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.) At the beginning of 2019, the pension formula was amended to: 1.75% × 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 $150,000 and a rate of return (actual and expected) of 10%.

10 Sachs Brands' defined benefit pension plan specifies annual retirement benefits equal to: 1.6% * service years x 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%. (EV of $1. PV of $1. EVA of $1 PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 10 polnts At the beginning of 2019, the pension formula was amended to: 1.75%x Service years x Final year's salary eBook The amendment was made retroactive to apply the increased benefits to prior service years. Print 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 $150,000 and a rate of return (actual and expected) of 10% References (For all requirements, do not round intermediate calculations. Round your final answers to nearest whole dollar.) 1 Prior service cost 2 Prior service cost amortization 3 Service cost 4 Interest cost 5 Pension expense O

Answer 1

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highlighted in yellow: 0.0225 Answers are 5400 Solution: Prior service cost = (1.75%- 1.60%) 0.15% x 15 years (2018-2004) x 240000 1) $ 5,400 x10.05909 54,319 54319x 0.25842 = 14,037 Present value of an ordinary annuity of $1: n= 18, i=7% = 10.05909 Present value of $1: n-20, i-7% 0.25842 2) PSC Amortization = Prior Service cost/Year of expected remaining service (14037/20) $ 702 1.75%x 1 x 240000 3) $ 4,200 $ 4,200 x 10.05909 42,248 Service cost 2019 $ 42,248 x 0.27651 11,682 Present value of an ordinary annuity of $1: n= 18, i=7% = Present value of $1: n-19, i=7% 10.05909 0.27651

(163767 7%) Interest Cost $ 4) 11,464 (1.75% x 15 yr x 240000) 63,000 63,000 x10.05909 $ 633723 633723 x 0.25842 163767 $ 5) 11,682 Service cost Interest Cost 11,464 $ -15,000 Return on Plan assets (150000*10%) Amortization of Prior service cost 702 $ Pension Expense 8,848