Question

Pension plan was adopted on Jan 1 2018, all employees were granted benefits for prior serviced. This created PBO of $205,352. Company immediately contributed $155,000 to the plan. In 2018 Company provided additional funds of $130,000. Interest was outstanding all year long, and accrued at 4%. Return on planned assets invested in January was expected to approximate 8%. The plan is administered by trust department of regional bank. The planned assets are invested in exchange-listed equity securities 40%, corporate bonds 15% and U.S. government bonds 45% There is an expected rate of compensation increase of 5 %, yet the rate did not happen this year. Compute pension expense.

Answer 1

Net Pension Expense = Interest Cost + Service Cost - Expected Return on Plan Assets + Amortization of Prior Service Costs

Net Pension Expense = $8,214.08 (See note 1)+ $285,000 (See note 2)- $12,400 (See Note 3)

Net Pension Expense = $280,814.08/-

Note 1:

Calculation of Interest Cost

all employees were granted benefits for prior serviced and the PBO is $205,352/- Also Interest was outstanding all year long, and accrued at 4%. the company incurs an annual expense equal to the discount rate used to determine the PBO multiplied by the starting balance of the PBO.

Hence,

$205,352/-*4%= $8214.08

Note 2 :

Calculation of Service Cost:

For the purpose of calculation of service cost we are adding all the contribution made by company during the year.

Hence,

$155,000+ $130,000= $285,000

Note 3 :

Calculation of Expected Return on Plan Assets:

At the time of calculation of Expected Return on Plan Assets company consider the dividends, interest, and capital gains generated by assets held in a company's pension plan. In our example our Expected return mentioned 8% on amount invested in January 2018 i.e. $155,000

Hence,

$155,000*8%= $12,400

Note 4:

Calculation of Amortization of Prior Service Costs

Amendment is not take place during this year hence no need to calculation of Amortization of Prior Service Costs