Question

Pronghorn, Inc. is a furniture manufacturing company with 50 employees. Recently, after a long negotiation with the local labor union, the company decided to initiate a pension plan as a part of its compensation plan. The plan will start on January 1, 2020. Each employee covered by the plan is entitled to a pension payment each year after retirement. As required by accounting standards, the controller of the company needs to report the pension obligation (liability). On the basis of a discussion with the supervisor of the Personnel Department and an actuary from an insurance company, the controller develops the following information related to the pension plan.

Average length of time to retirement		14 years
Expected life duration after retirement		10 years
Total pension payment expected each year after retirement
for all employees. Payment made at the end of the year.		$824,200 per year

The interest rate to be used is 9%.


On the basis of the information above, determine the present value of the pension obligation (liability).

Answer 1

Present value of expected pension payment at end of year 14 = PVA 9%,10* Payment

      = 6.41766*824,200

      = $ 5,289,435.37

present value of obligation today =PVF 9%,14* Present value of expected pension payment at end of year 14

      = 0.29925 * $ 5,289,435.37

       = $ 1,582,863.53

Therefore, the present value of obligation is $ 1,582,863.53

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