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In Class Example Present Value Computations for Pension PlanIn Class Example – Accumulation and Distribution Schedules for PBO and Plan AssetsAcct 414 Prof. Teresa GordonIn Class ExamplePresent Value Computations for Pension PlanConsider a defined benefit, noncontributory plan. Assume that retirement benefits are paid at end of each year and employees are given credit for years of service prior to the adoption of the plan. The plan pays each employee an annual benefit equal to the number of years of qualifying service multiplied by a specified percentage of the final year’s salary. We will consider the pension computations for a single employee:Assumed discount rate 8.00%Retirement age: 65 years oldDraws retirement for: 15 yearsAge at adoption of pension plan: 55 years oldLength of prior service for employer 20 yearsYears until retirement _________ yearsSalary at adoption of plan $ 39,904 Expected rate of salary increases 5%Expected salary at retirement $___________Benefit formula (percentage of final salary) 1.5%Payment earned by one year of work $___________ Per year until death1. With these assumptions, how much will the company need to have set aside in a pension plan when the employee retires (so the promised benefit can be paid)?2. If the company wants to set aside the necessary funds in 10 equal payments starting one year from now, how much will they need to contribute to the pension plan?3. What is the liability related to the pension plan at adoption? (Hint: related to prior service period – but more than one possible way to measure – ABO vs PBO)4. Compute service cost for the first year of the plan (Hint: this is the cost of ONE year’s benefit).tmp5banvobn Page 1Acct 414 Prof. Teresa GordonIn Class Example – Accumulation and Distribution Schedules for PBO and Plan Assets 8.00% 8.00% a b c d e f g h i jkc+d-h+kEnd ofYearAge ofEmployeeServiceCostInterestCostPaymentsto RetireeProjectedBenefitObligationFair Value ofPlan AssetsReturn onPlan AssetsEmployerContributionto PensionPlanPaymentsto RetireeAmortizationof PriorService CostsNet PensionCostRecorded0 55 - 77,312 - 1 56 4,175 6,185 - 87,671 17,283 - 17,283 - 7,731 18,091 2 57 4,509 7,014 - 99,193 35,948 1,383 17,283 - 7,731 17,871 3 58 4,869 7,935 - 111,998 56,106 2,876 17,283 - 7,731 17,660 4 59 5,259 8,960 - 126,217 77,877 4,488 17,283 - 7,731 17,461 5 60 5,679 10,097 - 141,993 101,390 6,230 17,283 - 7,731 17,278 6 61 6,134 11,359 - 159,487 126,784 8,111 17,283 - 7,731 17,113 7 62 6,625 12,759 - 178,870 154,209 10,143 17,283 - 7,731 16,972 8 63 7,154 14,310 - 200,334 183,828 12,337 17,283 - 7,731 16,859 9 64 7,727 16,027 - 224,088 215,817 14,706 17,283 - 7,731 16,778 10 65 8,345 17,927 - 250,360 250,365 17,265 17,283 - 7,731 16,738 11 66 - 20,029 (29,250) 241,139 241,144 20,029 29,250 12 67 - 19,291 (29,250) 231,180 231,185 19,292 29,250 13 68 - 18,494 (29,250) 220,424 220,430 18,495 29,250 14 69 - 17,634 (29,250) 208,808 208,815 17,634 29,250 15 70 - 16,705 (29,250) 196,263 196,270 16,705 29,250 16 71 - 15,701 (29,250) 182,714 182,721 15,702 29,250 17 72 - 14,617 (29,250) 168,081 168,089 14,618 29,250 18 73 - 13,446 (29,250) 152,277 152,286 13,447 29,250 19 74 - 12,182 (29,250) 135,209 135,219 12,183 29,250 20 75 - 10,817 (29,250) 116,776 116,787 10,818 29,250 21 76 - 9,342 (29,250) 96,868 96,880 9,343 29,250 22 77 - 7,749 (29,250) 75,368 75,380 7,750 29,250 23 78 - 6,029 (29,250) 52,147 52,160 6,030 29,250 24 79 - 4,172 (29,250) 27,069 27,083 4,173 29,250 25 80 - 2,166 (29,250) (16) (0) 2,167 29,250 tmp5banvobn Page 2Acct 414 Prof. Teresa GordonNotes on computations. The number in the BOX under PBO and FV of plan assets is the answer to the first question. It is the amount that will be needed at the date of retirement to make the promised payment to the employee assuming he works until retirement and all our assumptions are true.The first number in the PBO (projected benefit obligation) column is the answer to the third question. It is what we owe immediately because the employee has already worked for us and is getting credit for past services. So we have an immediate obligation to give him at least ($65,000 * .015 * 20 years of prior service) per year from retirement age until he dies. The subsequent PBO figures are computed as the balance forward + service cost + interest cost – payments to retiree. Interest


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UI ACCT 414 - Pension PV Example

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