Question

The company established a defined benefit plan at the end of last year. Discount rate and expected rate of return is 6%. There are 400 employees that started working with the initial salary of $45000.00. Assume the employees will work 40 years and will benefit for 30 years. The Service costs for the year-employees earned $4000 each to be in retirement. Expect the rate of the return is 6% on the plan assets and valued at $4000000 as of January 1st. The prior year service costs for 20 employees were $300,000, and 2 employees retire yearly and use the service method. The actual loss for the year is $200,000. Compute the project benefit obligation, pension expense, plan asset, and whether the plan is under or over funded for the current year.

Answer 1

Plan assets in pension Fund

Fair value at starting of year(january 1st)

plan assets valued at $4000000

+rate of return is 6% = 4000000 *6/100 =$240000

+employee contributions in pension =

8.33% of 45000 =3748.5

Fair value of Plan assets for current year

=$4000000 + $240000 + $3748.5= $4243748.5

Project Benefit Obligation

Service Cost for 20 Employee were $300000

Service Cost for 1 Employee is = $300000/20 = $15000

Service Cost for 400 Employees is = 400*15000 = $6000000

+Service cost in retirement = 4000*400 =1600000

+Actual Loss for the year is = $200000

Projected benefit obligation is = $6000000 + 1600000 +200000 =$7800000

Plan assets < Projected benefit obligation ($4243748.5 <$7800000)

Therefore Plan is underfunded

Pension Expense

Service cost = $1600000

+Prior service Cost = $6000000

+Rate of return on Plan assets = $240000

+loss =$200000

Pension Expense = 1600000+ 6000000 + 200000 + 240000 = $8040000