I totally don’t know which concept the question is asking, even though i read the answer already.
Can anyone explain the concept in more details? (or which concept i can refer to?)
thanks a lot!
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.
The adjusted operating profit is $25,075, calculated as follows:
The adjustment to operating profit is to add back reported pension expense [calculated as service costs ($404) plus interest cost ($275) less expected return on assets ($200)], then subtract current service cost ($404). The adjustment to interest expense is to add interest cost ($275). The adjustment to other income is to add actual return on plan assets ($176).
The concept is to decompose pension expense and then remove certain components from the operating profit by putting it in a line below operating profit.
So here, you take the original operating profit, add back the pension expense (serv cost + interest - expected return), and then deduct the component that should be in operating profit which is serv cost.
The interest component should be charged as an interest expense (as oppose to the operating expense) .
Actual return wil be deducted on other income, (rather then the expected return).
Total income before taxes would be the difference of the actual and expected returns.
Since you have Schweser, look at the section "R eclassifying Periodic Pension Cost for Analytical Purposes"
Correct me if i am wrong, that means the general Income statement will include the pension expense in the operating expense to calculate the operating profit (unadjusted operating income), but when we need to analyze the statement, it is better to adjust it, like putting back the interest cost to interest expense.
Service cost > stay in operating expense
Interest cost > stay in interest expense
Expected return is not accurate enough to reflect the statement, thus we use actual return and put it back in other income
Not able to find the section "R eclassifying Periodic Pension Cost for Analytical Purposes" in Schweser…