I still do not understand the second part about pension assets. Can anyone give me an example? Thx.

Question 56 (PVD-0010B) Effective January 1, year 2, Flood Co. established a defined benefit pension plan with no retroactive benefits. The first of the required equal annual contributions was paid on December 31, year 2. A 10% discount rate was used to calculate service cost and a 10% rate of return was assumed for plan assets. All information on covered employees for year 2 and year 3 is the same. How should the service cost for year 3 compare with year 2, and should the year 2 balance sheet report a pension asset or a pension liability? Service cost Pension cost for year 3 compared reported on the year 2 to year 2 balance sheet o Equal to Pension liability Equal to Pension asset Your Answer Greater than Pension liability Correct Greater than Pension asset This Answer is Correct This question addresses the behavior of the components of pension expense over a period of time. Service cost is the actuarial present value of benefits attributed by the pension benefit formula to services rendered by employees during that period. This problem states that "all information on covered employees for year 2 and year 3 is the same," which indicates that there has been no change in Flood's work force during this two-year period. The only difference in the service cost for these two years would, therefore, be attributable to differences in the discounting of the benefits. Each year a group of employees works, the group becomes one year closer to retirement age and to collecting their retirement benefits. The present value of the benefits earned by employees each year grows as their retirement date grows nearer, because the benefits are discounted over a shorter period of time. If, for instance, the "average" retirement date for Flood's employees is January 1, year 12, the present value of the benefits for year 3's service will be greater than the present value of year 2 service, because it is discounted eleven years for year 2 versus ten years for year 3. (This is because every additional year of discounting reduces the present value of the benefits.) Therefore, the service cost for year 3 will be greater than for year 2. The problem also states that Flood intends to fund the plan in equal annual installments, and that the discount rate which was used to calculate the service cost is equal to the assumed rate of return on plan assets. Under these circumstances, to fully fund the pension obligation in equal payments, Flood will contribute an amount which exceeds the pension cost in the first years of the plan and which is less than the pension cost in later years. A pension asset is the cumulative employer contributions in excess of the pension liability cost. Since year 2's funding would exceed its pension cost, Flood would report a pension asset on its year 2 balance sheet. The journal entry to record the funding would be Pension expense Pension asset/liability xxx Cash XXX XXX