Question

Clark Industries has a defined benefit pension plan that specifies annual, year-end retirement benefits equal to:

1.2% × Service years × Final year’s salary

Stanley Mills was hired by Clark at the beginning of 2002. Mills is expected to retire at the end of 2046 after 45 years of service. His retirement is expected to span 15 years. At the end of 2021, 20 years after being hired, his salary is $97,000. The company’s actuary projects Mills’s salary to be $440,000 at retirement. The actuary’s discount rate is 6%. (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.)

Required:
1. Estimate the amount of Stanley Mills’s annual retirement payments for the 15 retirement years earned as of the end of 2021.
2. Suppose Clark’s pension plan permits a lump-sum payment at retirement in lieu of annuity payments. Determine the lump-sum equivalent as the present value as of the retirement date of annuity payments during the retirement period.
3. What is the company’s projected benefit obligation at the end of 2021 with respect to Stanley Mills?
4. Even though pension accounting centers on the PBO calculation, the ABO still must be disclosed in the pension disclosure note. What is the company’s accumulated benefit obligation at the end of 2021 with respect to Stanley Mills?
5. If we assume no estimates change in the meantime, what is the company’s projected benefit obligation at the end of 2022 with respect to Stanley Mills?
6. What portion of the 2022 increase in the PBO is attributable to 2022 service (the service cost component of pension expense) and to accrued interest (the interest cost component of pension expense)?

1. Annual Retirement Payments?

2. PV of retirement annuity?

3. Projected benefit obligation?

4. Accumulated benefit obligation?

5. Projected benefit obligation?

6. Interest Cost?

     Service Cost?

Answer 1

Clark Industries

Requirement 1 Annual Retirement Payments

1.2% × Service years × Final year’s salary

1.2% × 20 × 440,000 = $105,600

Requirement 2 PV of retirement annuity

  present value of the retirement benefits at the end of 2046:

  105,600  × 9.7122 = 1,025,608

(PVIFA 15 YEARS @ 6%)

Requirement 3 Projected benefit obligation

  PBO present value of the retirement benefits at the end of 2021

  1,025,608 × 0.233 = 238,967

(PVIF 25 YEARS @ 6%)

Requirement 4 Accumulated benefit obligation

1.2% × 20 × 97,000 = 23,280

23,280 × 9.7122 = 226,100

226,100 × 0.233 = 52,681

(PVIFA 15 YEARS @ 6%) & (PVIF 25 YEARS @ 6%)

Requirement 5 Projected benefit obligation

1.2 % × 21 × 440,000 = 110,880

110,880 × 9.7122 = 1,076,889

1076889 × 0.24698 = 265,970

(PVIF 24 YARS @ 6%)

Requirement 6

PBO at the end of 2022	265,970
LESS:PBO at the end of 2021	(238,967)
change in PBO	27,003
LESS: interest cost (238,967 * 6%)	(14,338)
service cost	12,665

------HOPE THIS IS HELPFUL