CFA Practice Question

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CFA Practice Question

Which of the following statements is (are) true with respect to the impact pension calculation will have on a firm's balance sheet and income statement?

I. The prepaid pension expense asset account will increase on the balance sheet whenever the cash contribution to the plan exceeds the calculated pension expense for the period.
II. The economic measure of a firm's true funded status can best be measured by comparing the Accumulated Benefit Obligation (ABO) with the current market value of the plan assets.
III. In reporting the pension expense for the year, the actual return on assets is used rather than the expected return.
IV. Amortization of prior service costs will always lead to an increase in the pension expense for the period.
A. I and II
B. I and IV
C. III and IV
Explanation: II is incorrect because the economic measure of a firm's true funded status can best be measured by comparing the Projected Benefit Obligation (PBO) with the current market value of the plan assets.

III is incorrect because in reporting the pension expense for the year, the expected return on assets is used rather than the expected return.

User Contributed Comments 2

User Comment
anricus28 What if the employer changed the status of the plan so that the employee got less benefit. Then the service cost adjustment to be put through is positive (i.e. will reduce pension expense). Therefore Amortisation of prior service cost can reduce pension expense (although in most cases it will increase expense).
CIDB I used the same reasoning in excluding IV.
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