Pension expense typically consists of five components. Answer the following questions related to each component.
a. Service cost: Is it possible for the service cost component to reduce pension expense for the year? Explain your answer.
b. Interest cost: Is it possible for the interest cost component to reduce pension expense for the year? Explain your answer.
c. Expected return on plan assets: GAAP requires firms to reduce pension expense each year by the expected, not the actual, return on investments. What is the logic employed by policymakers in reaching this decision?
d. Amortization of prior service cost: What is a prior service cost? Provide an example of a plan change that would generate an amount labeled prior service cost.
e. Amortization of actuarial gains and losses: What circumstances give rise to actuarial gains and losses?