Question

The funded status of Hilton Paneling Inc.'s defined benefit pension plan and the balances in prior service cost and the net gain–pensions, are given below.

	($ in 000s)
		2018				2018
	Beginning Balances				Ending Balances
Projected benefit obligation	$	3,600			$	3,801
Plan assets		3,700				4,021
Funded status		100				220
Prior service cost–AOCI		420				350
Net gain–AOCI		410				355

Retirees were paid $257,000 and the employer contribution to the pension fund was $258,000 at the end of 2018. The expected rate of return on plan assets was 10%, and the actuary’s discount rate is 6%. There were no changes in actuarial estimates and assumptions regarding the PBO.

Required:

1. Determine the actual return on plan assets of 2018.
2. Determine the loss or gain on plan assets of 2018.
3. Determine the service cost of 2018.
4. Determine the pension expense of 2018.
5. Average remaining service life of active employees (used to determine amortization of the net gain)

Answer 1

(1)

To calculate Actual Return on Plan Assets	($ in 000s)
Beginning Balance of Plan Assets	$       3,700
Add: Actual Return	?
Cash Contributions from Employer	258
Less: Benefits of Retiree	(257)
Ending Balance of Plan Assets	$       4,021

Therefore,

Actual Return on Plan Assets = Ending Balance of Plan Assets – (Beginning Balance of Plan Assets + Cash Contributions from Employer - Benefits of Retiree)

= $ [4,021 – (3,700 + 258 – 257)] = $320

(2)

To calculate the loss on Plan Assets	($ in 000s)
Expected Return on Plan Assets (10% of $3,700)	$        370
Actual Return on Plan Assets (refer 1)	(320)
Loss on Plan Assets	$          50

(3)

To calculate Service Cost	($ in 000s)
Beginning Balance of Projected Benefit Obligation	$       3,600
Add: Service Cost	?
Interest Cost (6% of $3,600)	216
Loss/Gain on Projected Benefit Obligation	0
Less: Benefits of Retiree	(257)
Ending Balance of Projected Benefit Obligation	$       3,801

Therefore,

Service Cost = Ending Balance of Projected Benefit Obligation – (Beginning Balance of Projected Benefit Obligation + Interest Cost - Benefits of Retiree)

= $[3,801 – (3,600 + 216 – 257)] = $242

(4)

To calculate Pension Expense	($ in 000s)	Computation
Service Cost	$        242	Refer 3
Interest Cost	216	6% of $3,600
Expected Return on Plan Assets	(370)	10% of $3,700
Prior Service Cost-AOCI amortized	70	Beginning Bal. - Ending Bal. $(420 – 350)
Net Gain-AOCI amortized	(5)	Beginning Bal. - Ending Bal. – Loss on Plan Assets $(410 – 355 – 50)
Pension Expense	$        153	Sum of the above

(5)

To calculate the average remaining service life of Active employees	($ in 000s)
Net Gain-AOCI (Beginning Balance)	$       410
Less: Expected Return on Plan Assets (10% of $3,700)	$     (370)
Excess Amount	$           40
Amount amortized	$             5
Average Service Period (Excess Amount / Amount Amortized)	$40 / $5 = 8 years