The board of directors of the Vermont Company is going to adopt a defined benefit pension plan for the company's employees. The board is considering granting pension credit for up to ten (10) years of service rendered prior to the date that the plan is adopted. The board desires to grant the retroactive credit in order to provide equity to employees for their previous years of service. The board has hired an actuary to determine the cost of granting the retroactive credit. The actuary has calculated the cost of the retroactive benefits to be approximately one million dollars. The board has asked the company's controller to explain how the cost of the prior service credit would be accounted for in the financial statements.
Required:
a.Describe the GAAP that would be required by Vermont Company if prior service credit is granted to its employees.
b.Many people have argued that the method adopted by the FASB to account for prior service costs has several conceptual flaws. Briefly discuss the flaws of the approach adopted by the FASB for prior service costs.
c.The textbook discusses three other approaches that might have been used to account for prior service costs. Describe these three alternative approaches.

Question

The board of directors of the Vermont Company is going to adopt a defined benefit pension plan for the company's employees. The board is considering granting pension credit for up to ten (10) years of service rendered prior to the date that the plan is adopted. The board desires to grant the retroactive credit in order to provide equity to employees for their previous years of service. The board has hired an actuary to determine the cost of granting the retroactive credit. The actuary has calculated the cost of the retroactive benefits to be approximately one million dollars. The board has asked the company's controller to explain how the cost of the prior service credit would be accounted for in the financial statements.
Required: 
a.Describe the GAAP that would be required by Vermont Company if prior service credit is granted to its employees.
b.Many people have argued that the method adopted by the FASB to account for prior service costs has several conceptual flaws. Briefly discuss the flaws of the approach adopted by the FASB for prior service costs.
c.The textbook discusses three other approaches that might have been used to account for prior service costs. Describe these three alternative approaches.

Quizplus · Accepted Answer

The Answer of The board of directors of the Vermont Company is going to adopt a defined benefit pension plan for the company's employees. The board is considering granting pension credit for up to ten (10) years of service rendered prior to the date that the plan is adopted. The board desires to grant the retroactive credit in order to provide equity to employees for their previous years of service. The board has hired an actuary to determine the cost of granting the retroactive credit. The actuary has calculated the cost of the retroactive benefits to be approximately one million dollars. The board has asked the company's controller to explain how the cost of the prior service credit would be accounted for in the financial statements.
Required: 
a.Describe the GAAP that would be required by Vermont Company if prior service credit is granted to its employees.
b.Many people have argued that the method adopted by the FASB to account for prior service costs has several conceptual flaws. Briefly discuss the flaws of the approach adopted by the FASB for prior service costs.
c.The textbook discusses three other approaches that might have been used to account for prior service costs. Describe these three alternative approaches.

The Board of Directors of the Vermont Company Is Going