Pension Question

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  • #184616

    In 20X9, Rhino Robots Inc. has the following information related to its defined benefit pension plan:

    Fair value of plan assets, 1/1/X9 $2,130,000

    Fair value of plan assets, 12/31/X9 2,525,000

    Projected benefit obligation, 1/1/X9 3,500,000

    Projected benefit obligation, 12/31/X9 3,850,000

    Unrecognized net losses 420,000

    The average remaining service period of Rhino’s employees is 20 years. What is the net loss

    amortization that Rhino will include in its 20X9 net periodic pension cost?

    a. $0

    b. $1,750

    c. $3,500

    d. $21,000

    Explanation:

    Choice “c” is correct. Unrecognized pension gains or losses are amortized over the average remaining

    service period if, at the beginning of the year, the gain or loss exceeds 10% of the greater of the beginning

    of the year PBO or the beginning of the year market related value of plan assets (we will use the fair value

    of the plan assets in this example as the market related value is not given and these amounts are

    approximately equal).

    At 1/1/X9, Rhino’s PBO exceeds the fair value of the plan assets, so the 20X9 net loss amortization is

    calculated as:

    Unrecognized net loss $ 420,000

    Less: 10% of Greater of Beg. PBO/Plan Assets – 350,000 = $3,500,000 PBO x 10%

    Excess $ 70,000

    Excess / Average Remaining Service Life = $70,000 / 20 = $3,500

    Choice “a” is incorrect. Because the unrecognized net loss exceeds 10% of the greater of the beginning

    PBO/Plan assets, the excess must be amortized over the average remaining service period.

    Choice “b” is incorrect. This amortization is calculated using the 12/31/X9 PBO. The greater of the

    beginning PBO/Plan assets must be used to determine the amount to amortize.

    Choice “d” is incorrect. This is the total unrecognized net loss amortized over 20 years. GAAP allows

    companies to amortize only the portion of net gain or loss in excess of 10% of the greater of PBO/Plan

    assets.

    The part I’m having trouble with is the explanation for D. It sounds to me that companies can choose to amortize between only the exceeding portion (the Corridor Approach) or fully. If it is the case, how do I know which method should I use in a real exam? Thank you in advance.

    FAR - 84
    BEC - 80
    REG - 81
    AUD - 85

Viewing 2 replies - 1 through 2 (of 2 total)
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  • #540461
    stoleway
    Participant

    I guess the general consensus is to use the corridor method for amortization of net loss or gain. You realize that the question didn’t give a hint about the use of corridor method, but the answer did geared towards that path (corridor method). Most questions on far is presumed to have GAAP implication unless it’s stated otherwise.

    GAAP prefers you to amortize these gain or losses by using the corridor method. I stand to be corrected, if I’m wrong.

    REG -63│ 84!!
    BEC- 59│70│ 71 │78!
    AUD- 75!
    FAR- 87!

    Mass-CPA

    #540496
    stoleway
    Participant

    I guess the general consensus is to use the corridor method for amortization of net loss or gain. You realize that the question didn’t give a hint about the use of corridor method, but the answer did geared towards that path (corridor method). Most questions on far is presumed to have GAAP implication unless it’s stated otherwise.

    GAAP prefers you to amortize these gain or losses by using the corridor method. I stand to be corrected, if I’m wrong.

    REG -63│ 84!!
    BEC- 59│70│ 71 │78!
    AUD- 75!
    FAR- 87!

    Mass-CPA

Viewing 2 replies - 1 through 2 (of 2 total)
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