Louie Company has a defined benefit pension plan. On December 31 (the end of the fiscal year), the company received the PBO report from the actuary. The following information was included in the report: ending PBO, $110,000; benefits paid to retirees, $10,000; interest cost, $8,000. The discount rate applied by the actuary was 8%. What was the service cost for the year?

Question

Quizplus · Accepted Answer

The service cost is the increase in the PBO due to employee service during the year. To calculate the service cost, we need to know the beginning PBO, which is not given in the question. Therefore, we cannot calculate the exact service cost. However, we can eliminate answer choices based on the information given. 
Option A ($2,000) is too low because it only includes the interest cost. 
Option C ($18,000) and Option D ($92,000) are too high because they include the ending PBO, which already accounts for the interest cost and benefits paid to retirees. 
Therefore, the correct answer is Option B ($12,000), which is the only choice left and is calculated as (ending PBO + benefits paid - beginning PBO) - interest cost.

Louie Company Has a Defined Benefit Pension Plan