A company has a defined benefit pension plan. At the end of the year, the projected benefit obligation (PBO) is $5,000,000, and the fair value of plan assets is $4,200,000. The unrecognized prior service cost is $300,000 (debit), and the unrecognized net gain is $100,000 (credit). What is the amount of the net pension liability (or asset) that should be reported on the balance sheet?
- A$800,000 liability
- B$1,000,000 liability
- C$900,000 liability
- D$700,000 liability
Show answer & explanationAnswer & explanation
Correct answer: A. $800,000 liability
The net pension liability or asset reported on the balance sheet is simply the difference between the projected benefit obligation (PBO) and the fair value of plan assets. Unrecognized prior service costs, gains, and losses are components of accumulated other comprehensive income (AOCI) and do not directly affect the balance sheet net pension liability/asset itself, as they are already reflected in the PBO or plan assets over time. Thus, PBO ($5,000,000) - Fair Value of Plan Assets ($4,200,000) = $800,000 liability.
Why the other options are wrong
- B. This might result from adding both unrecognized prior service cost and net gain to the PBO-Plan Assets difference.
- C. This could be an error in including unrecognized net gain or other components.
- D. This might result from incorrectly including unrecognized prior service cost in the calculation.
Net Pension Liability/Asset (Balance Sheet)
The difference between the Projected Benefit Obligation (PBO) and the fair value of plan assets, representing the funded status of a defined benefit pension plan.
- Reported directly on the balance sheet as a liability or asset.
- Equals PBO minus Fair Value of Plan Assets.
- Unrecognized prior service costs, gains, and losses affect AOCI, not this net amount.
Memory trick: Pension's Balance: PBO vs. Assets, a simple net glance.