Question

At year end, a company has a defined benefit pension plan with a projected benefit obligation of $350,000; a net gain of $140,000 that was not previously recognized in net periodic pension cost; and prior service cost of $210,000 that was not previously recognized in net periodic pension cost. What amount should be reported in accumulated other comprehensive income related to the company's defined benefit pension plan at year end?

	A credit balance of $420,000.
	A debit balance of $420,000.
	A credit balance of $70,000.
	A debit balance of $70,000.

(Answer A debit balance of $70,000) This Answer is Correct

Correct! Accumulated other comprehensive income (AOCI) is impacted by unexpected gains and losses from plan assets and unamortized portions of prior service costs from pension plan amendments. The net gain of $140,000 that has not previously been recognized in pension expense is reported as part of AOCI as a credit balance. The unamortized portion of prior service cost of $210,000 is reported as part of AOCI as a debit balance. The amount reported in AOCI related to the company's defined benefit pension plan is a net debit balance of $70,000.

Question

I don't understand why the answer is $70,000 debit balance to accumulated other comprehensive income related to the defined benefit pension plan, can please explain regardless of the explanation above because I don't understand it? Why isn't the answer a credit balance of $70,000 instead?

Answer 1

Answer

The answer is Option D - A debit balance of $70,000.

This can be explained using the Golden Rule of accounting with respect to Nominal Accounts - "Debit All Expenses and Losses" and "Credit all Incomes and Gains"

Here in this question the amounts that has not been initially included in the determination of pension expense are

1. A net gain of $140,000 that was not previously recognized in net periodic pension cost

2. A prior service cost of $210,000 that was not previously recognized in net periodic pension cost.

The Accumulated other comprehensive income (AOCI) is impacted by unexpected gains and losses from plan assets and unamortized portions of prior service costs from pension plan amendments.

Hence the amount to be reported in accumulated other comprehensive income is the net gain of $140,000 (Credit) and the prior service cost of $210,000 (Debit), for a net debit balance of $70,000 (Debit).