In: Accounting
Stanley-Morgan Industries adopted a defined benefit pension plan
on April 12, 2021. The provisions of the plan were not made
retroactive to prior years. A local bank, engaged as trustee for
the plan assets, expects plan assets to earn a 10% rate of return.
The actual return was also 10% in 2021 and 2022.* A consulting
firm, engaged as actuary, recommends 5% as the appropriate discount
rate. The service cost is $160,000 for 2021 and $250,000 for 2022.
Year-end funding is $170,000 for 2021 and $180,000 for 2022. No
assumptions or estimates were revised during 2021.
* We assume the estimated return was based on the actual return on
similar investments at the inception of the plan and that, since
the estimate didn't change, that also was the actual rate in
2022.
Calculate each of the following amounts as of both December 31, 2021, and December 31, 2022
(a) Projected benefit obligation
(b) Plan assets
(c) Pension Expenses
(d) Net pension asset or net pension liability
Answer- | ||
1 | ||
Projected Benefit Obligation | ($) | |
Balance, January 1, 2021 | $ 0 | |
Service cost | $ 160,000 | |
Interest cost (5% x $0) | $ - | |
Benefits paid | $ - | |
Balance, December 31, 2021 | $ 160,000 | |
Service cost | $ 250,000 | |
Interest cost (5% x $160,000) | $ 8,000 | |
Benefits paid | $ - | |
Balance, December 31, 2022 | $ 418,000 | |
2. | ||
Plan Assets | ||
Balance, January 1, 2021 | $ 0 | |
Actual return on plan assets (10% x $0) | $ - | |
Contributions, 2021 | $ 170,000 | |
Benefits paid | (0) | |
Balance, December 31, 2021 | $ 170,000 | |
Actual return on plan assets (10% x $170,000) | $ 17,000 | |
Contributions, 2022 | $ 180,000 | |
Benefits paid | (0) | |
Balance, December 31, 2022 | $ 367,000 | |
3. Pension expense – 2021 | ||
Service cost | $ 160,000 | |
Interest cost (5% x $0) | $ - | |
Expected return on the plan assets (10% x $0) | 0 | |
Pension expense | $ 160,000 | |
Pension Expense – 2022 | ||
Service cost | $ 250,000 | |
Interest cost (5% x $160,000) | $ 8,000 | |
Expected return on the plan assets (10% x $170,000) | -$ 17,000 | |
Pension expense | $ 241,000 | |
4. Net pension asset/liability | ||
PBO | $ 160,000 | |
Plan assets | $170,000 | |
Net pension asset, Dec. 31, 2021 | $ 10,000 | |
PBO | $ 418,000 | |
Plan assets | $367,000 | |
Net pension liability, Dec. 31, 2022 | $ 51,000 |