[cpa1988]

I don’t get the deferred tax asset part of the journal entry. Even after that entire chapter on deferred stuff, I just don’t really get it. Can someone help me see whats happening here?

AmeriGene Inc. reported net periodic pension cost of $400,000 in the current year, calculated as follows:

Service cost $ 300,000

Interest cost 175,000

Expected return on plan assets (100,000)

Amortization of prior service cost 40,000

Amortization of net gain (15,000)

Net periodic pension cost $ 400,000

AmeriGene has an overfunded pension plan. The company’s effective tax rate is 30%. How will the service cost component of the current year net periodic pension cost affect the current year balance sheet?

a. $90,000 increase in accumulated other comprehensive income.

b. $300,000 increase in noncurrent pension benefit asset.

c. $90,000 increase in deferred tax asset.

d. $300,000 decrease in retained earnings.

Explanation

Choice “c” is correct. Deferred taxes must be considered when recording net periodic pension cost and changes in pension plan funded status due to prior service cost, net gains and losses, and net transition assets and obligations. Therefore, the service cost component of AmeriGene’s net periodic pension cost would be recorded with the following JE:

Debit (Dr) Credit (Cr)

Net periodic pension cost $ 300,000

Pension benefit asset $ 300,000

Deferred tax asset 90,000

Deferred tax benefit – income statement 90,000

Choice “b” is incorrect. As demonstrated in the journal entry above, service cost decreases the pension benefit asset.

Choice “d” is incorrect. Net periodic pension cost affects retained earnings on an after-tax basis. Therefore, the service component will decrease retained earnings by $210,000 [$300,000 × (1 − 30%)].

Choice “a” is incorrect. Service cost does not affect accumulated other comprehensive income. The pension component of accumulated other comprehensive income reflects changes in the funded status of a pension plan due to prior service cost, net gains and losses, and net transition assets or obligations.

[cpagal]

I don't get it either. You are not alone.

FAR - 08/30/15 - 90
AUD - 11/12/15 - 92
REG - 01/19/16 - 82
BEC - 02/29/16 - 83

Passed all on 1st attempt using GLEIM (full program) and NINJA (MCQ only)!!!

Louisiana Licensed CPA

[greg2015]

The pension plan is overfunded, so it's implied that there are no employer contributions to the plan for the current year. Pension expense itself is not deductible, only contributions are. Therefore, the company would not get a tax deduction in the current year. The pension expense creates a temporary difference between book income and taxable income. The question relates only to the service cost component, so the pension expense creates a deferred tax asset of $300,000 X 30%. The effect of this entry provides a tax effect on the pension expense recognized in income. The deferred tax asset reverses over time; each year deferred taxes are recorded on the difference between contributions to the plan and pension expense. Let me know if this is not clear or if you need additional explanation.

AUD: 99
FAR: 95
BEC: 89
REG: 87

AICPA Ethics: 91

Licensed Illinois CPA

[Author]

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