ExpertHard1 markMultiple Choice
CPA · Question 22 · Area II: Balance Sheet Accounts
Atlantic Corp. has a defined benefit pension plan. At the beginning of Year 1:<br/>- Projected benefit obligation (PBO): $2,000,000<br/>- Plan assets (fair value): $1,800,000<br/>- Service cost for Year 1: $150,000<br/>- Interest cost for Year 1: $120,000<br/>- Actual return on plan assets: $90,000<br/>- Employer contributions: $200,000<br/><br/>What is Atlantic's pension expense for Year 1?
Atlantic Corp. has a defined benefit pension plan. At the beginning of Year 1:<br/>- Projected benefit obligation (PBO): $2,000,000<br/>- Plan assets (fair value): $1,800,000<br/>- Service cost for Year 1: $150,000<br/>- Interest cost for Year 1: $120,000<br/>- Actual return on plan assets: $90,000<br/>- Employer contributions: $200,000<br/><br/>What is Atlantic's pension expense for Year 1?
Answer options:
A.
$180,000
B.
$270,000
C.
$70,000
D.
$380,000
How to approach this question
Calculate pension expense as: Service cost + Interest cost - Expected return on plan assets + Amortization of prior service cost + Amortization of net loss. Employer contributions affect cash and the funded status but not pension expense.
Full Answer
A.$180,000✓ Correct
$180,000
Under ASC 715, pension expense consists of service cost, interest cost, expected return on plan assets (reduces expense), and amortization components. Service cost ($150,000) + Interest cost ($120,000) - Expected return on assets ($90,000) = $180,000. Employer contributions affect the funded status but not the expense.
Common mistakes
Including employer contributions in expense calculation, not subtracting return on assets, or adding all components without considering their directional impact
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