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The book explanation does not match the answer to the online question!


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#1 bella.dreamer

bella.dreamer

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Posted 04 December 2013 - 06:14 AM

The employer net pension liability for the Golf City Fire Department increased by $200,000 from Year 1 to Year 2 as a result of a change in the formula used to compute benefits for retiring firemen. The change includes $150,000 of cost attributable to prior service. As a result of this change, Golf City will display the following on their Year 2 government-wide financial statements:

 

I thought The answer is C. Deferred outflow of resources of 150,000 because 150,000 attributes to prior service cost. And 50,000 should be expensed because that is for the current period.   ref: page 34, ch 8. Becker FAR.  

 

 

 

a.

Deferred outflows of resources of $50,000

b.

Pension Expense of $200,000

c.

Deferred outflows of resources of $150,000

d.

Deferred inflows of resources of $50,000

 

 

 

Explanation

Choice "a" is correct. Pension expense includes the effect of changes in the employer's net pension liability (except for deferred outflows/inflows of resources). The government should recognize the effect of a change in benefits in pension expense immediately to the extent that a change is attributable to prior service and amortize the balance over the remaining service life of the affected individuals.

Choice "b" is incorrect. Pension expense includes the effect of changes in the employer's net pension liability (except for deferred outflows/inflows of resources). The government should recognize the effect of a change in benefits in pension expense immediately to the extent that a change is attributable to prior service and amortize the balance over the remaining service life of the affected individuals. The proposed solution recognizes the entire amount of the change as expense without consideration of deferred amounts.

Choice "c" is incorrect. Pension expense includes the effect of changes in the employer's net pension liability (except for deferred outflows/inflows of resources). The government should recognize the effect of a change in benefits in pension expense immediately to the extent that a change is attributable to prior service and amortize the balance over the remaining service life of the affected individuals. The $150,000 component of the change in the liability that has already been earned by the employees would be expensed, not deferred.

Choice "d" is incorrect. The amount of the change in the liability ($50,000) that is not associated with prior service is displayed as a deferred outflow, not a deferred inflow of resources.

I thought the answer would be 

 

Thanks.