Sachs Brands\' defined benefit pension plan specifies annual retirement benefits

Question

Sachs Brands' defined benefit pension plan specifies annual retirement benefits equal to: 1.4% × service years × final year's salary, payable at the end of each year. Angela Davenport was hired by Sachs at the beginning of 2004 and is expected to retire at the end of 2038 after 35 years' service. Her retirement is expected to span 18 years. Davenport's salary is $97,000 at the end of 2018 and the company's actuary projects her salary to be $315,000 at retirement. The actuary's discount rate is 7%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 andPVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:

1. What is the company's projected benefit obligation at the beginning of 2018 (after 14 years' service) with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)
2. Estimate by the projected benefits approach the portion of Davenport's annual retirement payments attributable to 2018 service.
3. What is the company's service cost for 2018 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)
4. What is the company's interest cost for 2018 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)
5. Combine your answers to requirements 1, 3, and 4 to determine the company's projected benefit obligation at the end of 2018 (after 15 years' service) with respect to Davenport. (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

1. Project benefit obligation 2. Annual retirement payments 3. Service cost 4. Interest cost 5. Projected benefit obligation

Explanation / Answer

SOLUTION

1. Project benefit obligation

Annual retirement benefit: 1.4% * 14 years * $315,000 = $61,740

The present value of the retirement annuity as of the retirement date is: $61,740 * 10.0590 = $621,043

The projected benefit obligation - $621,043 * 0.2415 = $149,981

2. Annual retirement payments

= 1.4% * 1 * $315,000 = $4,410

3. Service cost = (1.4%* 1 * 315,000) * 10.05909 * 0.27651

= $12,266

4. Interest Cost = $149,981 * 7% = $10,499

5.

Amount ($) PBO 149,981 Service cost 12,266 Interest cost 10,499 PBO at the end 172,746

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