[riech001]

AmeriGene Inc. reported net periodic pension cost of $400,000 in the current year, calculated as follows:

Service cost $ 300,000

Interest cost 175,000

Expected return on plan assets (100,000)

Amortization of prior service cost 40,000

Amortization of net gain (15,000)

Net periodic pension cost $ 400,000

AmeriGene has an overfunded pension plan. The company’s effective tax rate is 30%. How will the amortization of the net gain affect the current year balance sheet under U.S. GAAP?

a. No effect.

b. $15,000 decrease in accumulated other comprehensive income.

c. $10,500 increase in retained earnings.

d. $15,000 increase in net pension asset.

Explanation

Choice “c” is correct. U.S. GAAP requires that net gains and losses be reported as a component of accumulated other comprehensive income until recognized in net periodic pension cost through amortization. The current year amortization of the net gain would be recorded as a reclassification adjustment from accumulated other comprehensive income with the following journal entry:

Debit (Dr) Credit (Cr)

(Dr) Other comprehensive income $ 15,000

(Cr) Net periodic pension cost $ 15,000

(Dr)Deferred tax expense – net income 4,500

(Cr)Deferred tax expense – OCI 4,500

The reclassification adjustment affects net income and retained earnings on an after-tax basis.

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After reading the question a couple of times, I understand why it would increase retained earnings (since the amortization of the gain and the deferred tax expense would be part of income, and then we would close it to retained earnings). However, I’m thinking that these transactions would have no effect on the balance sheet, since the unamortized gain and the related deferred tax expense were part of AOCI before hitting the income statement. Any help would be appreciated, thanks!

AUD - NINJA in Training
BEC - 90
FAR - 91
REG - NINJA in Training

Almost there

B -September 8, 2016
A -?
R -?
F -August 1, 2016

[baruchgirl]

I don't know if this help but my teacher explained the following:

AOCI = Past + Present transactions
OCI = Present Transactions

Net decrease would be $10,500 in AOCI since you are crediting deferred tax expense to OCI.

I had to edit this post 3 times. LOL. I think I finally have the right answer.

FAR - 1st Attempt - Waiting for Score 8/4/16
AUD - TBD
REG - TBD
BEC - TBD

[Author]

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