Question

Payne, Inc., a nonpublicly traded company, implemented a defined benefit pension plan for its employees on January 2, year 2. The following data are provided for year 2, as of December 31, year 2:

Fair value of plan assets: $78,000
Projected benefit obligation: $103,000
Net periodic pension cost: $90,000
Employer's contribution: $70,000

What amount should Payne record as pension liability at December 31, year 2?

a. $0
b. $25,000
c. $20,000
d. $45,000

Answer 1

b. $25,000

Step-by-step explanation:

For computing the pension liability amount, we need to do apply the formula which is shown below:

= Projected benefit obligation - Fair value of plan assets

= $103,000 - $78,000

= $25,000

The net periodic pension cost and the employer's contribution is not relevant. So, these items are ignored and hence not included in the computation part.

The excess amount is shown as a pension liability.