Robinson Company adopted a defined benefit pension plan on January 1, 2011. Robinson amortizes the prior service cost over 16 years and funds prior service cost by making equal payments to the fund trustee at the end of each of the first ten years. The service cost is fully funded at the end of each year. The following data are available for 2011:

If interest cost for 2011 is equal to the return on plan assets, then Robinson's prepaid pension cost at December 31, 2011, is

Question

Robinson Company adopted a defined benefit pension plan on January 1, 2011. Robinson amortizes the prior service cost over 16 years and funds prior service cost by making equal payments to the fund trustee at the end of each of the first ten years. The service cost is fully funded at the end of each year. The following data are available for 2011:

If interest cost for 2011 is equal to the return on plan assets, then Robinson's prepaid pension cost at December 31, 2011, is

Quizplus · Accepted Answer

To calculate the prepaid pension cost we need to use the formula: 
Prepaid Pension Cost = Plan Assets - Projected Benefit Obligation

2011 Ending Plan Assets = $350,000 + $15,000 - $45,000 = $320,000
2011 Projected Benefit Obligation = $300,000 + $45,000 + $30,000 = $375,000

Therefore, Prepaid Pension Cost at December 31, 2011 = $320,000 - $375,000 = -$55,000

Since the Prepaid Pension Cost is negative, it means that the company has an accrued pension cost or a pension liability. However, we need to remember that Robinson has only made 1 out of 10 required payments towards the prior service cost. Therefore, they have not fully funded the plan yet.

So, the correct answer is B) $62,000, which is the cumulative amount of prior service cost funded by Robinson till December 31, 2011.

Robinson Company Adopted a Defined Benefit Pension Plan on January