CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Information regarding the defined-benefit pension plan of Amber Beverages included the following for 2011 ($ in millions):

Prepaid pension cost, January 1 (debit balance): 20.
Service cost: 490.
Interest cost: 380.
Actual and expected return on plan assets: 220.
Amortization of unrecognized net loss: 30.
Prior service cost: none.
Employer contributions to the pension plan (end of year): 500.

The accumulated benefit obligation was less than the fair value of plan assets at December 31, 2011. Amber should report accrued pension cost at December 31, 2011, in the amount of:

A. $140 million.
B. $160 million.
C. $200 million.
Correct Answer: B

The pension expense for 2011 is $680 ($490 + 380 - 220 +30), and the contribution is $500. The accrued pension cost is thus credited for $180, offsetting the beginning $20 debit balance. [in millions].

User Contributed Comments 6

User Comment
HenryQ Contribution has nothing to do with pension expense! How come it gets into the picture??! Contribution has nothing to do with PBO, ABO or VBO, it only impacts asset! Think of this way, suppose the contribution is an indefinite amount, does that mean the employer does not have any pension expense any more? Common sense...
kodali I think the question is not about the expense account on the P&L, its the liablity account on the BS.
ngeorge Kodali is correct. Prepaid pension cost is a liabilitiy account--it is not the same thing as pension expense.
dblueroom ngeorge, prepaid pension cost is an asset account, and that's why you reduce the 180 accrued pension cost, (a liability, calculated as pension expense - contribution) with the 20 prepaid.
birdperson agree with the @dblueroom
davidt876 ight... and this is a different account to the net funded account on the b/s that shows whether PBO is greater than or less than FV of plan assets?
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