Stanley Mills was hired by Clark at the beginning of 1997. Mills is expected to
ID: 2543938 • Letter: S
Question
Stanley Mills was hired by Clark at the beginning of 1997. Mills is expected to retire at the end of 2041 after 45 years of service. His retirement is expected to span 15 years. At the end of 2016, 20 years after being hired, his salary is $90,000. The company’s actuary projects Mills’s salary to be $370,000 at retirement. The actuary’s discount rate is 6%.
Required:
1.) Estimate the amount of Stanley Mills’s annual retirement payments for the 15 retirement years earned as of the end of 2016.
2.) Suppose Clark’s pension plan permits a lump-sum payment at retirement in lieu of annuity payments. Determine the lump-sum equivalent as the present value as of the retirement date of annuity payments during the retirement period.
3.) What is the company’s projected benefit obligation at the end of 2016 with respect to Stanley Mills?
4.) Even though pension accounting centers on the PBO calculation, the ABO still must be disclosed in the pension disclosure note. What is the company’s accumulated benefit obligation at the end of 2016 with respect to Stanley Mills?
5.) If we assume no estimates change in the meantime, what is the company’s projected benefit obligation at the end of 2017 with respect to Stanley Mills?
6.) What portion of the 2017 increase in the PBO is attributable to 2017 service (the service cost component of pension expense) and to accrued interest (the interest cost component of pension expense)?
Clark Industries has a defined benefit pension plan that specifies annual retirement benefits equal to:Explanation / Answer
1. Estimate the amount of Stanley Mills’s annual retirement payments for the 15 retirement years earned as of the end of 2016.
= 1.5% x Service years x Final year's salary
= 1.5% x 20 x 3,70,000
= 1,11,000
2. Suppose Clark’s pension plan permits a lump-sum payment at retirement in lieu of annuity payments. Determine the lump-sum equivalent as the present value as of the retirement date of annuity payments during the retirement period.
Annual retirement benefit 1,11,000
Present value of an ordinary annuity (n=15, i = 6%) 9.71225
Present value o the retirement benefit's at the end of 2041 10,78,060
3. What is the company’s projected benefit obligation at the end of 2016 with respect to Stanley Mills
Present value of retirement benefit at the end of 2016 10,78,060
Present value of an ordinary annuity (n=20, i = 6%) 0.31180
Project benefit obligation 3,36,140
4. Even though pension accounting centers on the PBO calculation, the ABO still must be disclosed in the pension disclosure note. What is the company’s accumulated benefit obligation at the end of 2016 with respect to Stanley Mills.
Salary at the end of 2016 90,000
Pension benefit at the end of 2016 = 1.5% x 20 x 90,000 = 27,000
present value of annuity end of 2016 = 27,000 x 9.71225 = 2,62,231
Accumulated benefit obligation = 2,62,231 x 0.31180 = 81,764
5. If we assume no estimates change in the meantime, what is the company’s projected benefit obligation at the end of 2017 with respect to Stanley Mills.
Retirement salary = 3,70,000
Retirement benefit payment = 1.5% x 21 x 3,70,000 = 1,16,550
Present value of retirement annuity at the end of = 1,16,550 x 9.71225 = 11,31,963
Project benefit obligation = 11,31,963 x 0.31180 = 3,52,946
6. What portion of the 2017 increase in the PBO is attributable to 2017 service (the service cost component of pension expense) and to accrued interest (the interest cost component of pension expense)
PBO at the end of 2017 3,52,946
PBO at the end of 2016 (3,36,140)
Change in PBO 16,806
Less:Interest cost (3,36,140 x 6%) ( 20,168)
Service cost (3362)
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