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A company has an underfunded defined benefit pension plan. During the current year, the company uses the years-of-service method to amortize its prior service cost. What effect will the amortization of prior service cost have on the company's current-year financial statements?
a. Total liabilities will be decreased.
b. Current period expenses will be decreased.
c. Net income will be increased.
d. Other comprehensive income will be increased.
【正确答案】d
【答案解析】
Choice "d" is correct. Using the years of service method, the prior service cost is amortized to pension expense over the remaining service period of employees expected to receive benefits under the pension plan. The offsetting credit is to other comprehensive income which results in an increase to other comprehensive income.
Choice "a" is incorrect. The amortization of prior service costs will not decrease total liabilities. The amortization of prior service costs increases pension expense and increases other comprehensive income.
Choice "c" is incorrect. Net income is not increased because of the amortization of prior service cost. Net income is actually decreased as a result of the amortization of prior service costs because of the increase in pension expense.
Choice "b" is incorrect. Current period expenses are not decreased as a result of the amortization of prior service cost, but increased because of the increase to pension expense.
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