E6.14 (LO 5) (Computation of Pension Liability) Nerwin, Inc. is a furniture manufacturing company with 50...

E6.14 (LO 5) (Computation of Pension Liability) Nerwin, Inc. is a furniture manufacturing company with 50 employees. Recently, after a long negotiation with the local labor union, the company decided to initiate a pension plan as a part of its compensation plan. The plan will start on January 1, 2020. Each employee covered by the plan is entitled to a pension payment each year after retirement. As required by accounting standards, the controller of the company needs to report the pension obligation (liability). On the basis of a discussion with the supervisor of the Personnel Department and an actuary from an insurance company, the controller develops the following information related to the pension plan.

Average length of time to retirement	15 years
Expected life duration after retirement	10 years
Total pension payment expected each year after retirement for all employees. Payment made at the end of the year.	$700,000 per year

The interest rate to be used is 8%.

Instructions

On the basis of the information above, determine the present value of the pension obligation (liability).

Solutions

Expert Solution

Annual pension payment expected	700,000
Multiply: Present value Annuity factor @ 8% for 10 periods	6.71008
Value as on retirement date	4,697,056

Value as on retirement date	4,697,056
Multiply: Present value factor @ 8% for 15 periods	0.31524
Present value of the pension obligation - liability	1,480,700

Year	PV factor @ 8%	Remarks
1	0.92593	= 1 / 1.08
2	0.85734	= 0.92593 / 1.08
3	0.79383	= 0.85734 / 1.08
4	0.73503	= 0.79383 / 1.08
5	0.68058	= 0.73503 / 1.08
6	0.63017	= 0.68058 / 1.08
7	0.58349	= 0.63017 / 1.08
8	0.54027	= 0.58349 / 1.08
9	0.50025	= 0.54027 / 1.08
10	0.46319	= 0.50025 / 1.08
Total	6.71008

11	0.42888	= 0.46319 / 1.08
12	0.39711	= 0.42888 / 1.08
13	0.36770	= 0.39711 / 1.08
14	0.34046	= 0.3677 / 1.08
15	0.31524	= 0.34046 / 1.08

ekkarill92 answered 1 year ago

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