[Anonymous]

Becker Question –

Barrel Corporation had service and interest costs of $50,000 related to its defined benefit pension plan for the year ended December 31, Year 7. The company’s unrecognized prior service cost was $200,000 at December 31, Year 6 and the average remaining service life of the company’s employees was 20 years. Plan assets earned an expected and actual return of 10% during Year 7. The company made contributions to the plan of $25,000 and paid benefits of $30,000 during the year. The pension plan had plan assets with a fair value of $300,000 at December 31, Year 6. The PBO was $400,000 at December 31, Year 6 and $420,000 at December 31, Year 7. Barrel’s expected tax rate is 30%.

What should Barrel Corporation report in accumulated other comprehensive income for this pension plan at December 31, Year 7 under U.S. GAAP?

Correct answer: $133,000

At December 31, Year 7, the unrecognized prior service cost, before tax, is:

12/31/Year 6 Unrecognized prior service cost $200,000

− Amortization of prior service cost 10,000 = $200,000 / 20 years

12/31/Year 7 Unrecognized prior service cost $190,000

The amount reported in accumulated other comprehensive income is therefore $190,000 × (1 − 30%) = $133,000.

My question: Why not also include the amortization of Existing Net Obligation in the calculation, which is (Beginning PBO$300K-$Beginning FMV) over the greater of 15 years or average remaining job life???

 

 

[Whopper Warrior]

The exsiting net obligation would not be in OCI because it hits the P&L account immediately as an expense.

things in OCI related to pension:

Prior Service Costs (arise from increases in pension liability due to changes of the plan)

Pension Gains / Losses below the corridor approach (I forget the approximate %'s)

Changes in Estimates.

The only way to get rid of a PBO is to pay it or change the plan prospectus.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[nolifecpa]

hmm this is a tricky one but i think i got it.

the question is asking for the “ACCUMULATED” oci. you only record the UNamortized portion into ACCUMULATED oci. the amortized portion you're asking about goes to SIRAGE

someone correct me if i'm wrong

REG-65,71,74,73,70,74,79
BEC-60's,60's,69,71,76*,78
FAR-67,66,65,79
AUD-54,60's,65,83*,69,80
*expired

DONE

[Anonymous]

nolifecpa:

You were right about that. However, if the unamortized portion goes into Accum. OCI, then you would have to amortize 1 year Existing Net Obligation. And the remaining 14 yeas goes into AOCI? I know I must be misunderstanding the concept because I am not supposed to include it here in the calculation.

[Anonymous]

Hi Whopper Warrior,

Here is a Becker Simulation asking for the calculation of pension expense for Year 5 based on the information given below, it should include amortization of existing net obligation, how come it does not???

PBO: 12/31/Year 4 $3,155,000

PBO: 12/31/Year 5 $3,080,000

FV of Plan asset , 12/31/Year4 $3,310,000

FV of Plan asset, 12/31/Year5 $3,350,000

Unrecognized prior service cost, 12/31/year 4 $275,000

Unrecognized actuarial loss(incurred during year 4) $220,000

Service cost-year 5 $920,000

Average remaining service life: 20 years

Discount rate: 6%

Actual rate of return: 4.5%

Expected rate of return: 5.5%

Solution: Service cost $920,000

interest cost 189,300

Return on plan assets: (182,050)

Amortization of Prior service cost (13,750)

Amortization of (Gain)/Loss: 0

Pension expense: $941,000

I did everything right except for I did an extra step:

Amortization of existing plan obligation: PBO $3,155,000

Less:FV of plan Asset <3,310,000>

Unfunded 155,000

Greater of 15 years or remaining service life: 20years

Amortization of existing plan obligation: 7,750

What is wrong with this if I include it in the Income statement as current year expense?

Thank you soooo much for your help!!!!

[Tux]

FYI –

I'm also studying with Becker, so I know that they teach the formula for pension expense as SIRAGE.

However, in order for me to understand pensions better, I have referenced several other sources and NONE of them teach about the E in SIRAGE.

EVERY other source teaches the formula for pension expense to include the 5 components of SIRAG, not 6 – the E portion is not included.

One very reputable source is Wiley, and it does not include the E in pension expense formula.

So, just be aware of that. I seriously doubt that the exam tests on the “E” portion.

Even the Becker text says that this component has pretty much been completely amortized by companies because it started so long ago.

FAR - 86 - 2/27/14
AUD - 75 - 5/29/14
BEC - 80 - 8/31/14
REG - 89 - 2/27/15
Praise Jesus! I'm done!!

Study resources:
Becker
Wiley test bank

[nolifecpa]

Damn it! Left out 1 important detail. Amort net oblig has to be from “inception”. Since its from yr 6 or 7 its not “inception”.

So glad i'm done with this stupid thing

REG-65,71,74,73,70,74,79
BEC-60's,60's,69,71,76*,78
FAR-67,66,65,79
AUD-54,60's,65,83*,69,80
*expired

DONE

[Whopper Warrior]

hhmmm. i just reviewed my notes. to me it appears the E in sirage is exsiting net obligation at inception (aka prior service cost at inception). I have a feeling if it is not directly mentioned that their is a a liability being amoritized over inception, to believe the plan started fully funded. the E is measured at inception and not any other time then amoritized out. it is not measured at any other time so I am in agreement with @nolifecpa. honestly i do not even rember this part.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Anonymous]

Thank you all so much!!!

I feel much better after the discussions.

Happy Thanksgiving!!

[Anonymous]

[Author]

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