “SIRAGE.” Interesting to say the least – if anyone else could jump in and shed some light on this that would be awesome.

[Author]

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