| Posted: 08 Apr 2009 at 14:17 | IP Logged
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Big Books, Inc. has the following information related to its defined benefit pension plan:
December 31, 20X6:
Projected benefit obligation $1,500,000
Fair value of plan assets 1,200,000
Unrecognized prior service cost 200,000
Unrecognized net transition asset 60,000
December 31, 20X7:
Projected benefit obligation $1,740,000
Fair value of plan assets 1,800,000
Service cost 220,000
Assumptions:
Discount rate 6%
Expected return on plan assets 8%
Big Books makes an annual pension plan contribution of $200,000. The company's employees had an average remaining service life of 20 years on 12/31/X6 and the company expects to pay benefits totaling $170,000 to retired employees in 20X8. Big Books has an effective tax rate of 30%. What would Big Books report as net periodic pension cost on its December 31, 20X7, income statement?
Answer is as follows:
Choice "c" is correct. The 20X7 net periodic pension cost should be calculated as follows:
S Service cost $220,000
I Interest cost 90,000 = $1,500,000 x 6% = Beg PBO x discount rate
R Expected return on plan assets (112,000) = $1,400,000 x 8% = Beg FV x expected rate
A Amortization of prior service cost 10,000 = $200,000 / 20 years
G Amortization of (gains)/losses 0
E Amortization of transition asset (3,000) = $60,000 / 20 years
Net periodic pension cost $205,000
In R Expected return on plan assets (112,000) = $1,400,000 x 8% = Beg FV x expected rate -
did they get the 1,400,000 by taking the 1,200,000 at 12/31/06 and adding the annual funding amount of 200,000. If so, then I think I get this problem now.
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Topic: Pension Cost question...
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