Module 11 - Pension 2

What is a defined benefit pension plan?

A plan where the employer promises a specific retirement benefit and must estimate and fund future obligations.

What are the two key measurements in pension accounting?

Projected Benefit Obligation (PBO) and Plan Assets.

What is funded status?

Funded Status = Plan Assets − PBO.

When is there a pension liability?

When PBO > Plan Assets.

What is the core pension expense formula?

Service + Interest − Return + PSC Amortization ± G/L Amortization

What does service cost represent?

The value of benefits earned by employees during the current period.

How is interest cost calculated?

Beginning PBO × discount (settlement) rate.

What is prior service cost (PSC)?

Cost of retroactive benefits granted when a plan is amended.

What is the journal entry for initial PSC?

Dr OCI–PSC

Cr PBO

How is PSC amortized?

Dr Pension Expense

Cr OCI–PSC

When must PSC be included in interest calculations?

When PSC occurs at the beginning of the year (e.g., January 1).

How is an asset gain/loss calculated?

Actual return − Expected return.

How is a liability gain/loss calculated?

Expected PBO − Actual PBO.

Where are gains and losses initially recorded?

Other Comprehensive Income (OCI).

What is a liability gain?

A decrease in PBO due to actuarial changes.

What does each worksheet row represent?

A single pension event (e.g., service cost, interest, return).

What is the effect of service cost in the worksheet?

Dr Pension Expense

Cr PBO

What is the effect of interest cost?

Dr Pension Expense

Cr PBO

How does actual return affect the worksheet?

Dr Plan Assets

Cr Pension Expense (if using actual approach)

How do contributions affect the worksheet?

Dr Plan Assets

Cr Cash

How do benefits affect the worksheet?

Dr PBO

Cr Plan Assets

Do all “Balance” rows carry forward all accounts?

No—some Wiley balance rows only show specific columns (e.g., only PBO).

Why was Balance Jan. 1, 2025 unusual?

It only showed the updated PBO (after PSC), not full carryforward balances.

What is a key clue that a row is not a full carryforward?

A PSC row appears immediately before it.

What must be included in a pension journal entry?

• Pension Expense

• Cash (contributions)

• OCI (current year only)

• Pension Asset/Liability (plug)

Should journal entries use cumulative OCI balances?

No—only current-year OCI activity.

How is the Pension Asset/Liability determined in the JE?

It is the balancing (plug) amount.

What goes into the cash column?

Only contributions.

Does interest or service cost affect cash?

No.

What pension item appears on the income statement?

Pension Expense only.

What are the OCI components?

• Asset gains/losses

• Liability gains/losses

• PSC amortization

How are OCI components presented?

All numbers are positive; the label indicates the type.

Should OCI be netted in the OCI section?

No—show components separately, then total.

What is comprehensive income?

Net Income + OCI.

What pension amount appears under liabilities?

Net Pension Asset/Liability.

What appears in stockholders’ equity?

Accumulated OCI (PSC and G/L separately).

Should PSC and G/L be combined in the balance sheet?

No—list separately.

How is PSC classified?

Debit balance → Loss.

How is G/L classified?

Credit balance → Income.

How are OCI losses shown on the balance sheet?

Negative (parentheses) with “Loss” label.

How are OCI gains shown on the balance sheet?

Positive with “Income” label.

What is the full pension flow from worksheet to statements?

Worksheet → Journal Entry → Expense → OCI → Comprehensive Income → Balance Sheet

What pension-related amount appears on the income statement?

Pension Expense only.

What pension-related items appear in Other Comprehensive Income (OCI)?

• Asset gains/losses

• Liability (actuarial) gains/losses

• Prior service cost (PSC) changes

How are OCI components shown in the OCI section of the financial statements?

Each component is shown separately as a positive number; labels indicate type (gain/loss).

How is total OCI calculated in the OCI statement?

Sum all components as positive amounts (do NOT subtract PSC amortization).

What is comprehensive income?

Net Income + Total OCI.

Does the journal entry use current-year OCI or ending OCI balances?

Current-year OCI activity only.

Does the OCI section use current-year flows or totals?

Current-year flows, shown as separate components.

What pension amount is shown in liabilities on the balance sheet?

Net Pension Asset/Liability (funded status).

Should PSC and G/L be combined in balance sheet equity?

No—show them separately if given separate lines.

How do you classify a debit balance in AOCI?

As a Loss.

How do you classify a credit balance in AOCI?

As Income.

How are AOCI losses shown on the balance sheet?

As negative numbers (parentheses) with a “Loss” label.

How are AOCI gains shown on the balance sheet?

As positive numbers with an “Income” label.

What does a PSC balance represent?

Deferred cost from plan amendment, amortized over time.

What does a G/L balance represent?

Accumulated asset and liability gains/losses from actuarial changes.

If Wiley gives separate lines for PSC and G/L, what must you do?

Report each one separately—do NOT combine into total AOCI.

If your numeric value is correct but marked wrong, what is the likely issue?

Incorrect labeling (Income vs Loss) or incorrect sign formatting.

When does Wiley want positive numbers vs negative numbers?

• OCI statement → positive numbers only

• Balance sheet → use actual sign (loss = negative)

Before submitting a pension presentation answer, what 3 things must you check?

1. Is it in the correct statement (Income, OCI, or Balance Sheet)?

2. Are components separated correctly (PSC vs G/L)?

3. Are sign and labels correct (Income vs Loss)?

What is the most common cause of errors in pension financial statement questions?

Mixing up:

• OCI vs Income Statement

• Current-year vs cumulative amounts

• Proper labels and sign formatting