Question #1
Reading: Reading 9 Employee Compensation - Post-Employment and Share-Based
PDF File: Reading 9 Employee Compensation - Post-Employment and Share-Based.pdf
Page: 1
Status: Correct
Correct Answer: A
Question
Wonderful Manufacturing has implemented a change in its pension plan, that will increase the future benefits for all of its current employees. Which of the following is the most likely effect on the company's financial statements of this change in promised benefits under current U.S. GAAP standards?
Answer Choices:
A. The net pension liability will increase immediately by the projected increase in pension benefits due to employees
B. The pension expense for the next reporting period will increase by the projected increase in pension benefits due to employees
C. The firm’s prior financial statements will be adjusted to reflect the increase in benefits
Explanation
A plan amendment will result in an immediate increase in the PBO. Under current U.S.
accounting standards, an increase in PBO will result in an increase in the net pension
liability (decrease in funded status).