Chapter 17, Problem 17.4P

(1)

To determine

Pension expense: Pension expense is an expense to the employer paid as compensation after the completion of services performed by the employees.

Pension expense includes the following components:

• Service cost
• Interest cost
• Expected return on plan assets
• Amortization of prior service cost
• Amortization of net loss or net gain

To calculate: The Company’s prior service cost at the beginning of 2017 with respect to D after amendment.

Explanation of Solution

Calculate Company’s prior service cost.

$\begin{array}{c}\text{Prior service cost = PBO}\text{}\text{with Amendment – PBO}\text{}\text{without Amendment}\\ \text{= \$163,767 }\left(\text{From }6\right)\text{ – \$149,730 }\left(\text{From }3\right)\\ =\$14,037\end{array}$

Working Notes:

Calculate projected benefit obligation without amendment.

Step 1: Compute the amount of annual retirement payment of D.

$\begin{array}{c}\text{Annual retirement benefit = 1}\text{.6\% }\times \text{ Service years }\times \text{ Final year's salary}\\ \text{= 1}\text{.6\% }\times 15\text{years }\left(2002\text{to 2017}\right)\times \$240,000\\ =\$57,600\end{array}$ (1)

Step 2: Compute the lump-sum retirement amount.

$\begin{array}{c}\text{Lump - sum retirment paymnent = Present value of annual retirement benefit }\\ \text{= \$57,600 }\times 10.05909\\ \text{= \$579,404}\end{array}$ (2)

The lump-sum amount of the retirement represents the present value of the annual retirement benefit of $57,600 (1). The present value of an ordinary annuity of $1, at the rate of 7% for 18 years is 10.05909 (Refer to Table 4 in Appendix).

Step 3: Compute the amount of PBO.

$\begin{array}{c}\text{PBO }\text{}\text{=}\text{Present value of lump-sum retirement amount }\\ \text{= \$579,404 }\left(\text{From 2}\right)\times 0.25842\\ =\$149,730\end{array}$ (3)

The PBO is the present value of the retirement benefit. The present value of $1 at the rate of 7% for ${\text{20 }}^{\left[\text{35}\left(\text{Total}\text{years of service}\right)-15\right]}$ periods is 0.25842.

Calculate projected benefit obligation with amendment.

Step 1: Compute the amount of annual retirement payment of D.

$\begin{array}{c}\text{Annual retirement benefit = 1}\text{.75\% }\times \text{ Service years }\times \text{ Final year's salary}\\ \text{= 1}\text{.75\% }\times \text{ 15}\text{years }\left(2002\text{to 2017}\right)\times \$240,000\\ =\$63,000\end{array}$ (4)

Step 2: Compute the lump-sum retirement amount.

$\begin{array}{c}\text{Lump - sum retirment paymnent = Present value of annual retirement benefit }\\ \text{= \$63,000 }\times 10.05909\\ \text{= \$633,723}\end{array}$ (5)

The lump-sum amount of the retirement represents the present value of the annual retirement benefit of $63,000 (4). The present value of an ordinary annuity of $1, at the rate of 7% for 18 years is 10.05909 (Refer to Table 4 in Appendix).

Step 3: Compute the amount of PBO.

$\begin{array}{c}\text{PBO }\text{}\text{=}\text{Present value of lump-sum retirement amount }\\ \text{= \$633,723 }\left(\text{From 5}\right)\times 0.25842\\ =\$163,767\end{array}$ (6)

The PBO is the present value of the retirement benefit. The present value of $1 at the rate of 7% for ${\text{20 }}^{\left[\text{35}\left(\text{Total}\text{years of service}\right)-15\right]}$  periods is 0.25842.

Conclusion

Therefore, Company’s prior service cost at the beginning of 2017 with respect to D is $14,037.

(2)

To determine

To calculate: The amount of prior service cost amortization that would be included in pension expense.

Explanation of Solution

Calculate the amount of prior service cost amortization.

$\begin{array}{c}\text{Amortization of prior service cost = }\frac{\text{Total prior service cost }}{\text{Expected remaining services}}\\ =\frac{\$14,037}{20\text{years}}\\ =\$702\end{array}$

Conclusion

Therefore, the amount of prior service cost amortization that would be included in pension expense is $702.

(3)

To determine

To calculate: The service cost for 2017 with respect to D.

Answer to Problem 17.4P

Compute the amount of service cost for 2017.

$\begin{array}{c}\text{Service cost for 2017 = Present value of lump-sum service benefit}\\ \text{=\$42,248×0}\text{.27651}\\ \text{=\$11,682}\end{array}$

Explanation of Solution

The service cost is the present value of the service benefit. The present value of $1 at the rate of 7% for 19 periods is 0.27651 (Refer to Table 4 in Appendix).

Working Notes:

Compute the amount of annual service benefit of D.

$\begin{array}{c}\text{Service cost for 2017 = 1}\text{.75\%}\times \text{Service years}\times \text{Final year's salary}\\ \text{=1}\text{.75\%}\times 1\text{×240,000}\\ \text{=\$4,200}\end{array}$ (7)

Compute the lump-sum service benefit.

$\begin{array}{c}\text{Lump - sum service benefit = Present value of service benefit }\\ \text{= \$4,200 }\times \text{ 10}\text{.05909}\\ \text{= \$42,248}\end{array}$ (8)

The lump-sum amount of the service benefit represents the present value of the service benefit of 2017 of $4,200 (7). The present value of an ordinary annuity of $1, at the rate of 7% for 18 years is 10.05909 (Refer to Table 4 in Appendix).

Conclusion

Therefore, the service cost for 2017 with respect to D is $11,682.

(4)

To determine

To Calculate: The interest cost for 2017 with respect to D.

Explanation of Solution

Calculate the interest cost for 2017.

$\begin{array}{c}\text{Interest cost for 2017 = PBO with amendment}\times 7\%\\ \text{=\$163,767}\times 7\%\\ \text{=\$11,464}\end{array}$

Conclusion

Therefore, the interest cost for 2017 with respect to D is $11,464.

(5)

To determine

To Calculate: The pension expense for 2017 with respect to D.

Explanation of Solution

The following table shows the pension expense for 2017.

Particulars	Amount ($)
Service cost	11,682
Interest cost	11,464
Expected return on the plan assets	(15,000)
Amortization of prior service cost	702
Pension expense	8,848

Table (1)

Working Note:

Compute expected return on plan assets.

$\begin{array}{c}\begin{array}{l}\text{Expected return}\\ \text{ on plan assets }\end{array}\}\text{=}\left\{\begin{array}{l}\text{Balance of plan assets}\\ \text{×}\text{Expected rate of return}\end{array}\right\}\\ =\$150,000\times 10\%\\ =\$15,000\end{array}$

Conclusion

Therefore, the pension expense for 2017 with respect to D is $15,000.