(a) Describe what is meant by service cost and interest cost (the service and interest costs appear both in the reconciliation of the PBO and in the computation of pension expense). OService cost represents the wages earned by employees managing the pension plan during the current year. Interest cost is an expense that accrues on the pension obligation during the year. Oservice cost represents the additional pension benefits earned by employees during the current year but paid to employees in the future. Interest cost is the expense we incur on funds borrowed by the pension plan. Oservice cost represents the wages earned by employees managing the pension plan during the current year. Interest cost is the expense we incur on funds borrowed by the pension plan. ●Service cost represents the additional pension benefits earned by employees during the current year but paid to employees in the future. Interest cost is an expense that accrues on the pension obligation during the year. (b) What is the actual return on the pension and the health care ("Other") plan investments in 2010? Use a negative sign to indicate the actual return was a loss, if applicable. $ 846 million Was Xerox's profitability impacted by this amount? OThe actual return for both plans is the income or loss that is reported in Xerox's income statement. OThe actual return for the pension plans is the income or loss that is reported in Xerox's income statement. Because the "Other" (health care) plan is funded on a pay-as-you-go basis, it does not affect Xerox's profit until the benefits are paid. Oxerox's profit is reduced by the expected return on pension assets. Because the health care ("Other") plan is not funded, there are no assets generating a return, hence there is no expected return offset for this plan. The expected return (not the actual return) on the pension plan assets impacts Xerox's income for 2010. Pension expense is reduced by this amount. Because the health care ("Other") plan is not funded, there are no assets generating a return, hence there is no expected return offset for this plan. (c) Provide an example under which an "actuarial gain," such as the $477 million gain in 2010 that Xerox reports, might arise. OAn increase in the actual return on plan assets. An increase in the discount rate. OA reduction in the amount of benefit payments. OAn increase in the expected return assumption. (d) What is the source of funds to make payments to retirees? Opension and health care assets Ooperating cash flows Opension and health care liabilities Opension and health care obligations (e) How much cash did Xerox contribute to its pension and health care plans in 2010? Pension $237 Health care $92 million million (f) How much cash did retirees receive in 2010 from the pension plan and the health care plan? Pension = $0 million Health care = $0 million How much cash did Xerox pay these retirees in 2010? $ 0 million (g) Show the computation of the 2010 funded status for the pension and health care plans. Do not use negative signs with your answers. Pension: $7,940 million - $0 million $0 million = Health care : $0 million - $ 0 million $0 million = Xerox reports the following pension and retiree health care ("Other") footnote as part of its 10-K report. (in millions) Pension Benefits Retiree Health 2010 2009 2010 2009 Change in Benefit Obligation Benefit obligation, January 1 $9,194 $8,495 $1,102 $1,002 Service cost 178 173 8 7 Interest cost 575 508 54 60 Plan participants' contributions 11 9 26 36 Plan amendments (19) 4 (86) 1 Actuarial loss (gain) 477 209 13 124 Aquistions 140 1 1 - Currency exchange rate changes (154) 373 6 15 (1) Curtailments Benefits paid/settlements Benefit obligation, December 31 Change in Plan Assets Fair value of plan assets, January 1 (143) (670) (578) (118) $9,731 $9,194 $1,006 $1,102 $7,561 $6,923 $-- $- Actual return on plan assets 846 720 Employer contribution 237 122 92 107 Plan participants' contributions 11 9 26 36 Aquistions 107 - - - Currency exchange rate changes (144) 349 Benefits paid/settlements (669) (578) (118) (143) Other (9) 16 Fair value of plan assets, December 31 $7,940 $7,561 $-- $- Net funded status at December 31 $ (1,791) $ (1,633) $ (1,006) $ (1,102) (in millions) Components of Net Periodic Benefit Cost Service cost Interest cost Expected return on plan assets Recognized net actuarial loss Amortization of prior service credit Recognized settlement loss Defined benefit plans Defined contribution plans Total net periodic benefit cost Pension Benefits 2010 2009 2008 Retiree Health 2010 2009 2008 $178 $173 $209 575 508 (570) (523) 71 25 $8 $7 $14 (5) 54 60 (80) - 84 - - 36 - - - (22) (21) (20) (30) (41) (21) 72 70 34 - -- - 304 232 174 22 32 26 77 51 38 80 - $355 $270 $254 $32 $26 $77 Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income Net actuarial loss (gain) 198 8 1,062 13 126 (244) Prior service cost (credit) (19) - 1 (86) 1 (219) Amortization of net actuarial (loss) gain (143) (95) (70) - 22 21 20 30 41 21 Amortization of prior service (cost) credit Total recognized in other comprehensive income $58 $ (66) $1,013 (43) $168 $ (442)