Question

On July 31, Year 1, Tern Co. amended its single employee defined benefit pension plan by granting increased benefits for services provided prior to Year 1. This prior service cost will be reflected in the financial statement(s) for A Years before Year 1 only. B Year 1 only. C Year 1 and years before and following Year 1. D Year 1 and following years only.

Answer 1

Answer

Correct asnwer is Year 1 and following years only

Prior service cost is the cost recognized when a plan is amended to grant additional benefits for services already rendered by employees. The services are already rendered but the prior service cost is amortised as pension expense over future periods of those employees active at the date of the plan amendment and who are expected to receive benefits under the plan. Thus, prior service cost is reflected in the Year 1 financial statements when the plan is actually amended and in the following years as it is amortized