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Topic
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In 20X9, Rhino Robots Inc. has the following information related to its defined benefit pension plan:
Fair value of plan assets, 1/1/X9 $2,130,000
Fair value of plan assets, 12/31/X9 2,525,000
Projected benefit obligation, 1/1/X9 3,500,000
Projected benefit obligation, 12/31/X9 3,850,000
Unrecognized net losses 420,000
The average remaining service period of Rhino’s employees is 20 years. What is the net loss
amortization that Rhino will include in its 20X9 net periodic pension cost?
a. $0
b. $1,750
c. $3,500
d. $21,000
Explanation:
Choice “c” is correct. Unrecognized pension gains or losses are amortized over the average remaining
service period if, at the beginning of the year, the gain or loss exceeds 10% of the greater of the beginning
of the year PBO or the beginning of the year market related value of plan assets (we will use the fair value
of the plan assets in this example as the market related value is not given and these amounts are
approximately equal).
At 1/1/X9, Rhino’s PBO exceeds the fair value of the plan assets, so the 20X9 net loss amortization is
calculated as:
Unrecognized net loss $ 420,000
Less: 10% of Greater of Beg. PBO/Plan Assets – 350,000 = $3,500,000 PBO x 10%
Excess $ 70,000
Excess / Average Remaining Service Life = $70,000 / 20 = $3,500
Choice “a” is incorrect. Because the unrecognized net loss exceeds 10% of the greater of the beginning
PBO/Plan assets, the excess must be amortized over the average remaining service period.
Choice “b” is incorrect. This amortization is calculated using the 12/31/X9 PBO. The greater of the
beginning PBO/Plan assets must be used to determine the amount to amortize.
Choice “d” is incorrect. This is the total unrecognized net loss amortized over 20 years. GAAP allows
companies to amortize only the portion of net gain or loss in excess of 10% of the greater of PBO/Plan
assets.
The part I’m having trouble with is the explanation for D. It sounds to me that companies can choose to amortize between only the exceeding portion (the Corridor Approach) or fully. If it is the case, how do I know which method should I use in a real exam? Thank you in advance.
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