1. On January 1, Year One, a company started a defined benefit pension plan for
ID: 2414940 • Letter: 1
Question
1. On January 1, Year One, a company started a defined benefit pension plan for its employees. Assume that the annual service cost is $200,000. Funding is $150,000 each December 31, beginning on December 31, Year One. The interest rate used for discount purposes to determine the projected benefit obligation is 10 percent. Both actual and expected earnings on plan assets are 8 percent. What pension liability should this company report on its December 31, Year Two, balance sheet? a. $100,000 b. $108,000 c. $132,000 d. $150,000
2.The Johnson Corporation has a large defined pension benefit plan for its employees. Currently, the projected benefit obligation is $44 million and plan assets amount to $37 million. The earnings on the plan assets are expected to be 7 percent per year over the next few years. In the current year, the actual earnings were 8 percent. Which of the following statements is not true?
a.In computing its pension expense for the current year, the 7 percent expected return should ultimately be used to reduce the expense rather than the 8 percent actual return.
b.In arriving at the plan asset balance at the end of the year, the 8 percent actual earnings should be included rather than the 7 percent expected return.
c.The difference between the 7 percent expected return and the 8 percent actual return increases a deferred gain and has no direct impact on the pension expense.
d.The 1 percent by which actual earnings were in excess of expected earnings serves to reduce pension expense for the current year.
Explanation / Answer
Solution:1
For the first part of the question, you have not provided the full information like PBO, fair value of the plan asset etc.
Solution:2
Begining balance of the plan asset..........37000000
Rate of return........................................8%
Return on plan assets.............................2960000
Begining value.................37000000
Adjustment (8%-7%)...........1%
Adjusted gain on plan asset.....................(370000)
Expected return on plan asset..................2590000
Since expected return is subtracted from PBO to calculate the pension expense, therefore, option d is the right answer because the 1 percent by which actual earnings were in excess of expected earnings serves to increase pension expense for the current year.
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