Defined Benefit Plan Funded Status

Medium Employee Compensation Defined Benefit Plans

ABC Corporation offers a defined benefit pension plan to its employees. The plan promises employees a monthly benefit upon retirement, determined by a formula based on years of service and salary history. As of the most recent financial statements, the company reported a pension liability of $2 million and plan assets of $1.5 million. Consider how these figures relate to the funded status of the pension plan and the implications for ABC Corporation's financial statements.

In addition, the company must also account for any actuarial gains or losses that may affect the defined benefit obligation (DBO). Based on this information, which of the following statements accurately reflects the accounting treatment of ABC Corporation’s pension plan?

The pension plan is overfunded, and ABC Corporation will recognize an immediate gain on its balance sheet.

The pension plan is underfunded, and ABC Corporation must recognize a liability for the unfunded amount on its balance sheet.

The funded status is neutral because the pension assets equal the pension liabilities.

Hint

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