Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the operation of the plan for the year 2015.

Service cost $ 230,000

Contributions to the plan 220,000

Actual return on plan assets 180,000

Projected benefit obligation (beginning of year) 2,400,000

Fair value of plan assets (beginning of year) 1,600,000

The expected return on plan assets and the settlement rate were both 10%. The amount of pension expense reported for 2015 is:

a. $230,000.

b. $290,000.

c. $310,000.

d. $470,000.

Question

Ramon Hampton

Business

Yesterday, 18:21

Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the operation of the plan for the year 2015.

Service cost $ 230,000

Contributions to the plan 220,000

Actual return on plan assets 180,000

Projected benefit obligation (beginning of year) 2,400,000

Fair value of plan assets (beginning of year) 1,600,000

The expected return on plan assets and the settlement rate were both 10%. The amount of pension expense reported for 2015 is:

a. $230,000.

b. $290,000.

c. $310,000.

d. $470,000.

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Answers (1)

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Yareli Barron · Answer 1

C) $310,000.

Explanation:

the pension expense for the year = service cost + (projected benefit obligation PBO x 10%) - (fair value of assets x 10%) = $230,000 + ($2,400,000 x 10%) - ($1,600,000 x 10%) = $230,000 + $240,000 - $160,000 = $310,000

The pension expense includes all the service costs related to the pension plan plus the difference between the PBO and fair market value times the return rates. Since the FMV is lower than the PBO, the expense increases.