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 $91,000 at the end of 2018 and the company's actuary projects her salary to be $285,000 at retirement. The actuary's discount rate is 9%. (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: 1.40% × 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 $110,000 and a rate of return (actual and expected) of 10%.

Answer 1

Requirement 1

        PBO Without Amendment                         PBO With Amendment

    1.3% x 15 yrs. x $285,000 = $55,575                      1.4% x 15 yrs. x $285,000 = $59,850
     $55,575 x 8.75563* = $486,594                              $59,850 x 8.75563* = $524,024
     $486,594 x .17843** = $86,823                             $524,024 x .17843** = $93,502

                                                  æ                                              å

                                                                        $6,679

                                                               Prior service cost         

                        *    present value of an ordinary annuity of $1: n=18, i=9% (from Table 4)

                        ** present value of $1: n=20, i=9% (from Table 2)

   Alternative calculation: 1.4 - 1.3 =                    0.10% x 15 yrs x $285,000 = $4,275
                                                                                 $4,275 x 8.75563* = $37,430
                                                                                 $37,430 x .17843** = $6,679

Requirement 2

$6,679 ÷ 20 years (expected remaining service) = $334

Requirement 3

                        1.4% x 1 x $285,000 =     $3,990

                        $3,990 x 8.75563* =   $34,935

                        $34,935 x .19449** = $6,795

                        *    present value of an ordinary annuity of $1: n=18, i=9% (from Table 4)

                        ** present value of $1: n=19, i=9% (from Table 2)

Requirement 4

$93,502 x 9% = $8,415

Requirement 5

                      Service cost (from req. 3)                                               $6,795
       Interest cost (from req. 4)                                                 8,415
       Return on the plan assets (10% x $110,000 )                   (11,000)
       Amortization of prior service cost (from req. 2)                   334
          Pension expense                                                      $4,544