Question

I'm having trouble figuring out N for this problem.

Sachs Brands's defined benefit pension plan specifies annual retirement benefits equal to 1.6% × 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 $94,000 at the end of 2021 and the company's actuary projects her salary to be $300,000 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 2021 (after 14 years' service) with respect to Davenport? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar.)
2. Estimate by the projected benefits approaches the portion of Davenport's annual retirement payments attributable to 2021 service.
3. What is the company's service cost for 2021 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar.)
4. What is the company's interest cost for 2021 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to the 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 2021 (after 15 years' service) with respect to Davenport. (Do not round intermediate calculations. Round your final answer to the nearest whole dollar.)

Answer 1

1. Company’s projected benefit obligation at the beginning of 2021:

= PV of Benefits based on projected future salary levels and calculated by Benefits Years of Service Method

= 1.6%*14*$94000*1/(1.08)14

= $173591

2. Projected benefits approaches the portion of Davenports annual retirement payments attributable to 2021 service

=$173591+$94000=$267591

3. Company’s service cost for 2021 with respect to Davenport

=Increase in PBO on account of employee service cost in the period

= $173591-1.6%*13*$94000*1/(1.08)13

=$173591-$154535

=$19056

4. Company’s Interest Cost for 2021

= Beginning PBO* Discount rate

= $173591*8/100

=$13887.28

5. Company’s projected benefit obligation at the end of 2021

= $173591+$19056+$13887.28

=$206534