During 2016, Abbott Laboratories decreased its discount rate used to calculate pension obligation from 4.3% to 3.8%. The effect on the company's pension expense for the year and pension obligation balance at year end is: A. Decrease pension expense, increase pension obligation B. No effect on pension expense, decrease pension obligation C. Increase pension expense, decrease pension obligation D. Decrease pension expense, decrease pension obligation E. Increase pension expense, increase pension obligation

Question

Daniela Frey

Business

6 July, 14:51

During 2016, Abbott Laboratories decreased its discount rate used to calculate pension obligation from 4.3% to 3.8%. The effect on the company's pension expense for the year and pension obligation balance at year end is: A. Decrease pension expense, increase pension obligation B. No effect on pension expense, decrease pension obligation C. Increase pension expense, decrease pension obligation D. Decrease pension expense, decrease pension obligation E. Increase pension expense, increase pension obligation

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Answers (1)

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Samir Berry · Answer 1

B. Decrease pension expense, increase pension obligation

Explanation:

Decrease in discount rate decreases the interest cost for the year which in turn reduces the pension expense for the year.

Pension obligation is the present value of future payments. By reducing the discount rate, present value increases, thus, pension obligation increases.