P10-41. Analyzing and Interpreting Pension Disclosures Johnson P10-41. Analyzing and Interpreting Pension Disclosures Johnson
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Review key terms such as projected benefit obligation (PBO), accumulated benefit obligation (ABO), fair value of plan assets, and funded status. Show more…
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Technique Technologies, Inc. started a defined-benefit plan this year. As part of the union agreement, it provided $560,000 in retroactive benefits to all employees for their prior years' service. The company amortized $15,600 of these benefits during the current year. At the end of the year, the actuary provided you with the following information related to the plan: - Service cost for the year: $915,590. - Actual return (loss) on plan assets: ($128,000). - Contributions for the year: $345,700. - Expected return on plan assets: loss of $150,000. - Settlement rate: 10%. - No retirement benefits were paid during the year. Required: a. Compute the pension cost for the year. b. Determine the ending balances of the plan assets and the projected benefit obligation and indicate the funded status of the plan. c. Prepare the journal entry to record the current year's pension cost. d. Reconcile the ending balance in accumulated other comprehensive income.
Adi S.
A friend of yours works in the HR department of a small company. The company has decided to offer defined-benefit pension plans in which they will pay 75% of an employee's last annual salary given the employee has worked there for 25 years. The pension amount will be reduced by 3% for each year less than 25 years (so an employee that retires after 15 years will receive 45% (75%-10*3%) of his final years salary). Payments begin at age 65 if the worker retires, though they may continue working and increase their pension if they have not worked for 25 years up to that age. Your friend is trying to come up with some estimates of the cost of the plan and is looking to you for help. She has provided you with information on two employees, Jack and Jill. Jack has worked at the company for 27 years, is 58 years old, and makes $34,000 per year. It is believed he will remain at the firm until he retires and that his salary will increase by 4% annually until that time. Jill has worked at the company for 3 years, is 47 years old, and makes $42,000 annually. She will likely receive a 7% annual raise until she is retirement age. You must help your friend determine how much money the company must invest annually. The company can borrow money at 8% and feels that this is the minimal rate their invested funds should be able to earn. The life expectancy of each employee is 15 years at age 65. 1. If Jack and Jill both retire at the age of 65, how much will each person's pension be? Correct answers: Jack $33,556.26 and Jill $89,433.01 2. If the firm purchases an annuity from an insurance company to fund each pension, and the insurance company claims to be able to earn 9% on the funds, what is the cost or the amount required to purchase the annuity contracts (at the time of retirement)? 3. If the firm can earn 8% on the money it must invest annually to fund the pensions, how much will the firm have to invest annually to have the funds necessary to purchase both annuities? 4. What would be the impact of each of the following situations on the amount that the firm must invest annually to fund the pension? a. Life expectancy is increased to 20 years. (numerical answer needed) b. The rate of interest on the annuity contract with the insurance company is reduced to 7%. (numerical answer needed)
Supreeta N.
Comprehensive Pension Problem - Take Home Quiz - a 20 points bonus The following information relate to the defined benefit pension plan of Lorentz Corp. as of 1/1/x1 Projected benefit obligation 1,655,000 Fair value of plan assets 1,513,500 Unrecognized prior service cost 221,600 Unrecognized net pension gain or (loss) (65,000) Pension data for 20x1 and 20x2: 20x1 20x2 Service cost 88,000 99,000 Contributions to pension plan 120,000 125,000 Benefits paid to retirees 132,000 140,000 Actual return on pension plan assets 26,350 180,000 Amortization of prior service costs 53,000 42,000 Settlement interest rate 11% 11% Expected rate of return on plan assets 10% 10% Accumulated benefit obligation 12/31 1,620,000 1,850,000 Vested benefit obligation 12/31 1,200,000 1,500,000 Average remaining service lives of employees 12 years 14 years 1. Calculate the PBO at 12/31/x1 and 12/31/x2 20x1 20x2 Beginning balance 1,655,000 Service cost Interest Benefits paid to retirees Ending balance
Akash M.
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