Question

Which of the following statements is true concerning prior service cost?

1) Prior service costs are the costs of retroactive benefits.
2) Prior service cost is reported as a liability at the date of the plan amendment.
3) Prior service cost is reported as a negative element of other comprehensive income at the date of the plan amendment.
4) All of the choices

Answer 1

Prior service costs relate to the costs of providing retroactive benefits as a result of a pension plan amendment, which must be reported both as a liability and as a negative adjustment to other comprehensive income. All statements provided regarding prior service cost are true.

Step-by-step explanation:

The subject of this question is prior service cost, which pertains to accounting for pension plans. Prior service costs are incurred when a pension plan is amended and the amendment results in an increase in the benefits for service provided in prior periods. The true statements concerning prior service cost are:

1. Prior service costs are the costs of retroactive benefits that the company grants to employees as a result of plan amendments.
2. Prior service cost is reported as a liability at the date of the plan amendment because it represents an obligation the company has to its employees for additional benefits.
3. Prior service cost is reported as a negative element of other comprehensive income (OCI) at the date of the plan amendment, which reflects the costs of past service benefits that will be provided to employees in the future.

Considering the accuracy and truthfulness of the statements provided in the question, the correct answer is option 4) All of the choices are true.