Pension expense typically consists of five components. Review Exhibit 8.11, which lists the components, and answer the

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Pension expense typically consists of five components. Review Exhibit 8.11, which lists the components, and answer the following questions related to each component:
1. Service cost - Is it possible for the service cost component to reduce pension expense for the year? Explain your answer.
2. Interest cost - Is it possible for the interest cost component to reduce pension expense for the year? Explain your answer.
3. Expected return on plan assets - GAAP requires firms to reduce pension expense each year by the expected, not the actual, return on investments. Discuss the logic employed by policymakers in reaching this decision.
4. Amortization of prior service cost - Define prior service cost, including providing an example of a plan change that would generate an amount labeled prior service cost.
5. Amortization of actuarial gains and losses - Describe the circumstances that give rise to actuarial gains and losses.
GAAP
Generally Accepted Accounting Principles (GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the...
Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...
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