Sachs Brands\' defined benefit pension plan specifies annual retirement benefits
ID: 2548329 • Letter: S
Question
Sachs Brands' 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 2004 and is expected to retire at the end of 2038 after 35 years' service. Her retirement is expected to span 18 years. Davenport's salary is $96,000 at the end of 2018 and the company's actuary projects her salary to be $310,000 at retirement. The actuary's discount rate is 6%. (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 2019, the pension formula was amended to:
1.45% × 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 2019 with respect to Davenport after the amendment described above?
2. Since the amendment occurred at the beginning of 2019, amortization of the prior service cost begins in 2019. What is the prior service cost amortization that would be included in pension expense?
3. What is the service cost for 2019 with respect to Davenport?
4. What is the interest cost for 2019 with respect to Davenport?
5. Calculate pension expense for 2019 with respect to Davenport, assuming plan assets attributable to her of $200,000 and a rate of return (actual and expected) of 10%.
(For all requirements, do not round intermediate calculations. Round your final answers to nearest whole dollar.)
Sachs Brands' 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 2004 and is expected to retire at the end of 2038 after 35 years' service. Her retirement is expected to span 18 years. Davenport's salary is $96,000 at the end of 2018 and the company's actuary projects her salary to be $310,000 at retirement. The actuary's discount rate is 6%. (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 2019, the pension formula was amended to:
1.45% × 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 2019 with respect to Davenport after the amendment described above?
2. Since the amendment occurred at the beginning of 2019, amortization of the prior service cost begins in 2019. What is the prior service cost amortization that would be included in pension expense?
3. What is the service cost for 2019 with respect to Davenport?
4. What is the interest cost for 2019 with respect to Davenport?
5. Calculate pension expense for 2019 with respect to Davenport, assuming plan assets attributable to her of $200,000 and a rate of return (actual and expected) of 10%.
(For all requirements, do not round intermediate calculations. Round your final answers to nearest whole dollar.)
Explanation / Answer
1) Pension Benefit Obligations without Amendment
At the end of 2018
Service Years = from 2004 to 2018 = 15 years
Annual retirement benefits = 1.3%*15 yrs*$310,000 = $60,450
Present value of retirement benefits as of the retirement date = Annual retirement benefits*PVAF(18 yrs, 6%)
= $60,450*10.8276 = $654,528
The PBO at the end of 2018 = $654,528*PVF(6%, 20 yrs*) (* from 2019 to 2038)
= $654,528*0.31180 = $204,082
Pension Benefit Obligations with Amendment
At the end of 2018
Service Years = from 2004 to 2018 = 15 years
Annual retirement benefits = 1.45%*15 yrs*$310,000 = $67,425
Present value of retirement benefits as of the retirement date = Annual retirement benefits*PVAF(18 yrs, 6%)
= $67,425*10.8276 = $730,051
The PBO at the end of 2018 = $730,051*PVF(6%, 20 yrs*) (* from 2019 to 2038)
= $730,051*0.31180 = $227,630
Prior Service Cost at the beginning of 2019 = PBO with amendment - PBO without amendment
= $227,630 - $204,082 = $23,548
2) Prior service cost will be amortized over expected remaining service period.
Expected Remaining Service Period = 20 years
Prior Service cost = $23,548
Prior Service cost amortization = $23,548/20 yrs = $1,177
3) Service cost for 2019
Retirement obligation for 2019 = 1.45%*1 year*$310,000 = $4,495
Present value of retirement obligation of 2019 = $4,495*PVAF(18 yrs, 6%)
= $4,495*10.8276 = $48,670
Service Cost for 2019 = $48,670*PVF(19 yrs, 6%)
= $48,670*0.33051 = $16,086
4) Interest cost for 2019 = PBO with amendment at the end of 2018*6%
= $227,630*6% = $13,658
5) Calculation of Pension expense for 2019 (Amount in $)
Service Cost (from requirement 3) 16,086 Add: Interest Cost (from requirement 4) 13,658 Less: Expected Return on Plan Assets ($200,000*10%) (20,000) Add: Amortization Prior Service Cost (from requirement 2) 1,177 Pension Expense for 2019 10,921Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.