Accounting for Pension Plans: Asset, Expense, and Obligation Analysis

This assignment provides detailed solutions to various pension accounting problems. It begins with determining pension plan assets at fair value, calculating cash contributions, and determining pension expense. The assignment further delves into Projected Benefit Obligation (PBO) and Accumulated B...Read More

Running head: PENSION PLAN ASSETS
Pension Accounting: Pension Plan Assets
Name
Institution

PENSION PLAN ASSETS
E 17–5
Determine pension plan assets
The following data relate to Voltaire Company’s defined benefit pension plan:
Required:
Determine the amount of pension plan assets at fair value on December 31.
$ in Millions
Plan Assets
Beginning of the year 600
Add: Actual return 48
Add: Cash contributions 100
748
Less: Retiree benefits (11)
End of the year 737
The amount of pension plan assets at fair value on December 31 is determined by deducting
the retiree benefits from the sum of plant assets at the beginning of the year, actual returns,
and cash contributions (Holzmann, 2001).
E 17–7
Changes in plan assets; determine cash contributions
Pension data for Fahy Transportation Inc. include the following:
Required:

PENSION PLAN ASSETS
Assuming cash contributions were made at the end of the year, what was the amount of those
contributions?
$ in millions
Plan Assets
End of the year 750
Retiree benefits 66
816
Beginning of the year 700
Actual return 77
39
Cash contributions are the funding provided by the employer which based of the service cost,
interest cost, prior service cost, and expected return on plan asset (Brealey, 1995). Cash
contribution is determined by subtracting actual return and beginning plan assets at fair value
on December 31 from the sum of end year plan assets and retiree benefits (Watson, 2013).
Actual return is 11% of plan asset as at January.
E 17–10
Determine pension expense
Abbott and Abbott has a noncontributory, defined benefit pension plan. At December 31, 2016,
Abbott and Abbott received the following information:
The expected long-term rate of return on plan assets was 10%. There was no prior service cost
and a negligible net loss–AOCI on January 1, 2016.
Required:
1. Determine Abbott and Abbott’s pension expense for 2016.
$ in millions
Service cost 20
Interest cost 12
32

PENSION PLAN ASSETS
Less: Expected return on the plan assets 8
24
2. Prepare the journal entries to record Abbott and Abbott’s pension expense, funding, and
payment for 2016
Dr Cr
Pension expense 24
Plan assets 8
PBO (20 service cost + 12 interest
cost)
32
Plan assets 20
Cash 20
PBO 9
Plan Asset 9
E 17–12
PBO calculations; ABO calculations; present value concepts
Clark Industries has a defined benefit pension plan that specifies annual retirement benefits equal
to:
1.2% × Service years × Final year’s salary
Stanley Mills was hired by Clark at the beginning of 1997. Mills is expected to retire at the end
of 2041 after 45 years of service. His retirement is expected to span 15 years. At the end of 2016,
20 years after being hired, his salary is $80,000. The company’s actuary projects Mills’s salary to
be $270,000 at retirement. The actuary’s discount rate is 7%.
Required:
1. Estimate the amount of Stanley Mills’s annual retirement payments for the 15 retirement years
earned as of the end of 2016.
1.2% × Service years × Final year’s salary
Service years 20
Final year’s salary
270,00
0
Rate 1.20%
Annual retirement payments
64,80
0

PENSION PLAN ASSETS
2. Suppose Clark’s pension plan permits a lump-sum payment at retirement in lieu of annuity
payments. Determine the lump-sum equivalent as the present value as of the retirement date of
annuity payments during the retirement period.
PVAF 9.1079
Annual retirement payments 64,800
Present value of the retirement benefits 590,192.83
Present Value of the retirement benefit have been calculated using Present Value Annuity
factor for the next 15 years at a rate of 7% (Phelps, 2010).
3. What is the company’s projected benefit obligation at the end of 2016 with respect to Stanley
Mills?
Present value of the retirement benefits 590,192.
83
Present value interest factor 0.18425
108,742.54
4. Even though pension accounting centers on the PBO calculation, the ABO still must be
disclosed in the pension disclosure note. What is the company’s accumulated benefit
obligation at the end of 2016 with respect to Stanley Mills?
Rate 1.20%
Salary 80,000
Service years 20
PVAF 9.1079
PVIF 0.18425
Accumulated benefit obligation at the end of
2016
32,220.0
1
5. If we assume no estimates change in the meantime, what is the company’s projected benefit
obligation at the end of 2017 with respect to Stanley Mills?
Rate 1.20%
Final year’s salary 270,000
Service years 21
PVAF 9.1079
PVIF 0.19715
The company’s projected benefit obligation, 2017 122,172.25
6. What portion of the 2017 increase in the PBO is attributable to 2017 service (the service cost
component of pension expense) and to accrued interest (the interest cost component of pension
expense)?

PENSION PLAN ASSETS
PBO at the end of 2017 122,172.25
PBO at the end of 2016 (108,742.54)
Change in PBO 13,429.70
Less: Interest cost (108,743 x 7%) (7,611.98)
Service cost 5,817.73
E 17–15
Pension spreadsheet
A partially completed pension spreadsheet showing the relationships among the elements that
comprise the defined benefit pension plan of Universal Products is given below. The actuary’s
discount rate is 5%. At the end of 2014, the pension formula was amended, creating a prior
service cost of $120,000. The expected rate of return on assets was 8%, and the average
remaining service life of the active employee group is 20 years in the current year as well as the
previous two years.
Required:
Copy the incomplete spreadsheet and fill in the missing amounts.
()s indicate credits; debits
otherwise
PBO Plan Prior Net Pensio
n
Cas
h
Net Pension,
($ in 000s) Assets Servic
e
loss Expens
e
(Liability)/
Asset
Balance, Jan. 1, 2016
(800) 600 114 80 (200)
Service
(84) 84 (84)
Interest cost, 5%
(40) 40 (40)
Expected return on
assets 48 (48) 48
Adjust for:
Loss on Assets
(6) 6 (6)
Amortization:
Prior service cost
(6) 6
Amortization:
Net Loss
- -
Gain on PBO
12 (12) 12

PENSION PLAN ASSETS
Prior service cost
- - -
Cash funding
68 (68) 68
Retiree benefits
50 (50)
Balance, Dec. 31, 2016
(862) 660 108 74 82 (202)

PENSION PLAN ASSETS
References
Brealey, R. M. (1995). Fundamentals ofCorporate Finance (p. 69). . New York: McGraw-Hill.
Holzmann, R. &. (2001). New ideas about old age security: Toward sustainable pension systems
in the 21st century. . The World Bank.
Phelps, R. B. (2010). U.S. Patent No. 7,769,607. . Washington, DC: U.S.: Patent and Trademark
Office.
Watson, T. (2013). Global pension assets study 2013. . Towers Watson.