Question

On July 31, year 2, Tern Co. amended its single employee defined benefit pension plan by granting increased benefits for services provided prior to year 2. This prior service cost will be reflected in the financial statement(s) for?

Answer 1

The prior service cost due to increased benefits granted by Tern Co. for services prior to year 2 is recognized in the financial statements as a component of other comprehensive income and amortized over future periods according to pension accounting standards.

Step-by-step explanation:

When Tern Co. amended its defined benefit pension plan on July 31, year 2, by granting increased benefits for services provided prior to year 2, this prior service cost is recognized in the financial statements as a component of other comprehensive income and then is amortized to pension expense over future periods. Under accounting rules, such adjustments are typically accounted for under the pension accounting standards, which may require the use of a projected credit method to amortize the cost. It is important to note that underfunding pension plans can result in penalties, and it is required that firms provide employees with detailed pension account information. The approach to recognizing the increased costs involves spreading it out over the service period of the affected employees, in accordance to the principles of accrual accounting.

Answer 2

Options Include:

1. Years before Year 1 only.

2. Year 1 only.

3. Year 1 and years before and following Year 1.

4. Year 1 and following years only. is Correct

Step-by-step explanation:

Prior cost of service is acknowledged whenever a contract is changed to provide added benefits for services previously received by workers.

The amortization of the prior service expense must be acknowledged as an element of the retirement cost during the future service periods of all those workers whom are active on the date of the plan modification and are entitled to receive rewards under the Scheme.

Therefore, prior service costs are expressed throughout the financial statements for Year 1 once the plan was modified and even in the years that follow when it is amortized.