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In: Accounting

Carla, Inc. is a furniture manufacturing company with 50 employees. Recently, after a long negotiation with...

Carla, 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. $812,100 per year The interest rate to be used is 9%. On the basis of the information above, determine the present value of the pension obligation (liability). (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Solutions

Expert Solution

Interest Rate is 9%
Year    Present Value factor   Present Value of annuity factor  
1      0.91743      0.91743
2      0.84168      1.75911
3      0.77218      2.53129
4      0.70843      3.23972
5      0.64993      3.88965
6      0.59627      4.48592
7      0.54703      5.03295
8      0.50187      5.53482
9      0.46043      5.99525
10      0.42241      6.41766
11      0.38753      6.80519
12      0.35553      7.16073
13      0.32618      7.48690
14      0.29925      7.78615
15      0.27454      8.06069
Interest Rate is 9%
Annual pension payment $                812,100
Multiply: Present Value of annuity factor (n = 10)                     6.41766
Present Value of annual pension payment at the end of 10th year $             5,211,782
Multiply:   Present Value factor (n = 15)                     0.27454
Present Value of expected payments at the beginning of current year    $             1,430,843
Present value of the pension obligation $             1,430,843

ekkarill92 answered 1 year ago
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