CPA Exam - FAR (Financial Accounting and Reporting)Select TransactionsMedium
A company has a defined benefit pension plan. At year-end, the projected benefit obligation (PBO) is $1,500,000, and the fair value of plan assets is $1,200,000. The current service cost for the year is $100,000, and the actual return on plan assets is $80,000. The expected return on plan assets was $100,000. What is the pension expense (service cost component) for the current year?
- A$200,000
- B$80,000
- C$100,000
- D$120,000
Show answer & explanationAnswer & explanation
Correct answer: C. $100,000
The service cost component of pension expense is simply the current service cost. Other components like interest cost, expected return on assets, and amortization of prior service cost or actuarial gains/losses are calculated separately to arrive at the total net periodic pension cost. This question specifically asks for the service cost component.
Why the other options are wrong
- A. This is an incorrect calculation, possibly summing multiple components incorrectly.
- B. This is the actual return on plan assets, which reduces the total pension expense, not the service cost.
- D. This is an incorrect calculation, possibly confusing service cost with other components.
Net Periodic Pension Cost Components
Net periodic pension cost (pension expense) is comprised of several components: service cost, interest cost, expected return on plan assets, and amortization of prior service cost and actuarial gains/losses.
- Service Cost: Increase in PBO for employee service in current period.
- Interest Cost: Interest on the PBO.
- Expected Return on Plan Assets: Reduces pension expense.
- Amortization of Prior Service Cost/Actuarial G/L: Recognized over time.
Memory trick: PENSION plans have many moving parts: PBO, Assets, and the 5-component EXPENSE.