[lulusky]

Hi guys, I have a question about pension plan.

In the Becker textbook, it says <gain> and losses includes the difference between the expected and actual return on plan assets when the expected return on plan assets is used to calculate pension expense.

But in below question, I do not understand why amortization of (gain ) or loss is 0.

Big books, Inc. has the following information related to its defined benefit pension plan:

Dec. 31. Year 6:

Projected benefit obligation: $1,500,000

FV of plan assets: 1,400,000

Unrecognized prior service cost: 200,000

Unrecognized net transition asset: 60,000

Dec. 31. Year 7:

Projected benefit obligation: $1,750,000

FV of plan assets: 1,670,000

Service Cost: 220,000

Assumptions:

Discount Rate: 6%

Expected return on plan assets: 8%

Big Books makes an annual pension plan contribution of $200,000. The company’s employees had an average remaining service life of 20 years on 12/31/year 6. The company paid benefits of $70,000 in Year 7 and expects to pay benefits totaling $170,000 to retired employees in Year 8. Big Books has an effective tax rate of 30%. The actual return on plan assets was 10%. What would Big Books reports as U.S. GAAP net periodic pension cost on its Dec. 31, Year 7, income statement?

Answer: Service cost: $220,000

Interest cost: 90,000(1,500,000*6%)

Expected return on plan assets: (112,000) (1,400,000*8%)

Amortization of prior service cost: 10,000 (200,000/20 years)

Amortization of (gains) / losses: 0

Amortization of transition asset: (3,000) (60,000/20 years)

Net periodic pension cost: $205,000

Since expected return on plan assets is 8%, actual return on plan assets is 10%. there should be unrecognized gain of the differences between actual return and expected return.

I am kind of confused about this part.

Thanks

[Anonymous]

Since the actual return is $140,000 and the expected return in $112,000. I would also think that there would be a gain of $28,000 deducted from net pension cost.

I was under the impression that if actual=expected, then gain/loss is 0. When they are different it will yield either a gain or loss. Not quite sure why there is a gain/loss of 0.

[Anonymous]

I believe the amortization of the gain/loss of return on plan assets would begin in Year 8. Maybe? Pensions weren't my strong suit.

I.e. your year 7 amortization would have occurred in year 6, and the year 8 amortization will be from year 7. Amortized over the remaining service years given (20 years).

[excel monkey]

ARCPA2B is correct.

Amortization of the gain/loss is based of the beginning AOCI balance. Since we are not given a beginning balance, we can assume it's 0. The 28,000 gain would go to OCI, and amortization would begin in year 8 (potentially, depending upon the corridor).

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[Author]

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