[GeauxAwayCPA]

Hi everyone! This is probably really simple but it’s the second time I’ve seen this question and it’s just bothering me. The answer to the below question is D and the solution is below the question. What I don’t understand is the second part of the question/solution. It states “From the prior year the funding of the benefits to the plan was made, but the projected benefit obligation had yet to be set up, and thus the plan was overfunded.” How the heck are we supposed to know the projected benefit obligation hasn’t been set up? Is there some super subtle indicator in this question that I’m missing?! Or is there some rule that I’m supposed to know that I clearly don’t? Thanks in advance!

Effective January 1 of the previous year, Flood Co. established a defined benefit pension plan with no retroactive benefits. The first of the required equal annual contributions was paid on December 31 of that previous year. A 10% discount rate was used to calculate service cost and a 10% rate of return was assumed for plan assets. All information on covered employees for the previous and current year is the same. How should the service cost for the current year compare with the previous year, and should the previous-year balance sheet report an underfunded or an overfunded funding status?
A. Service cost for current year compared to the previous year, Equal to; Funding status reported on the previous-year balance sheet, Underfunded
B. Service cost for current year compared to the previous year, Equal to; Funding status reported on the previous-year balance sheet, Overfunded
C. Service cost for current year compared to the previous year, Greater than; Funding status reported on the previous-year balance sheet, Underfunded
D. Service cost for current year compared to the previous year, Greater than; Funding status reported on the previous-year balance sheet, Overfunded

From the prior year to this year, service costs should usually be increasing because the employees are accruing more benefits with their additional service years. Service cost keeps track of the additional benefits owed to employees from their additional year of service. From the prior year the funding of the benefits to the plan was made, but the projected benefit obligation had yet to be set up, and thus the plan was overfunded.

Licensed CPA in Texas trying to start up my own tax practice

[GeauxAwayCPA]

anyone able to help on this one?

Licensed CPA in Texas trying to start up my own tax practice

[AScott89]

I think I can explain this. Okay so the answer explanation tells you the PBO had yet to be set up. The PBO is the projected benefit obligation, which is in part based on service already performed. Since there was no credit given for service performed in the past, then there was no PBO set up at the start of the plan. So since there was no PBO set up, the payment to the plan overfunded it. The clue in the problem was the part about no retroactive benefits. It's tricky as hell so its easy to miss.

I hope that helps.

--
B - 65, 74, 2/26/18
A - 72, 68, 84
R - 72, 82
F - 55, 79

BEC-65
AUD-72(8 '14); 68(11 '14)
FAR-
REG-

[mjbey1s]

Completely agree. The reference to “no retroactive benefits” means that the PBO was not set up yet.

AUD - 83
BEC - 82
FAR - 80
REG - 83

“There is only one thing that makes a dream impossible to achieve: the fear of failure.”

― Paulo Coelho,

Ethics - 96

[Author]

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