Bateman Corp.provides a defined benefit pension plan for its employees, and uses the IFRS.The trustee administering the plan provided the following information for the year ended December 31, 2017: The fair value of the plan assets at December 31, 2017 would be

Question

Bateman Corp.provides a defined benefit pension plan for its employees, and uses the IFRS.The trustee administering the plan provided the following information for the year ended December 31, 2017:  The fair value of the plan assets at December 31, 2017 would be

Quizplus · Accepted Answer

The fair value of the plan assets can be calculated by subtracting the total pension obligation (present value of projected benefit obligations) from the fair value of plan assets at the end of the period. 
Total pension obligation = $1,695,000
Fair value of plan assets - Total pension obligation = $1,295,000 - $1,695,000 = -$400,000 (note: negative indicates a deficit)
Since the fair value of plan assets cannot be negative, we can assume that the amount provided for the total pension obligation is incorrect. Therefore, we need to use the formula, Fair value of plan assets + Unrecognized past service cost - Unrecognized actuarial losses = Total pension obligation. Using the information given in the table, we can calculate the unrecognized past service cost and unrecognized actuarial losses as follows:
Unrecognized past service cost = $225,000 - $85,000 = $140,000 
Unrecognized actuarial losses = $1,695,000 - $1,235,000 - ($225,000 - $85,000) = $150,000
Therefore, Fair value of plan assets + $140,000 - $150,000 = $1,695,000 which gives us the fair value of plan assets as $1,295,000 (Option B).