Chapter 8, Problem 26EP

To determine

Compute the missing amount of “schedule of changes in the County’s Net pension liability and related ratios”.

Explanation of Solution

Fiduciary activities: Fiduciary activities are those activities done by persons or organizations to another parties with utmost good faith and trust. A fiduciary activity may involve managing funds, assets and other valuables of a person or a group of people.

The person or organization involved in fiduciary activities need to act ethically in the best interest of others. Government also involve in fiduciary activities by holding the assets of individuals or organization to benefit them.

Prepare the financial statement of County B:

Table (1)

Working note (a): Calculate interest during the year 2020:

Interest amount is calculated by deducting all other pension liabilities from net change in total pension liability. Total pension liabilities except interest includes service costs, difference between expected and experience, and benefit payments. The amount of service cost is $123,225, difference between expected and experience is $1,250, and benefit payment is -$248,000. The net change in total pension liability is $66,205.

Calculation of interest is as follows:

$\begin{array}{c}\text{Interest}=\text{Net change in total pension liability}-\\ \left(\begin{array}{l}\text{Service cost}+\text{difference between expected and experience}+\\ \text{Benefit payment}\end{array}\right)\\ =\$66,205-\left(\$123,225+\$1,250-\$248,000\right)\\ =\$66,205+\$123,525\\ =\$189,730\end{array}$

Hence, the interest amount is $189,730.

Working note (b): Calculate net change in plan fiduciary net position:

Net change in plan fiduciary net position is the difference between plan fiduciary net position at the end of the year and plan fiduciary net position at the beginning of the year. Plan fiduciary net position at the ending is $1,057,720. Plan fiduciary net position at the beginning is $1,011,680.

Calculation of net change in plan fiduciary net position is as follows:

$\begin{array}{c}\text{Net change in plan fiduciary net position}=\left(\begin{array}{l}\text{Plan fiduciary net position at the end}-\\ \text{Plan fiduciary net position at the beginning}\end{array}\right)\\ =\left(\$1,057,720-\$1,011,680\right)\\ =\$46,040\end{array}$

Hence, the net change in plan fiduciary net position is $46,040.

Working note (c): Calculate net change in plan fiduciary net position:

Net change in plan fiduciary net position is the difference between plan fiduciary net position incomes and plan fiduciary net position expenses. Plan fiduciary net position income includes contribution from employee $32,450, contribution from employers $98,620, and net investment income $18,990. Plan fiduciary net position expenses include benefit payments of $64,500 and administrative expenses of $3,290.

Calculation of net change in plan fiduciary net position is as follows:

$\begin{array}{c}\text{Net change in plan fiduciary net position}=\left(\begin{array}{l}\text{Plan fiduciary net position incomes}-\\ \text{Plan fiduciary net position expenses}\end{array}\right)\\ =\left(\begin{array}{l}\left(\$32,450+\$98,620+\$18,990\right)-\\ \left(\$64,500+\$3,290\right)\end{array}\right)\\ =\$150,060-\$67,790\\ =\$82,270\end{array}$

Hence, the net change in plan fiduciary net position is $82,270.

Working note (d): Calculate plan fiduciary net position at the beginning of the year 2020:

Plan fiduciary net position at the beginning is computed as the difference between plan fiduciary net position at the end of the year and net change in plan fiduciary net position. Plan fiduciary net position at the end of the year is $1,220,490.

Calculation of plan fiduciary net position at the beginning is as given below:

$\begin{array}{c}\begin{array}{l}\text{Plan fiduciary net position}\\ \text{ at the beginning}\end{array}\}=\left(\begin{array}{l}\text{Plan fiduciary net position at the end of the year}-\\ \text{Net change in plan fiduciary net position}\end{array}\right)\\ =\left(\$1,220,490-\$82,270\right)\\ =\$1,138,220\end{array}$

Hence, the plan fiduciary net position at the beginning of the year 2020 is $1,138,220.

Working note (e): Calculate plan fiduciary net position as the percentage of total pension liability:

Plan fiduciary net position as a percentage of total pension liability is calculated by dividing plan fiduciary net position at the end of the year by total pension liability at the end of the year. Plan fiduciary net position at the end of the year is given as $1,220,490 and total pension liability at the end of the year is calculated as $2,149,920.

Calculate plan fiduciary net position as the percentage of total pension liability:

$\begin{array}{c}\left(\begin{array}{l}\text{Plan fiduciary net position }\\ \text{as a percentage of }\\ \text{total pension liability}\end{array}\right)=\frac{\left(\begin{array}{l}\text{Plan fiduciary net position }\\ \text{at the end of the year}\end{array}\right)}{\left(\begin{array}{l}\text{Total pension liability }\\ \text{at the end of the year}\end{array}\right)}\times 100\\ =\frac{\$1,220,490}{\$2,49,920}\times 100\\ =56.77\%\end{array}$

Hence, the plan fiduciary net position as percentage of total pension liability is 56.77%.

Working note (f): Calculate covered-employee payroll:

The calculation of covered-employee payroll is by dividing net pension liability at the ending by net pension liability as a percentage of covered-employee payrolls. Net pension liability at the ending is given as $929,430 and net pension liability as a percentage of covered-employee payrolls is 185.09%.

Calculate covered-employee payroll:

$\begin{array}{c}\text{Covered-employee payroll}=\frac{\text{Net pension liability at the ending}}{\left(\begin{array}{l}\text{Net pension liability }\\ \text{as a percentage of }\\ \text{covered-employee payrolls}\end{array}\right)}\\ =\frac{\$929,430}{1.8509}\\ =\$502,150\end{array}$

Hence, the covered-employee payroll is $502,150.

Working note (g): Calculate benefit payment for the year 2019:

Benefit payment is calculated by deducting all other pension liabilities from net change in total pension liability. Total pension liabilities except benefit payment includes service costs, interest, and difference between expected and experience. The amount of service cost is $125,440, interest amount is $182,580, and difference between expected and experience is -$850, and benefit payment is -$248,000. The net change in total pension liability is $75,590.

Calculate benefit payment for the year 2019:

$\begin{array}{c}\text{Benefit payment}=\text{Net change in total pension liability}-\\ \left(\begin{array}{l}\text{Service cost}+\text{Interest}-\\ \text{difference between expected and experience}\end{array}\right)\\ =\$75,590-\left(\$125,440+\$182,580-\$850\right)\\ =\$75,590-\$307,170\\ =-\$231,580\end{array}$

Hence, the benefit payment for the year 2019 is ($231,580).

Working note (h): Calculate total pension liability at the beginning of the year 2019:

Total pension liability at the beginning of the year is computed as the difference between total pension liability at the end of the year and net change in total pension liability. The total pension liability at the ending is $2,083,715. The calculation is as follows:

Calculate total pension liability at the beginning of the year 2019:

$\begin{array}{c}\begin{array}{l}\text{Total pension liability }\\ \text{at the beginning of the year}\end{array}\}=\left(\begin{array}{l}\text{Total liability at the ending}-\\ \text{Net cahnge in total pension liability}\end{array}\right)\\ =\left(\$2,083,715-\$75,590\right)\\ =\$2,008,125\end{array}$

Hence, the total pension liability at the beginning of the year is $2,008,125.

Working note (i): Calculate total pension liability at the end of the year 2019:

The total pension liability at the end of the year 2019 will be the same as the total pension liability at the beginning of the year 2020. The total pension liability at the beginning of the year 2020 is $2,083,715. Hence, the total pension liability at the end of the year 2019 is also $2,083,175.

Working note (j): Calculate net investment income for 2019:

Net investment income is the difference between net change in plan fiduciary net position and the difference between plan fiduciary net position incomes and plan fiduciary net position expenses. Plan fiduciary net position income includes contribution from employee $36,240, contribution from employers $102,530. Plan fiduciary net position expenses include benefit payments of -$42,780 and administrative expenses of -$3,110. The net change in plan fiduciary net position is given as $80,500.

Calculate net investment income for 2019:

$\begin{array}{c}\text{Net investment income}=\left(\begin{array}{l}\text{Net change in plan }\\ \text{fiduciary net position}\end{array}\right)-\left(\begin{array}{l}\text{Plan fiduciary }\\ \text{net position incomes}-\\ \text{Plan fiduciary }\\ \text{net position expenses}\end{array}\right)\\ =\$80,500-\left(\begin{array}{l}\left(\$36,240+\$102,530\right)-\\ \left(\$42,780+\$3,110\right)\end{array}\right)\\ =\$80,500-\$92,880\\ =-\$12,380\end{array}$

Hence, the net investment income for 2019 is ($12,380).

Working note (k): Calculate plan fiduciary net position at the beginning of 2019:

The plan fiduciary net position at the beginning of the year 2019 will be the same as the plan fiduciary net position at the end of the year 2018. The plan fiduciary net position at the end of the year 2018 is $1,057,720. Hence, the plan fiduciary net position at the beginning of the year 2019 is also $1,057,720.

Working note (l): Calculate plan fiduciary net position at the end of the year 2019:

Plan fiduciary net position at the ending is computed as the sum of plan fiduciary net position at the beginning of the year and net change in plan fiduciary net position. Plan fiduciary net position at the beginning of the year is $1,057,720.

Calculation of plan fiduciary net position at the beginning is as given below:

$\begin{array}{c}\begin{array}{l}\text{Plan fiduciary net position}\\ \text{ at the ending}\end{array}\}=\left(\begin{array}{l}\text{Plan fiduciary net position at the beginning of the year}-\\ \text{Net change in plan fiduciary net position}\end{array}\right)\\ =\left(\$1,057,720+\$80,500\right)\\ =\$1,138,220\end{array}$

Hence, the plan fiduciary net position at the end of the year 2019 is $1,138,220.

Working note (m): Calculate net pension liability at the end of the year 2019:

Net pension liability at the end of the year 2019 is calculated as the difference between total pension liability at the ending of 2019 and plan fiduciary net position at the ending. Total pension liability at the ending of 2019 is calculated as $2,083,715 and plan fiduciary net position at the ending of 2019 is $1,138,220.

Calculate net pension liability at the end of the year 2019:

$\begin{array}{c}\begin{array}{l}\text{Net pension liability}\\ \text{ at the ending}\end{array}\}=\left(\begin{array}{l}\text{Total pension liability at the ending}-\\ \text{Plan fiduciary net position at the ending}\end{array}\right)\\ =\left(\$2,083,715-\$1,138,220\right)\\ =\$945,495\end{array}$

Hence, the net pension liability at the end of the year 2019 is $945,495.

Working note (n): Calculate covered-employee payroll:

The calculation of covered-employee payroll is by dividing net pension liability at the ending by net pension liability as a percentage of covered-employee payrolls. Net pension liability at the ending is given as $945,495 and net pension liability as a percentage of covered-employee payrolls is 194.86%.

Calculate covered-employee payroll:

$\begin{array}{c}\text{Covered-employee payroll}=\frac{\text{Net pension liability at the ending}}{\left(\begin{array}{l}\text{Net pension liability }\\ \text{as a percentage of }\\ \text{covered-employee payrolls}\end{array}\right)}\\ =\frac{\$945,495}{1.9486}\\ =\$485,218\end{array}$

Hence, the covered-employee payroll is $485,218.

Working note (o): Calculate net change in total pension liability for the year 2018:

Net change in total pension liability is calculated by deducting benefit payment from all other pension liabilities. Total pension liabilities except benefit payment includes service costs, interest, and difference between expected and experience. The amount of service cost is $127,950, interest amount is $169,960, and difference between expected and experience is $625. The benefit payment is given as -$217,960.

Calculate net change in total pension liability for the year 2018:

$\begin{array}{c}\text{Net change in total pension liability}=\left(\begin{array}{l}\text{Service cost}+\text{Interest}+\text{difference between }\\ \text{expected and experience}-\text{Benefit payment}\end{array}\right)\\ =\left(\$127,950+\$169,960+\$625-\$217,960\right)\\ =\$298,535-\$217,960\\ =\$80,575\end{array}$

Hence, the net change in total pension liability for the year 2018 is $80,575.

Working note (p): Calculate total pension liability at the end of the year 2018:

The total pension liability at the end of the year 2018 will be the same as the total pension liability at the beginning of the year 2019. The total pension liability at the beginning of the year 2019 is $2,008,125. Hence, the total pension liability at the end of the year 2018 is also $2,008,125.

Working note (q): Calculate contribution from employees for 2018:

Contribution from employees is calculated as the difference between net change in plan fiduciary net position and the difference between plan fiduciary net position incomes and plan fiduciary net position expenses. Plan fiduciary net position income includes contribution from employers $91,550 and net investment income is -$21,510. Plan fiduciary net position expenses include benefit payments of -$51,330 and administrative expenses of -$2,840. The net change in plan fiduciary net position is calculated as $46,040.

Calculate contribution from employees for 2018:

$\begin{array}{c}\text{Contribution from employees}=\left(\begin{array}{l}\text{Net change in plan }\\ \text{fiduciary net position}\end{array}\right)-\left(\begin{array}{l}\text{Plan fiduciary }\\ \text{net position incomes}-\\ \text{Plan fiduciary }\\ \text{net position expenses}\end{array}\right)\\ =\$46,040-\left(\begin{array}{l}\left(\$91,550-\$21,510\right)-\\ \left(\$51,330+\$2,840\right)\end{array}\right)\\ =\$46,040-\$15,870\\ =\$30,170\end{array}$

Hence, the contribution from employee for 2018 is $30,170.

Working note (r): Calculate net change in plan fiduciary net position:

Net change in plan fiduciary net position is the difference between plan fiduciary net position at the end of the year and plan fiduciary net position at the beginning of the year. Plan fiduciary net position at the ending is $1,057,720. Plan fiduciary net position at the beginning is $1,011,680.

Calculation of net change in plan fiduciary net position is as follows:

$\begin{array}{c}\text{Net change in plan fiduciary net position}=\left(\begin{array}{l}\text{Plan fiduciary net position at the end}-\\ \text{Plan fiduciary net position at the beginning}\end{array}\right)\\ =\left(\$1,057,720-\$1,011,680\right)\\ =\$46,040\end{array}$

Hence, the net change in plan fiduciary net position is $46,040.

Working note (s): Calculate net pension liability at the end of the year 2018:

Net pension liability at the end of the year 2018 is calculated as the difference between total pension liability at the ending of 2018 and plan fiduciary net position at the ending. Total pension liability at the ending of 2018 is calculated as $2,008,125 and plan fiduciary net position at the ending of 2018 is $1,057,720.

Calculation of net pension liability at the end of the year 2018 is as given below:

$\begin{array}{c}\begin{array}{l}\text{Net pension liability}\\ \text{ at the ending}\end{array}\}=\left(\begin{array}{l}\text{Total pension liability at the ending}-\\ \text{Plan fiduciary net position at the ending}\end{array}\right)\\ =\left(\$2,008,125-\$1,057,720\right)\\ =\$950,405\end{array}$

Hence, the net pension liability at the end of the year 2018 is $950,405.

Working note (t): Calculate net pension liability as a percentage of covered-employee payrolls:

The calculation of net pension liability as a percentage of covered-employee payroll is by dividing net pension liability at the ending by covered-employee payroll. Net pension liability at the ending is given as $950,405 and covered-employee payroll is $489,810. The calculation of covered-employee payroll is as follows:

$\begin{array}{c}\begin{array}{l}\text{Net pension liability }\\ \text{as a percentage of }\\ \text{covered-employee payroll}\end{array}\}=\frac{\text{Net pension liability at the ending}}{\text{Covered-employee payroll}}\times 100\\ =\frac{\$950,405}{\$489,810}\times 100\\ =194.04\%\end{array}$

Hence, the net pension liability as a percentage of covered-employee payrolls is 194.04%.