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17 December, 14:50

Stanley-Morgan Industries adopted a defined benefit pension plan on April 12, 2021. The provisions of the plan were not made retroactive to prior years. A local bank, engaged as trustee for the plan assets, expects plan assets to earn a 10% rate of return. The actual return was also 10% in 2021 and 2022. A consulting firm, engaged as actuary, recommends 5% as the appropriate discount rate. The service cost is $180,000 for 2021 and $230,000 for 2022. Year-end funding is $190,000 for 2021 and $200,000 for 2022. No assumptions or estimates were revised during 2021.

Calculate each of the following amount as of both December 31, 2021and December 31, 2022.

a. Project benefit obligation

b. Plan asset

c. pension expenses

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  1. 17 December, 15:17
    0
    a.

    December 31, 2021

    PBO = $180,000

    December 31, 2022

    PBO = $419,000

    b.

    December 31, 2021

    Plan Assets = $190,000

    December 31, 2022

    Plan Assets = $409,000

    c.

    December 31, 2021

    Pension Expense = $180,000

    December 31, 2022

    Pension Expense = $220,000

    Explanation:

    a. Calculating Projected Benefits Obligation (PBO)

    The PBO is current requirement of pension plan to cover the future obligations to its employees.

    This is calculated as follows;

    December 31, 2021

    Balance on January 1: $0

    Service Cost: $180,000

    Interest Cost: $0

    Benefits Paid: $0

    PBO = Balance + Service Cost + Interest Cost - Benefits Paid

    PBO = $0 + $180,000 + $0 - $0

    PBO = $180,000

    December 31, 2022

    Balance on January 1: $180,000

    Service Cost: $230,000

    Interest Cost: $9,000 (5% of $180,000)

    Benefits Paid: $0

    PBO = Balance + Service Cost + Interest Cost - Benefits Paid

    PBO = $180,000 + $230,000 + $9,000 - $0

    PBO = $419,000

    b. Calculating Plan Assets

    Plan assets are assets of funded defined benefit plan. Such assets are managed by pension fund manager

    This is calculated as follows;

    December 31, 2021

    Balance on January 1: $0

    Actual Return on Plan: $0 (10% * $0)

    Contribution Made: $190,000

    Benefits Paid: $0

    Plan Assets = Balance + Actual Return + Contribution Made - Benefits

    Plan Assets = $0 + $0 + $190,000 - $0

    Plan Assets = $190,000

    December 31, 2022

    Balance on January 1: $190,000

    Actual Return on Plan: $19,000 (10% * $190,000)

    Contribution Made: $200,000

    Benefits Paid: $0

    Plan Assets = Balance + Actual Return + Contribution Made - Benefits

    Plan Assets = $190,000 + $19,000 + $200,000 - $0

    Plan Assets = $409,000

    c. Calculating Pension Expense

    It is amount reported in income statement related to company's pension plan. It is expenses in relation to liabilities towards pension payable to employees

    December 31, 2021

    Service Cost: $180,000

    Interest Cost: $0 (5% * $0)

    Expected Return: $0 (10% * $0)

    Pension Expense = Service Cost + Interest Cost - Expected Return

    Pension Expense = $180,000 + $0 - $0

    Pension Expense = $180,000

    December 31, 2022

    Service Cost: $230,000

    Interest Cost: $9,000 (5% of $180,000)

    Expected Return: $19,000 (10% * $190,000)

    Pension Expense = Service Cost + Interest Cost - Expected Return

    Pension Expense = $230,000 + $9,000 - $19,000

    Pension Expense = $220,000
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