CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsMedium
A county government maintains a Pension Trust Fund for its employees. During the year, the fund received $10,000,000 in employee and employer contributions, earned $2,000,000 in investment income, and paid $1,500,000 in pension benefits to retirees. What is the net increase in plan net position for the Pension Trust Fund for the year?
- A$13,500,000
- B$11,500,000
- C$10,500,000
- D$12,000,000
Show answer & explanationAnswer & explanation
Correct answer: C. $10,500,000
Pension Trust Funds are fiduciary funds and use the full accrual basis of accounting. The net increase in plan net position is calculated as total additions minus total deductions. Additions: Contributions ($10,000,000) + Investment Income ($2,000,000) = $12,000,000. Deductions: Pension Benefits Paid ($1,500,000). Net Increase = $12,000,000 - $1,500,000 = $10,500,000.
Why the other options are wrong
- A. This adds all three amounts, incorrectly treating benefits paid as an addition.
- B. This subtracts only investment income from contributions and benefits, which is incorrect.
- D. This only includes total additions, ignoring the deductions for benefits paid.
Pension Trust Fund Net Position Increase
The net increase in a Pension Trust Fund's net position is calculated by subtracting total deductions (e.g., benefits paid, administrative expenses) from total additions (e.g., contributions, investment income).
- Fiduciary fund, full accrual basis.
- Additions: contributions, investment income.
- Deductions: benefits paid, administrative expenses.
Memory trick: Fiduciary funds are 'TRUSTed' to manage money, so track incoming 'ADDITIONS' and outgoing 'DEDUCTIONS'.