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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Income smoothing is the concept of reducing the period-to-period fluctuations in revenues and expenses in order to decrease the variability of reported income. GAAP generally does not support income smoothing; however, a friend of yours, after studying GAAP, claims, “The use of expected returns and the corridor approach in pension accounting results in income smoothing.”

Required:

Describe the methods by which GAAP avoids year-to-year fluctuations in the amount of pension expense.

To determine

Describe the way in which the year-to-year fluctuations in the amount of pension expense would be avoided under GAAP.

Explanation

Pension plan: Pension plan is the plan devised by corporations to pay the employees an income after their retirement, in the form of pension.

Describe the way in which the year-to-year fluctuations in the amount of pension expense would be avoided under GAAP as follows:

In order to avoid fluctuation in the amount of pension expense, pension expense is calculated based on the expected return on plan assets rather than on the actual return under GAAP. Hence, the pension expense may vary much more than the assumed rate of return...

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