Essay: Pension 1. Farris Electronics amended its pension plan effective January
ID: 2612600 • Letter: E
Question
Essay: Pension
1. Farris Electronics amended its pension plan effective January 1, 2015. The increase in the Pension Benefit Obligation occurring as a result of the plan amendment is $ 6,290,000. Farris arranged to fund the prior service cost by equal annual contributions over the next 15 years at 10% interest. Farris will make the first payment on December 31, 2015. The company decides to amortize the prior service cost on a straight-line basis over the average remaining service life of its employees. As at January 1, 2015, the company has 225 employees who are entitled to the benefits of the amendment. Farris estimates that an average of 15 employees will retire each year.
Compute the amount Farris will pay each year to fund the prior service cost arising from the plan’s amendment.
Compute Farris’s annual prior service cost amortization based on average remaining years of employee service.
2. Concept Financial has a defined benefit pension plan for its employees. The following were the balances for the pension plan as of January 1, 2015:
Annual Benefit Obligation
$3,500,000
Pension Benefit Obligation
3,900,000
Deferred pension gain
420,000
Fair value of the pension fund
3,300,000
Market-related value of the pension fund ( five-year weighted average)
2,850,000
The pension plan would earn 12% of the market-related value of the pension fund in 2015. The actual return on the pension fund was $315,000. The company has elected to amortize the deferred pension gains and losses over 10 years.
Answer the following questions:
1. Compute the amount of deferred gain or loss for 2015.
2. Compute the amount of amortization of deferred pension gain or loss for 2015.
3. Computed pension expense is $ 534,000. However, this computation ignores any deferred gains or losses for the year (in other words, actual, not expected return on the pension fund was included in the computations) as well as any amortization of deferred gains or losses from prior years. What is pension expense after considering the impact of deferred gains and losses and their amortization?
4. What is the deferred pension gain or loss that Concept will carry forward to 2016?
Annual Benefit Obligation
$3,500,000
Pension Benefit Obligation
3,900,000
Deferred pension gain
420,000
Fair value of the pension fund
3,300,000
Market-related value of the pension fund ( five-year weighted average)
2,850,000
Explanation / Answer
1. Amount of increase in the pension benefit obligation = $6290000
Let the annual contirbution to the fund be $x
x*Cumulative PVF @ 10% for 15 years = 6290000
x = 6290000/7.606 = $826979
Annual Contribution to the fund = $826979
Average remaining years of employee service = 120/15 = 8 years
Annual prior service cost amortization = 6290000/ 8 = $786250
Year Remaining years 1 15 2 14 3 13 4 12 5 11 6 10 7 9 8 8 9 7 10 6 11 5 12 4 13 3 14 2 15 1 120Related Questions
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