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Topic
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On December 31, Company Inc. amended its overfunded pension plan and recorded prior service cost of $250,000. On that date, Company had an effective tax of 30% and its employees had an average future service period of 25 years. What effect will the plan amendment have on Spacer’s December 31 financial statements?
A) Increase net periodic pension cost
B) Decrease AOCI
C) Increase pension benefit asset
D) Decrease retained earnings
The answer is B: Decrease AOCI. The explanation says “Changes in the funded status of a pension plan due to plan amendment must be reported in OCI in the period incurred. Therefore, at December 31, Company will record prior service cost as a debit to OCI, which will decrease the AOCI balance at December 31:
Dr: OCI $250,000
Dr: Deferred Tax Asset $75,000
Cr: Deferred tax benefit – OCI $75,000
Cr: Pension Benefit Asset $250,000
I don’t get it…
I thought an increase in prior service cost would increase AOCI by $250,000. In year 2, the amortization of the prior service cost would decrease AOCI by $10,000 (250,000/25 years).
We would debit OCI by $250,000 and credit Pension benefit Liability, thus increasing AOCI.
And when we record the amortization of prior service cost, we would Debit Net Periodic Benefit Liability and Credit OCI, thus removing the amortized portion out of AOCI.
Unless we are removing the deferred tax asset from the overfunded pension plan…then I can understand why we would lower AOCI, however Becker’s explanation isn’t really stating that…
Please help me as my exam is on monday…
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