Post-Employment Benefits and Pension Expense Analysis

Very Hard Employee Compensation Post-employment Benefits

ABC Corporation operates a defined benefit pension plan for its employees and has a fiscal year ending December 31. The company recently reported that during the year, it incurred $1 million in service cost, $200,000 in interest cost, and $100,000 in expected return on plan assets. Based on these figures, its overall pension expense for the year amounts to $1.1 million. The actuarial assumptions used by ABC Corporation include a discount rate of 5% and a long-term expected rate of return on assets of 6%. As part of the annual review, the company also recognized a prior service cost of $500,000 which will be amortized over the remaining service life of current employees. Furthermore, the corporation has a termination benefits agreement that includes lump-sum payments to employees upon retirement based on years of service.

Given this context, which of the following statements regarding the post-employment benefits for ABC Corporation is correct?

The total pension expense recognized in the income statement will be $1.6 million after including the amortized prior service cost.

The expected return on plan assets decreases the pension expense recognized in the income statement.

The termination benefits agreement would be classified as an operating expense in the income statement.

Hint

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% Correct92%