Question

Jasper Company has a defined benefit pension plan. Effective at the beginning of the current year, The company retroactively amended its pension plan to increase the pension formula's salary percentage. which of the following statements are correct?

A) The increase in the PBO attributable to applying the more generous terms of the amendment to prior service years is the prior service cost.

B) The prior service cost is the difference between the PBO at the end of the previous year that was calculated without regard to the amendment and the recalculated PBO based on the plan amendment.

C) Prior service cost includes the increase in the PBO attributable to the employee service performed during the current year.

D) Since it was effective at the beginning of the year the change in the formula's salary percentage will not impact the current year interest cost.

Answer 1

Answer :-

Option B

.

Explanations :-

The prior service costs reflects on the cost incurred that relates to the planned benefit that was incurred in previous years. They are thus recognized at the end of the previous year . The prior service costs would be computed differently compared to the amendment which has been made in the current period or which created the adjustment to the costs.

However, in the PBO pension plan, the prior service costs can have impact on the changes that are made such as the percentage contribution by employees. This is because they are supposed to be reflective of the changing economic conditions and other costs that would make the prior costs to be less relevant or lower compared to the increasing pension compensation. This can be the main factor which made Jasper Company to increase the salary percentage that is paid to the pension plan.