. On January 1, Year One, a company started a defined benefit pension plan for i
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Question
. 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 January 1, beginning on January 1, 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?
2. Without taking pension expense into account, a company reports net income for Year One of $600,000. On January 1, Year One, the company started a defined benefit pension plan for its workers. These employees were given credit on that date for the time they had spent with the company prior to the start of this plan. These benefits created a projected benefit obligation of $360,000. On that date, the workers were expected to work for 9 more years on the average before retiring. The service cost for Year One was $100,000 and the interest rate used for the projected benefit obligation was 10 percent. No funding had taken place by the end of Year One. Which of the following is correct for the Year One financial statements? Ignore income tax effects. a.Net income is reported at $460,000 and comprehensive income is reported at $100,000. b.Net income is reported at $424,000 and comprehensive income is reported at $104,000. c.Net income is reported at $500,000 and comprehensive income is reported at $100,000. d.Net income is reported at $440,000 and comprehensive income is reported at $124,000.
Explanation / Answer
1.
The solution cannot be solved as the question is incomplete. To calculate the pension liability we need the plan assets at the beginning and ending of the period, which is not provided in the data given.
2.
Comprehensive income:
In this solution to calculate the comprehensive gain, we need service cost for the prior year as well as we need to calculate the gain/loss on the plan assets. As the details of the beginning and ending plan assets have not been given, while solving comprehensive income consider only service cost for the prior period. Service Cost is added to any gains or any losses are deducted from the service cost to arrive at the Comprehensive income.
Thus, Comprehensive income is $1,00,000
Net Income:
Given in the question net income is $6,00,000 before comprehensive income, deduct comprehensive income of $1,00,000 from $6,00,000. Net income would be $5,00,000 ($6,00,000 -$1,00,000)
Therefore Option (c) is correct.
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