Question

Sachs Brands' defined benefit pension plan specifies annual retirement benefits equal to: 1.2% × service years × final year's salary, payable at the end of each year. Angela Davenport was hired by Sachs at the beginning of 2004 and is expected to retire at the end of 2038 after 35 years' service. Her retirement is expected to span 18 years. Davenport's salary is $90,000 at the end of 2018 and the company's actuary projects her salary to be $280,000 at retirement. The actuary's discount rate is 8%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)   

Required:

1. What is the company's projected benefit obligation at the beginning of 2018 (after 14 years' service) with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)
2. Estimate by the projected benefits approach the portion of Davenport's annual retirement payments attributable to 2018 service.
3. What is the company's service cost for 2018 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)
4. What is the company's interest cost for 2018 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)
5. Combine your answers to requirements 1, 3, and 4 to determine the company's projected benefit obligation at the end of 2018 (after 15 years' service) with respect to Davenport. (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

Answer 1

1. Projected Benefit Obligation

=1.2% X Service Years X Final Years salary

=1.2% X 14 X $280000

=$47,040

$47,040 X 9.3719* = $440,854

$440,854 X 0.19866** = $87,580

*present value of an ordinary annuity of $1: n=18, i=8%

** present value of $1: n=21, i=8%

2. Annual retirement payments attributable to 2018 service.

Ans : 1.2% X 1 X $280,000 = $3,360

3. Company's Service Cost for 2018

Ans : Annual retirement payments attributable to 2018 service = $3,360

Company's Service Cost for 2018

$3,360 X 9.3719* = $31,490

$31,490 X 0.21455** = $ 6,756

*present value of an ordinary annuity of $1: n=18, i=8%

** present value of $1: n=20, i=8%

4. Companyis Interest Cost

Ans : Projected Benefit Obligation = $87,580

Interest = $87,580 X 8% = $7,006.41

5. PBO at the begining of 2018 = $ 87,580

Service Cost = $ 6,756

Interest = $ 7,006

PBO at the end of 2018 = $ 101,343