The following items appear on Brueggen Company\'s financial statements. 1. Under
ID: 2466992 • Letter: T
Question
The following items appear on Brueggen Company's financial statements.
1. Under the caption Assets:
Pension asset/liability
2. Under the caption Liabilities:
Pension asset/ Liability
3. Under the caption Stockholders' Equity:
Prior service cost as a component of Accumulated Other Comprehensive Income.
4. On the Income Statement:
Pension expense
Instructions
Explain the significance of each of the items above on corporate financial statements. (Note: All items set forth above are not necessarily to be found on the statements of a single company.)
Explanation / Answer
Solution.
1. Pension Asset/Liability: The investments that are purchased out of the funds available in pension funds are shown of the asset side of balance sheet.
2. Pension Asset/Liability: The balance available in the pension fund which is created out the contributions paid by the company is shown on the liabilities side of balance sheet.
Also, the pension is not paid directly, instead it is invested in annuities. Sometimes it may happen that the market scenario is not good and the funds might decline. That leaves less money in fund and creates pension liablities.
3. Prior Service Costs: It is the retrospective increase in the plan benefit obligation granted under a planned ammendment. It is then amortized as a component of net periodic pension cost.
4. Pension Expense: It is the summation of various costs that gets incurred during the year with regard to pension to be paid to employees. It includes Service cost (i.e., the discounted PV of benefits earned by employee), Interest Cost (i.e., increase in projected benefit obligation due to passsage of time) minus Actual return of plan assets.
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