Prior Service Cost Using Pension Worksheet Explained

What is prior service cost in pension accounting and how is it recorded on the pension worksheet? This tutorial explains prior service cost, its treatment in other comprehensive income and the projected benefit obligation, amortization methods, and a full pension worksheet example — built for CPA exam candidates and accounting students studying FAR and intermediate accounting. Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students. Video Timeline & Key Concepts: 0:00 — Introduction 0:48 — Definition of prior service cost: retroactive benefits granted when a plan is established or amended to increase benefits 2:43 — Initial recording: debit other comprehensive income and credit the projected benefit obligation 3:06 — Amortization methods overview: straight-line versus years-of-service 4:10 — Years-of-service method example allocating cost across employee groups, the generally preferred approach 8:07 — Comprehensive pension worksheet walkthrough 10:30 — Recording service cost, interest cost, and actual return on plan assets 11:51 — Handling contributions and benefit payments 15:32 — Calculating the final pension liability and the year-end journal entry Frequently Asked Questions: What is prior service cost? Prior service cost arises when an employer grants retroactive pension benefits, either by starting a new plan or amending an existing plan to increase benefits. It reflects the added obligation for service employees have already provided. How is prior service cost recorded initially? When granted, prior service cost is recorded by debiting other comprehensive income and crediting the projected benefit obligation. This increases the obligation without immediately hitting pension expense. How is prior service cost amortized? It is amortized from other comprehensive income into pension expense over time, using either the straight-line method or the years-of-service method. The years-of-service method allocates cost based on the remaining service of employee groups and is generally preferred. How does prior service cost appear on the pension worksheet? On the worksheet it flows through the other comprehensive income and projected benefit obligation columns, then into pension expense as it is amortized. The worksheet ties these items together with service cost, interest, returns, contributions, and benefit payments to produce the year-end journal entry. Who should watch this prior service cost lesson? This lesson is designed for CPA exam candidates and college accounting students who need to master pension expense, the pension worksheet, and other comprehensive income within the FAR section and intermediate accounting. #CPAexam #CMAexam #enrolledagentexam #accountingcourses #collegecourses #courses #FAR #pensionaccounting #priorservicecost #pensionworksheet #OCI #ProfessorFarhat