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Pension Plan Problem

Fred began work on 1/1/2002. On 1/1/2010 the company introduced a pension plan that would pay him an annual retirement benefit equal to

1.5% x years of employment x highest salary earned
Fred must work for at least 10 years (until 12/31/2011) before being eligible to receive his pension. He is expected to retire on 12/31/2019 (after 18 years with the company). Company will make his first retirement benefit payment on 12/31/2020. Fred will receive his 10th and final payment on 12/31/2029 and will promptly croak on that date (in actuality it’s a mortality estimate).

Fred receives full credit for the 8 years of prior service. His salary ($61,400 at 1/1/2010) will increase 5% each year. A 10% discount rate is used for calculating pension obligations.
On 1/1/2010 the company pays $5,000 into a pension fund (a 6% return is expected and actually received in 2010).


a. Calculate the vested benefit obligation (VBO), the accumulated benefit obligation (ABO) and the PBO (projected benefit obligation) on 1/1/2010. Write the relevant journal entry(ies) on 1/1/2010.

b. Calculate the Pension Expense for the year ended 12/31/2010 using the Pension Worksheet. Write the journal entry to record the Pension Expense. What are the balances in the Pension Asset/Liability accounts and the OCI-Prior Service Accounts on 12/31/2010? (indicate debit or credit balances)
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c. Assume on 1/1/2011, the company contributes $30,000 cash into plan. A 6% return on plan assets is expected but the actual return in 2011 is a loss of $3,000. Calculate the Pension Expense for the year ended 12/31/2011 using the Pension Worksheet. Write the journal entry to record the Pension Expense and any unexpected gains/losses on plan assets on 12/31/2011. What are the balances in the Pension Asset/Liability accounts, the OCI-Prior Service and the OCI-Gains and Losses Accounts on 12/31/2011? (Indicate debit or credit balances).

d. Assume all the facts in c. are true except that assume PBO on 12/31/2011 = $35,000. Expected return in 2012 is $2,000. Actual Return in 2012 is $2100. Calculate the Pension Expense for the year ended 12/31/2012 using the Pension Worksheet. Write the journal entry (ies) to record the Pension Expense, any unexpected gains/losses on plan assets, and amortization of any accumulated gains/losses for the year ended 12/31/2012.
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