Projected Benefit Obligation ($ in Millions)

Exercises

Exercise 17-1

Determine pension expense

LO6 LO7

Hunt Industries has a noncontributory, defined benefit pension plan. At December 31, 2009, Hunt received the following information:

Projected Benefit obligation ($ in millions)

Balance, January 1 $360

Service cost 60

Interest cost 36

Benefits paid (27)

Balance, December 31 $429

Plan Assets

Balance, January 1 $240

Actual return on plan assets 27

Contributions 2009 60

Benefits paid (27)

Balance, December 31 $300

The expected long-term rate of return on plan assets was 10%. There was no prior service cost and a negligible net loss–AOCI on January 1, 2009.

Required:

1. Determine Hunt’s pension expense for 2009.

2. Prepare the journal entries to record Hunt’s pension expense and funding for 2009.

E 17-2

Reporting the funded status of pension plans

LO6 LO7

Actuary and trustee reports indicate the following changes in the PBO and plan assets of JL Logistics during 2009:

Prior service cost–AOCI at Jan. 1, 2009, from plan amendment at the

beginning of 2006 (amortization: $2 million per year) $14 million

Net loss–AOCI at Jan.1, 2009 (previous losses exceeded previous gains) $40 million

Average remaining service life of the active employee group 10 years

Actuary’s discount rate 7%

($ in millions) PLAN
PBO ASSETS

Beginning of 2009 $300 Beginning of 2009 $200

Service cost 40 Return on plan assets,

Interest cost, 7% 21 8% (10% expected) 16

Loss (gain) on PBO (7) Cash contributions 45

Less: Retiree benefits (19) Less: Retiree benefits (19)

End of 2009 $335 End of 2009 $242

Required:

1. Determine JL Logistics’ pension expense for 2009 and prepare the appropriate journal entries to record the expense as well as the cash contribution to plan assets.

2. Prepare the appropriate journal entry to record any 2009 gains and losses.

Exercise 17-3

Postretirement benefits; determine the APBO and service cost

LO9 LO10

Love Industries has an unfunded postretirement health care benefit plan. Medical care benefits are provided to employees who render 10 years service and attain age 55 while in service. At the end of 2009, Larry Abbott is 31. He was hired by Love at age 25 (6 years ago) and is expected to retire at age 64. The expected postretirement benefit obligation for Abbott at the end of 2009 is $200,000 and $216,000 at the end of 2010.

Required:

Calculate the accumulated postretirement benefit obligation at the end of 2009 and 2008 and the service cost for 2009 and 2010 as pertaining to Abbott.

Exercise 17-4

Postretirement benefits; determine expense

LO11

Tomorrow, Inc. provides postretirement health care benefits to employees who provide at least 14 years service and reach age 61 while in service. On January 1, 2009, the following plan-related data were available:

($ in millions)

Accumulated postretirement benefit obligation $210

Fair value of plan assets none

Average remaining service period to retirement 20 years

Average remaining service period to full eligibility 15 years

On January 1, 2009, Tomorrow amends the plan to provide certain dental benefits in addition to previously provided medical benefits. The actuary determines that the cost of making the amendment retroactive increases the APBO by $30 million. Management chooses to amortize the prior service cost on a straight-line basis. The service cost for 2009 is $61 million. The interest rate is 5%.

Required:

Calculate the postretirement benefit expense for 2009.

Problems

Problem 17-1

ABO calculations; present value concepts

LO2 LO3

[Problems 1 – 5 are variations of the same situation, designed to focus on different elements of the pension plan.]

D&C Advisory’s defined benefit pension plan specifies annual retirement benefits equal to: 1.5% x service years x final year’s salary, payable at the end of each year. Bobby Flay was hired by D&C at the beginning of 1995 and is expected to retire at the end of 2039 after 45 years service. His retirement is expected to span 18 years. Flay’s salary is $80,000 at the end of 2009, and the company’s actuary projects his salary to be $250,000 at retirement. The actuary’s discount rate is 7%.

Required:

1. Draw a time line that depicts Flay’s expected service period, retirement period, and a 2009 measurement date for the pension obligation.

2. Estimate by the accumulated benefits approach the amount of Flay’s annual retirement payments earned as of the end of 2009.

3. What is the company’s accumulated benefit obligation at the end of 2009 with respect to Flay?

4. If no estimates are changed in the meantime, what will be the accumulated benefit obligation at the end of 2009 (two years later) when Flay’s salary is $85,000?

Problem 17-2

PBO calculations; present value concepts

LO3

[Problems 1 – 5 are variations of the same situation, designed to focus on different elements of the pension plan.]

Required:

1. Draw a time line that depicts Flay’s expected service period, retirement period, and a 2009 measurement date for the pension obligation.

2. Estimate by the projected benefits approach the amount of Flay’s annual retirement payments earned as of the end of 2009.

3. What is the company’s projected benefit obligation at the end of 2009 with respect to Flay?

4. If no estimates are changed in the meantime, what will be the projected benefit obligation at the end of 2011 (two years later) when Flay’s salary is $85,000?

Problem 17-3

Service cost, interest, and PBO calculations; present value concepts

LO3

[Problems 1 – 5 are variations of the same situation, designed to focus on different elements of the pension plan.]

Required:

1. What is the company’s projected benefit obligation at the beginning of 2009 (after 14 years’ service) with respect to Flay?

2. Estimate by the projected benefits approach the portion of Flay’s annual retirement payments attributable to 2009 service.

3. What is the company’s service cost for 2009 with respect to Flay?

4. What is the company’s interest cost for 2009 with respect to Flay?

5. Combine your answers to requirements 1, 3, and 4 to determine the company’s projected benefit obligation at the end of 2009 (after 15 years’ service) with respect to Flay?

Problem 17-4

Prior service cost; components of pension expense; present value concepts

LO3 LO6

[Problems 1 – 5 are variations of the same situation, designed to focus on different elements of the pension plan.]

At the beginning of 2010, the pension formula was amended to:

1.65% x service years x final year’s salary

The amendment was made retroactive to apply the increased benefits to prior service years.

Required:

1. What is the company’s prior service cost at the beginning of 2010 with respect to Flay after the amendment described above?

2. Since the amendment occurred at the beginning of 2010, amortization of the prior service cost begins in 2010. What is the prior service cost amortization that would be included in pension expense?

3. What is the service cost for 2010 with respect to Flay?

4. What is the interest cost for 2010 with respect to Flay?

5. Calculate pension expense for 2010 with respect to Flay assuming plan assets attributable to him of $70,000 and a rate of return (actual and expected) of 10%.

Problem 17-5

Loss on PBO; present value concepts

LO3 LO6

[Problems 1 – 5 are variations of the same situation, designed to focus on different elements of the pension plan.]

At the beginning of 2010, changing economic conditions caused the actuary to reassess the applicable discount rate. It was decided that 6% is the appropriate rate.

Required:

Calculate the effect of the change in the assumed discount rate on the PBO at the beginning of 2010 with respect to Flay.

Alternate Exercises and Problems 17-XXX 13-XXX