@caakankshajain don't cry, pensions are no fun. Have a glass of vino and reread your notes.
Do not try to memorize the relationship between service cost and deferred asset. You have approximately 6 elements that makes up the period's net expense (net periodic expense), correct? Out of 6 items, 4 of them are working towards increasing the expense, and other 2 (return on plan asset and gain due to either 1) actuarial calculation, or 2) actual return being bigger than expected return) are reducing it. Service cost is one of those 4 items that are increasing net periodic expense.
Remember, pension section is asking you to calculate the periodic expense but it is not necessarily vested (ready to exercise). In most cases, it is not. What does it mean? Down the road, the company has to pay this amount as an expense line item on the income statement. This will cause the future period's future income to go ‘down'. If income is low, your taxes are also low. Which is always good.
Deferred tax asset = Paying less tax in the future
Apply this logic to every single line in the period expense calculation. Item that lowers the expense will generate a deferred tax liability, because it's reducing the company's future expense.
Journals for taxes (as your question was about tax relationship):
For Service cost and Interest on PBO:
DR: Deferred tax asset
CR: Deferred tax benefit – OCI
For Return on Assets
DR: Deferred tax liability
CR: Deferred tax expense
For Amortization unrecognized period cost and amortization of net obligation
DR: Deferred tax benefit – OCI
CR: Deferred tax benefit – Income statement
For Gain on actual return/actuarial return
DR: Deferred tax expense – Income st
CR: Deferred tax expense – OCI
Hope this helps!
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