Defined Benefit Accounting Adjusted operating profit

[JamesPage]

In Kaplan Book 2 Question 11 on page 217 within the self test for FRA, the question asks,
“After reclassifying operating and non-operating pension items appropriately, the adjusted operating profit is closest to:
A)23,775
B)24,026
C)25,075
Prior to the question this information is given:
Beginning Pension Obligation- $4,545
Beginning Plan Assets - $4,327
Service Costs - $404
Interest Costs - $275
Loss due to change in actuarial assumptions during the year - $42
Benefits Paid - $560
Expected return on plan assets - $200
Actual Return on plan assets $176
Contributions to plan $895
Unadjusted Income Statement Items
Operating Profit - $25,000
Interest Expense - ($1,300)
Other Income - $350
Income before taxes - $24,050

Would someone please breakdown the adjusted values especially why they get adjusted operating profit as: 25,000 + (404+275-200) - 404 = $25,075

 

[JamesPage]

The final answer is C

 

[S2000magician]

The procedure outlined in the curriculum is to add total pension expense to operating income, then subtract service cost; the other components of pension expense being nonoperating. So that’s what they did: (404 + 275 − 200) is total pension expense (service costs + interest costs − expected return on plan assets), 404 is service costs.

 

[JamesPage]

Thanks S2000magician. I see where I was confused. I thought the Unadjusted income statement items did not include pension costs at all when in fact the “adjusting” we are doing to the income statement is taking the non operating portion (interest expense and expected return) and adding them to a more appropriate account.

 

[S2000magician]

JamesPage wrote:Thanks S2000magician.

My pleasure.

JamesPage wrote:I see where I was confused. I thought the Unadjusted income statement items did not include pension costs at all when in fact the “adjusting” we are doing to the income statement is taking the non operating portion (interest expense and expected return) and adding them to a more appropriate account.

Bingo!