Barrel Corporation had service and interest costs of $50,000 related to its defined benefit plan for...

Barrel Corporation had service and interest costs of $50,000 related to its defined benefit plan for the year ended December 31, Year 7. THe company's unrecognized prior service cost was $200,000 at December 31, Year 6 and the average remaining service life of the company's employees was 20 years. Plan assets earned an expected and actual return of 10% during Year 7. The company made contributions to the plan of $25,000 and paid benefits of $30,000 during the year. The pension plan had plan assets with a fair value of $300,000 at December 31, Year 6. The PBO was $400,000 at December 31, Year 6 and $420,000 at December 31, Year 7. Barrel's effective tax rate is 30%.

What is funded status of Barrel Corporation's pension plan at December 31, Year 7?

a-$20,000 underfunded

b-$75,000 overfunded

c-$95,000 underfunded

d-$120,000 overfunded

Expert Solution

Answer : Option ( C ) $95,000 Underfunded

The funded status of Barrel Corporation's pension plan at 12/31/year7 is the difference between the ending fair value of plan assets and the PBO. The ending PBO of $420,000 is given but the ending fair value of plan must be calculated

FV plan assets, 12/31/year 6 $300,000

Add: contribution 25,000

Less : Benefits paid (30,000)

Add: Return on plan assets $300,000 * .10 = 30,000

FV plan asset, 12/31/year 7 $325,000

The funded status is then calculated : $325,000 - $420,000 = $(95000). Because The PBO Exceeds the fair value of the plan assets, this pensionplan is uderfunded.

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