Chapter 17, Problem 17.2P

PBO calculations; present value concepts

• LO17–3

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%.

Required:

1. 1. Draw a time line that depicts Davenport’s expected service period, retirement period, and a 2018 measurement date for the pension obligation.
2. 2. Estimate by the projected benefits approach the amount of Davenport’s annual retirement payments earned as of the end of 2018.
3. 3. What is the company’s projected benefit obligation at the end of 2018 with respect to Davenport?
4. 4. If no estimates are changed in the meantime, what will be the company’s projected benefit obligation at the end of 2021 (three years later) with respect to Davenport?