QBank #87587 the Service and Interest Cost related to the pension accounting had been miscalculated, the new estimate should be 13M USD higher, to correct the accounting the answer increase the liability by 13 x (1-Tax) , decrease the net income and equity by 13 X (1-Tax) PBO should be increased by amount before tax or after tax? I am confused here Thanks
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Great Plains Grains (GPG) reported the following 2009 year-end data: Net income $45 million Dividends $10 million Total long-term liabilities $100 million Total shareholder’s equity $200 million Effective tax rate 40 percent Deferred Tax Assets $6 million Funded Status Underfunded Following the release of this data, GPG discovered that the service and interest costs related to their pension fund accounting had been miscalculated. The new estimates are $5 million and $8 million higher than the original estimates. What is the impact on the debt to equity ratio? The new debt/equity ratio is: A 56.1% B 61.7% C 56.5% The correct answer was A) 56.1%. The increases in the service and interest costs will decrease net income by $7.8 million ((5 + 8) × (1 − 0.40)). Due to the reduction in income retained earnings will fall by the same amount reducing equity to $192.2 million (200 – 7.8). Moreover, the new calculations will increase net liabilities by $7.8 million. Therefore, the new debt/equity ratio is 56.1% ((100 + 7.8) / (200 – 7.8)).