1. As of January 1, Year One, the Watkins Company has a projected benefit obliga
ID: 2424072 • Letter: 1
Question
1. As of January 1, Year One, the Watkins Company has a projected benefit obligation of $11 million and plan assets of $8 million that have resulted from the company's defined benefit pension plan. To avoid an employee strike, the company agrees to change the date of retirement from 65 years of age to 64. According to the actuary employed by the company, this amendment in the plan changed the projected benefit obligation to $12 million. The expected average remaining service life of those employees impacted by this change in retirement age is ten years. The expected and actual earnings on plan assets is 8 percent per year; the discount rate used in determining the projected benefit obligation is 10 percent per year. No funding occurs during Year One but the service cost for the period is $500,000. What should Watkins report as its pension expense for Year One?
2.
The Aberdeen Company maintains a defined benefit pension plan for its employees. On January 1, Year Four, this pension plan is amended so that employees can retire at the age of 64 rather than 65. As a result of this decision, the projected benefit obligation on that date increases by $2 million. The average remaining service life of the active employee group is 10 years. The discount interest rate is 7 percent per year. Which of the following statements is true?
a.The $2 million is recorded as an expense on January 1, Year Four.
b.The $2 million is recorded as an expense on December 31, Year Four.
c.The company reports $1.8 million as accumulated other comprehensive income in stockholders’ equity on December 31, Year Four.
d.The company reports $2.14 million as accumulated other comprehensive
Explanation / Answer
Solution:1
Service cost.................................................................................500000
Expected and actual return on plan assets (8000000*0.08)...............(640000)
Interest expense(12000000*0.1).....................................................1200000
Amortisation of prior service cost(1000000/10)................................100000
Pension expense...........................................................................$1160000
Solution 2
The answer is (a)
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