[nalratoss]

Effective January 1, Year 1, Flood Co. established a defined benefit pension plan with no retroactive benefits. The first of the required equal annual contributions was paid on December 31, Year 1. A 10% discount rate was used to calculate service cost, and a 10% rate of return was assumed for plan assets. All information on covered employees for Year 1 and Year 2 is the same. How should the service cost component of pension expense for Year 2 compare with Year 1, and should the Year 1 balance sheet report a pension asset or liability?

Service Cost ||| Pension Amount
for Year 2 ||| reported on the
compared with Year 1 ||| year 1 Balance Sheet

A Greater than ||| Liability
B Equal to ||| Liability
C Greater than ||| Asset
D Equal to ||| Asset

Totally have no clue, sometimes conceptual questions are much harder than calculation questions.

P.S Okay I can’t format this right. This one looks better
A. Service cost for current year compared to the previous year, Equal to; Funding status reported on the previous-year balance sheet, Underfunded
B. Service cost for current year compared to the previous year, Equal to; Funding status reported on the previous-year balance sheet, Overfunded
C. Service cost for current year compared to the previous year, Greater than; Funding status reported on the previous-year balance sheet, Underfunded
D. Service cost for current year compared to the previous year, Greater than; Funding status reported on the previous-year balance sheet, Overfunded

[Anonymous]

I'm just going to take quick stab. haven't looked at pensions since last year, but I think if you recognize that the interest rate is the same for both the plan and the entity, they should be equal.

It is easiest to think of pensions as two unique items, connected by the pension expense.

The company itself has its own set of entries and the plan (like an investment) is completely separate.

I think the answer is A. The fact that the company paid into the pension at the end of the year, means it did not have time to accrue “interest”. But the workers have worked and accrued that expense for year one, which the company is obligated for.

I'll verify when I get home, but my gut tells me so. I spent hours learning it..

[Author]

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