[incarnate1]

On January 2, 20X2, Loch Co. established a noncontributory defined benefit plan covering all employees and contributed $1,000,000 to the plan. At December 31, 20X2, Loch determined that the 20X2 service and interest costs on the plan were $620,000. The expected and the actual rate of return on plan assets for 20X2 was 10%. There are no other components of Loch’s pension expense. What amount should Loch report in its December 31, 20X2, balance sheet as prepaid pension cost?

Provided answer:
Incorrect. Service and interest costs of $620,000 will be reduced by the return on plan assets of $1,000,000 X 10% or $100,000 to give pension expense of $520,000. Since the amount contributed to the plan was $1,000,000, prepaid pension cost will be the difference of $480,000.

The question does not say that the beginning FV of plan assets were $1,000,000; contributions for the year were 1 million, not plan assets, but the answer seems to have somehow inferred that. What am I missing?

[Fk]

@ incarnate 1. It is not necessary to have beginning Plan asset.In the above problem the contribution were made in the begginning of the current year . Since one year has pass, the contribution will earn a return.

[incarnate1]

Thanks!

[Author]

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