Computing Defined Benefit Pension Payments Francisco Company has established a d

Question

Computing Defined Benefit Pension Payments Francisco Company has established a defined benefit pension plan for its lone employee, De Annual payments under the pension plan are equal to 39% of Derrald's highest lifetime the number of years with the company. Derrald's salary in 2014 was $75,000. Derrald is expected toreto 20 years,and his salary increases are expected to average 4% per year during that period. As of thehean ning of 2015, Derrald had worked for Francisco Company for 12 years. Exercise 17-24 salary multiplied by 1. What is the amount of the annual pension payment that should be used in computing Francisco's accumulated benefit obligation (ABO) as of January 1, 2015? 2. What is the amount of the annual pension payment that should be used in computing Francisco's projected benefit obligation (PBO) as of January 1, 2015?

Explanation / Answer

1) Solution: $27,000

Working:

Annual Pension Payment = 75,000 * 3% * 12 = 27,000

2) Solution: $59,160

Working:

PV = 75,000 ; N= 20; I = 4%

FV = 75,000 (1+0.04)^20

= 75,000 * 2.19

= 164,334

Annual Pension Payment = 164,334 * 3% * 12 = 59,160

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