Question

Sachs Brands's defined benefit pension plan specifies annual retirement benefits equal to 1.3% × service years...

Sachs Brands's defined benefit pension plan specifies annual retirement benefits equal to 1.3% × service years × final year's salary, payable at the end of each year. Angela Davenport was hired by Sachs at the beginning of 2007 and is expected to retire at the end of 2041 after 35 years' service. Her retirement is expected to span 18 years. Davenport's salary is $87,000 at the end of 2021 and the company's actuary projects her salary to be $265,000 at retirement. The actuary's discount rate is 9%. (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.) At the beginning of 2022, the pension formula was amended to: 1.40% × Service years × Final year's salary The amendment was made retroactive to apply the increased benefits to prior service years. Required:

1. What is the company's prior service cost at the beginning of 2022 with respect to Davenport after the amendment described above?

2. Since the amendment occurred at the beginning of 2022, amortization of the prior service cost begins in 2022. What is the prior service cost amortization that would be included in pension expense?

3. What is the service cost for 2022 with respect to Davenport?

4. What is the interest cost for 2022 with respect to Davenport?

5. Calculate pension expense for 2022 with respect to Davenport, assuming plan assets attributable to her of $120,000 and a rate of return (actual and expected) of 10%.

Homework Answers

Answer #1
1 company's prior service cost at the beginning of 2022 with respect to Davenport after the amendment described above
Due to Amendmends
= (1.4%-1.3%) x 15 years (2007-2021) x 265000
= $       3,975
= 3975 * 8.7556 * 0.17843
Prior service cost - amdendment = $       6,210
before amdende
= (1.3%) x 15 years (2007-2021) x 265000
= $     51,675
= 54675 * 8.7556 * 0.17843
Prior service cost - before amdende = $     80,730
Total prior service cost = =80730+6210
$     86,940
  • present value of annuity of $1: n=18 (i.e. retirement is expected to span ); r=9% (i.e.discount rate) = 8.7556
  • present value of $1: n=20 (i.e. Reamining years to retirement ); r=9% (i.e.discount rate) = 0.17843
2 . What is the prior service cost amortization that would be included in pension expense
Amortization of prior service cost
= Prior service cost - amdendment /Reamining years to retirement
= 6210/20
= $           311
3 .service cost for 2022 with respect to Davenport
= (1.4%) x 1 years x 265000
= $       3,710
= 3710 * 8.7556 * 0.19448
= $       6,317
present value of annuity of $1: n=18 (i.e. retirement is expected to span ); r=9% (i.e.discount rate) = 8.7556
present value of $1: n=19 (i.e. Reamining years to retirement -1 year); r=9% (i.e.discount rate) = 0.19448
4 interest cost for 2022 with respect to Davenport
= Total prior service cost *9%
= 86940 *9% = $ 7,825
5 Calculate pension expense for 2022 with respect to Davenport, assuming plan assets attributable to her of $120,000 and a rate of return (actual and expected) of 10%.
service cpst $       6,317
interset cost $       7,825
Amortization of prior service cost during the year $           311
Return on plan asset -12000
(120000*10%)
Pension Expense $       2,452
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