Question

Sachs Brands's defined benefit pension plan specifies annual retirement benefits equal to 1.3% × service years × final year's salary, payable at the end of each year. Angela Davenport was hired by Sachs at the beginning of 2007 and is expected to retire at the end of 2041 after 35 years' service. Her retirement is expected to span 18 years. Davenport's salary is $87,000 at the end of 2021 and the company's actuary projects her salary to be $265,000 at retirement. The actuary's discount rate is 9%. (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 2021 (after 14 years' service) with respect to Davenport? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar.)

2. Estimate by the projected benefits approach the portion of Davenport's annual retirement payments attributable to 2021 service.

3. What is the company's service cost for 2021 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar.)

4. What is the company's interest cost for 2021 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to the 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 2021 (after 15 years' service) with respect to Davenport. (Do not round intermediat

Answer 1

1	Project benefit obligation	$69,124
2	Annual retirement payments	$3,445
3	Service cost	$5,382
4	Interest cost	$6,221
5	Projected benefit obligation	$80,727

Part 1

Projected benefit obligation

$69,124

1.3% × 14 × $265,000 = $48,230

$48,230 × 8.75563 = 422,284

422,284 × 0.16369 = $69,124

present value of an ordinary annuity of $1: n=18, i=9% is 8.75563

present value of $1: n=21, i=9% is 0.16369

Part 2

Annual retirement payments

$3,445

1.3% × 1 × $265,000 = $3,445

Part 3

Service cost

$5,382

$3,445 × 8.75563 = 30,163

30,163 × 0.17843 = 5,382

present value of an ordinary annuity of $1: n=18, i=9% is 8.75563

present value of $1: n=20, i=9% is 0.17843

Part 4

Interest cost

$6,221

$69,124 x 9% = $6,221

Part 5

Projected benefit obligation

$80,727

PBO at the beginning of 2018 (end of 2017)	69,124
Service cost	5,382
Interest cost	6,221
PBO at the end of 2018	80,727