Question

Amortizing prior service cost for pension plans will:

Multiple Choice

• Decrease assets.

• Increase liabilities.

• Increase shareholders' equity.

• Decrease retained earnings. I chose this answer. Please explain why this is correct, thanks

Answer 1

The correct answer for the question is Option D - Decrease Retained Earnings. Amortization of Prior service cost for pensions will decrease retained earnings. Prior service costs is that expense that is recognized to give recognition to previous service of currently employed individuals within an organization. Since these expenses relate to the services of employees previously, they would have had to be reported as expenses of that particular period and hence it reduces the retained earnings of the earlier period to which it relates to . Hence, this is the correct answer.

Option A is incorrect as it doesnt decrease assets but rather the retained earnings.

Option B is incorrect as it does not increase the liabilities as mentioned in the option.

Option C is incorrect as the shareholders equity does not increase because of the amortization of prior service cost.

Please let me know if you have any questions via comments and all the best :) !