Question

Sachs Brands’ defined benefit pension plan specifies annual retirement benefits equal to: 1.6% × 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 $90,000 at the end of 2018 and the company’s actuary projects her salary to be $240,000 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.)

Required: 1. What is the company's projected benefit obligation at the beginning of 2018 (after 14 years' service) with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

2. Estimate by the projected benefits approach the portion of Davenport's annual retirement payments attributable to 2018 service.

3. What is the company's service cost for 2018 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

4. What is the company's interest cost for 2018 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

5. Combine your answers to requirements 1, 3, and 4 to determine the company's projected benefit obligation at the end of 2018 (after 15 years' service) with respect to Davenport.

Answer 1

1) Annual retirement benefits at the beginning of 2018 = 1.6%*Service years*final year's salary

= 1.6%*14 yrs*$240,000 = $53,760

Present value of retirement benefits as of the retirement date = $47,040*PVAF(7%, 18 yrs)

= $53,760*10.059087 = $540,777

Projected Benefit obligation at the beginning of 2018 = $540,777*PVF(7%, 21 yrs) (from 2018 to 2038)

= $540,777*0.2415131 = $130,605

2) Annual retirement benefits attributable to 2018 = 1.6%*1 year*$240,000

= $3,840

3) Service cost for 2018

Retirement obligation for 2018 = $3,840

Present value of retirement obligation of 2018 = $3,840*PVAF(18 yrs, 7%)

= $3,840*10.059087 = $38,627

Service Cost for 2018 = $38,627*PVF(20 yrs, 7%) (2019 to 2038)

= $38,627*0.258419 = $9,982

4) Interest cost for 2018 = PBO at the beginning of 2018*7%

= $130,605*7% = $9,142

5) Calculation of Pension expense for 2018 (Amount in $)

PBO at the beginning of 2018	130,605
Add: Service Cost (from requirement 3)	9,982
Add: Interest Cost (from requirement 4)	9,142
PBO at the end of 2018	149,729