Question

Sachs Brands' defined benefit pension plan specifies annual retirement benefits equal to: 1.5% × service years × final year's salary, payable at the end of each year. Angela Davenport was hired by Sachs at the beginning of 2004 and is expected to retire at the end of 2038 after 35 years' service. Her retirement is expected to span 18 years. Davenport's salary is $93,000 at the end of 2018 and the company's actuary projects her salary to be $295,000 at retirement. The actuary's discount rate is 7%. (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.)

At the beginning of 2019, the pension formula was amended to:

1.60% × Service years × Final year's salary

The amendment was made retroactive to apply the increased benefits to prior service years.

Required:

1. What is the company's prior service cost at the beginning of 2019 with respect to Davenport after the amendment described above?
2. Since the amendment occurred at the beginning of 2019, amortization of the prior service cost begins in 2019. What is the prior service cost amortization that would be included in pension expense?
3. What is the service cost for 2019 with respect to Davenport?
4. What is the interest cost for 2019 with respect to Davenport?
5. Calculate pension expense for 2019 with respect to Davenport, assuming plan assets attributable to her of $210,000 and a rate of return (actual and expected) of 10%.

Answer 1

1.PBO without amendment = 295000 * 15yers *1.5% = $66,375

Present value of PBO

($66375 * P.V. of annuity @7% for 18 years) * P.v.@ 7% for 20^th Year

(66375 * 10.05909) * 0.25842

= $1,72,539

PBO with amendment = 295000 * 15yers *1.6% = $70,800

Present value of PBO

($70800 * P.V. of annuity @7% for 18 years) * P.v.@ 7% for 20^th Year

(70800 * 10.05909) * 0.25842

= $1,84,042

Prior Service Cost = $184042-$172539

= $11,503

2.Prior service Cost Amortization = Prior Service Cost / Expected remaining service

= $11503 / 20

= $575

3.Service Cost = 295000 * 1 Year * 1.6%= $4720

Present value of Service Cost

($4720 * P.V. of annuity @7% for 18 years) * P.v.@ 7% for 19^th Year

= ($4720 * 10.05909) * 0.27651

= $13,128

4.Interest Cost = PBO * 7%

                        = $184042 * 7%

                        = $12,883

5.Calculation of Pension Expenses

Service Cost	$13,128
Interest Cost	$12,883
Return on the Plan assets ( $210000 * 10%)	($21000)
Amortization of Prior service Cost	$575
Pension Expenses	$5,586