Emily Smalls is the new CFO of the Evansville Manufacturing Company. Evansville produced castings of larger components consumed in the heavy machinery industry. Emily relocated to Evansville, Indiana from Boston, Massachusetts, where she had worked in the financial services and technology industries for a number of years. She decided to relocate for a more balanced life and to be near her aging parents. Prior to being in Evansville, Emily had only worked for companies that had 401(k) pension plans, which are defined contribution plans. Evansville follows the common practice in the heavy machinery and manufacturing industries in the mid west and has a defined benefit pension plan. As she approached her first year-end as the CFO of Evansville, she started looking over the prior year’s financial statements and the notes. When she reached the pension footnote, she remembered how complicated pension accounting is and also recognized that the many assumptions used in Pension accounting could have a significant impact on Evansville’s financial position and performance. Emily decided to talk with you, the accounting manager at Evansville, about the company pension plan and its accounting. In order to help you prepare for the meeting, she provided the following lists of questions.

Required:
Prepare a written response to each of the following questions.
a. What are the primary assumptions that we make each period as we prepare our pension accrual and the associated footnote?
b. I noticed an amount reported in our AOCI balances called “Prior Service Cost”. Can you remind me what that is and how it will impact our future pension expense (if at all)?
c. I also noticed a second amount reported in our AOCI balances called Actuarial Gains/Losses. It looks like this amount changes each year but has been relatively small. Can you tell me what this amount represents and could it ever become larger and, if it did, could it possibly impact our pension expense?