Question

Gains and losses that relate to the computation of pension expense should be

a. recorded currently as an adjustment to pension expense in the period incurred
b. recorded currently and in the future by applying the corridor method which provides the amount to be amortized
c. amortized over a 15-year period
d. recorded only if a loss is determined

Answer 1

Gains and losses in the computation of pension expense should be handled using the corridor method, which amortizes the excess over the average remaining service period if it exceeds 10% of the greater of the plan assets or plan liabilities.

Step-by-step explanation:

The question relates to the accounting treatment of gains and losses in the computation of pension expense. According to accounting standards, such as those outlined by the Financial Accounting Standards Board (FASB) in the United States, gains and losses can be dealt with in a few different ways. One of the methods is the corridor method, which is mentioned as an option in the question.

Gains and losses are not immediately recognized in pension expense but are instead amortized over future periods if they exceed a certain threshold, which is known as the 'corridor.' If the accumulated gains and losses at the end of the prior fiscal year exceed 10% of the greater of the plan assets or the plan liabilities (the corridor), then that excess is amortized over the average remaining service period of the employees.

The corridor method is intended to avoid significant volatility in pension expense from year to year. Option b is accurate because it correctly identifies the use of the corridor approach to amortize some types of gains and losses over time.