Chapter 17, Problem 17.4P

1.

To determine

Pension expense: Pension expense is an expense to the employer paid as compensation after the completion of services performed by the employees.

Pension expense includes the following components:

• Service cost
• Interest cost
• Expected return on plan assets
• Amortization of prior service cost
• Amortization of net loss or net gain

To Calculate: The Company’s prior service cost at the beginning of 2019 with respect to D after amendment.

Explanation of Solution

Calculate Company’s prior service cost.

$\begin{array}{c}\text{Prior service cost = PBO with Amendment – PBO without Amendment}\\ \text{= \$163,767}\text{(6)}\text{–\$149,730}\text{(3)}\\ \text{=}\text{\$14,037}\end{array}$

Working Notes:

Calculate projected benefit obligation without amendment.

Compute the amount of annual retirement payment of D.

$\begin{array}{c}\text{Annual Retirement Benefit = 1}\text{.6\% }\times \text{ Service years }\times \text{ Final Year's Salary}\\ \text{=}\text{1}\text{.6\% }\times \text{ 15 years }\left(\text{2002}\text{to}\text{2017}\right)\times \text{ \$240,000}\\ \text{=}\text{\$57,600}\end{array}$ (1)

Compute the lump-sum retirement amount.

The lump-sum amount of the retirement represents the present value of the annual retirement benefit of $57,600 (1).

The present value of an ordinary annuity of $1, at the rate of 7% for 18 years is 10.05909 (Refer to Table 4 in Appendix).

$\begin{array}{c}\text{Lump-sum retirement payment}=\text{Present value of annual retirement benefit}\\ =\text{\$57,600}\times \text{10}\text{.05909}\\ =\text{\$579,404}\end{array}$ (2)

Compute the amount of PBO.

The PBO is the present value of the retirement benefit.

The present value of $1 at the rate of 7% for 20 $\left[35\left(\text{Total Years of Service}\right)-15\right]$  periods is 0.25842.

$\begin{array}{c}\text{PBO = Present Value of Lump-sum Retiremnt Amount}\\ \text{=}\text{\$579,404 (2)}\times 0.25842\\ =\$149,730\end{array}$ (3)

Calculate projected benefit obligation with amendment.

Compute the amount of annual retirement payment of D.

$\begin{array}{c}\text{Annual Retirement Benefit}=\text{1}\text{.75\%}\times \text{Service years}\times \text{Final Year's Salary}\\ =\text{1}\text{.75\%}\times \text{15 years }\left(\text{2002}\text{to}\text{2017}\right)\times \text{\$240,000}\\ =\text{\$63,000}\end{array}$ (4)

Compute the lump-sum retirement amount.

The lump-sum amount of the retirement represents the present value of the annual retirement benefit of $63,000 (4).

The present value of an ordinary annuity of $1, at the rate of 7% for 18 years is 10.05909 (Refer to Table 4 in Appendix).

$\begin{array}{c}\text{Lump-sum retiremnt payment = Present value of annual retirement benefit}\\ \text{=}\text{\$63,000 }\times \text{ 10}\text{.05909}\\ \text{=}\text{\$633,723}\end{array}$ (5)

Compute the amount of PBO.

The PBO is the present value of the retirement benefit.

The present value of $1 at the rate of 7% for 20 $\left[35\left(\text{Total Years of Service}\right)-15\right]$  periods is 0.25842.

$\begin{array}{c}\text{PBO = Present Value of Lump-sum Retiremnt Amount}\\ \text{=}\text{\$633,723 (5)}\times 0.25842\\ =\$163,767\end{array}$ (6)

Conclusion

Therefore, Company’s prior service cost at the beginning of 2019 with respect to D is $14,037.

2.

To determine

To Calculate: The amount of prior service cost amortization that would be included in pension expense.

Explanation of Solution

Calculate the amount of prior service cost amortization.

$\begin{array}{c}\text{Amortization of prior service cost = }\frac{\text{Total prior service cost}}{\text{Expected}\text{Remaining}\text{services}}\\ =\frac{\$14,037}{20\text{years}}\\ =\$702\end{array}$

Conclusion

Therefore, the amount of prior service cost amortization that would be included in pension expense is $702.

3.

To determine

To Calculate: The service cost for 2019 with respect to D.

Explanation of Solution

Compute the amount of service cost for 2019.

The service cost is the present value of the service benefit.

The present value of $1 at the rate of 7% for 19 periods is 0.27651 (Refer to Table 4 in Appendix).

$\begin{array}{c}\text{Service cost for 2019 = Present Value of Lump-sum service benefit}\\ \text{=}\text{\$42,248}\text{(8)}\times 0.27651\\ =\$11,682\end{array}$

Working Notes:

Compute the amount of annual service benefit of D.

$\begin{array}{c}\text{Service Benefit for 2019}=\text{1}\text{.75\%}\times \text{Service years}\times \text{Final Year's Salary}\\ =\text{1}\text{.75\%}\times \text{1}\times \text{\$240,000}\\ =\text{\$4,200}\end{array}$ (7)

Compute the lump-sum service benefit.

The lump-sum amount of the service benefit represents the present value of the service benefit of 2019 of $4,200 (7).

The present value of an ordinary annuity of $1, at the rate of 7% for 18 years is 10.05909 (Refer to Table 4 in Appendix).

$\begin{array}{c}\text{Lump-sum service benefit}=\text{Present value of service benefit}\\ =\text{\$4,200}\times \text{10}\text{.05909}\\ =\text{\$42,248}\end{array}$ (8)

Conclusion

Therefore, the service cost for 2019 with respect to D is $11,682.

4.

To determine

To Calculate: The interest cost for 2019 with respect to D.

Explanation of Solution

Calculate the interest cost for 2019.

$\begin{array}{c}\text{Interest cost for 2019}=\text{PBO with Amendment}\times \text{7\%}\\ =\text{\$163,767}\times \text{7\%}\\ =\$11,464\end{array}$

Conclusion

Therefore, the interest cost for 2019 with respect to D is $11,464.

5.

To determine

To Calculate: The pension expense for 2019 with respect to D.

Explanation of Solution

The following table shows the pension expense for 2019.

Particulars	Amount ($)
Service cost	11,682
Interest cost	11,464
Expected return on the plan assets	(15,000) (9)
Amortization of prior service cost	702
Pension expense	8,848

Table (1)

Working Note:

Compute expected return on plan assets.

$\begin{array}{c}\begin{array}{l}\text{Expected return }\\ \text{on plan assets}\end{array}\}=\left\{\begin{array}{l}\text{Balance of plan assets }\\ \times \text{Expected rate of return}\end{array}\right\}\\ =\text{\$150,000}\times \text{10\%}\\ =\text{\$15,000}\end{array}$ (9)

Conclusion

Therefore, the pension expense for 2019 with respect to D is $15,000.