[SchruteBeet]

Nome Co. sponsors a defined benefit plan covering all employees. Benefits are based on years of service and compensation levels at the time of retirement. Nome determined that, as of September 30, Year 2, its projected benefit obligation was $380,000, and its plan assets had a $290,000 fair value. Nome’s September 30, Year 2, trial balance showed a pension asset of $20,000. To report the proper pension liability in its September 30, Year 2, balance sheet, what amount should Nome report as an adjustment?

A.$110,000

B.$360,000

C.$380,000

D.$400,000

Explanation: Correct answer is A. Since the projected benefit obligation is $90,000 more than the plan assets ($380,000 – $290,000), the total underfunded status of the plan of $90,000 needs to show up on the balance sheet. To adjust from the trial balance amount ($20,000 asset) to the correct ending amount of $90,000 liability requires a $110,000 credit adjustment ($90,000 + $20,000).

Can someone please explain why we add the plan asset to the liability instead of adjusting the plan assets up to the new amount?

[J King]

Funny I encountered that same problem earlier while I was reviewing pensions.

The $20,000 apparently is a prepaid pension cost, at least what Gleim TB stated. You're pretty much going to net together the unfunded amount (difference between PBO and FV of plan assets) and whatever is the pension cost (accrued or prepaid). It's a plus since prepaid pension cost results from contributions exceeding pension expense set by actuary.

Hope this helps.

[SchruteBeet]

@JKing Thanks for responding. If the $20K is an asset and the $90K is a liability, wouldn't the asset reduce the liability?

[J King]

You can think of it this way..

The fact that the September 30 trial balance showed $20,000 in prepaid pension costs, and plan assets with a fair value of $290,000, that means the NET pension benefit obligation was only $270,000. If the actual projected benefit obligation was determined to be $380,000, the plan was underfunded by $90,000. So 380 – 270 = 110

Then J/E would be (ignoring tax effects)

Dr. Pension Expense 110
Cr. PBO 110

[SchruteBeet]

Makes more sense. Thanks, @JKing!

[Author]

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