Effective January 1, 2006, 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, 2006. 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 2006 and 2007 is the same. How should the service cost for 2007 compare with 2006, and should the 2006 balance sheet report an accrued or a prepaid pension cost?

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Service cost for 2007 compared to 2006

Pension cost reported on the 2006 balance sheet

a.

Equal to

Accrued

b.

Equal to

Prepaid

c.

Greater than

Accrued

d.

Greater than

Prepaid