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.
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.
We are adjusting for operating income. Why would we subtract current pension costs when in fact it is an operating expense? Why do we add nonoperating expenses (interest and expected return on assets) to adjust for operating income?
Operating income includes all pension expenses. The adjustment removes interest and expected return on plan assets from those expenses, so that the only pension expense remaining in operating income is service cost.
You can do the adjustment two ways:
Remove the effects of interest and expected return on plan assets from operating income.
Remove the effects of all pension expenses from operating income, then include the effect of service cost in operating income.
