Question

Problem 17-3 Service cost, interest, and PBO calculations; present value concepts (LO17-3] Sachs Brands' defined benefit pension plan specifies annual retirement benefits equal to: 1.3% x service years x 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 $91,000 at the end of 2018 and the company's actuary projects her salary to be $285,000 at retirement. The actuary's discount rate is 9%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD 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

Answer 1

1) Calculation of Projected Benefit Obligation at the beginning of 2018

Pension Expense = 1.3%*Service Years*Final year's salary

(Service Years are 14 years from 2004 to 2017 end)

Pension Expense = 1.3%*14 yrs*$285,000 = $51,870

Accumulated Benefit obligation at the end of retirement = Pension expense*PVAF(18 yrs, 9%)

= $51,870*8.75562 = $454,154

Projected Benefit Obligations at the beg of 2018 = Accumulated Benefit Obligation*PVF(21 yrs*9%)

(21 years is from 2018 to 2038 i.e. remaining service life)

Projected Benefit Obligations at the beg of 2018 = $454,154*0.163698 = $74,344

Therefore the company's projected benefit obligation at the beginning of 2018 is $74,344.

2) Annual retirement payments attributable to 2018 = 1.3%*1 yr*$285,000

= $3,705

Therefore annual retirement payments attributable to 2018 is $3,705.

3) Service cost for 2018 = [Annual retirement payment for 2018*PVAF(18 yrs, 9%)]*PVF(20 yrs*9%)

= ($3,705*8.75562)*0.178431 = $5,788

Therefore the company's service cost for 2018 is $5,788.

4) Interest cost for 2018 = Projected Benefit Obligations at the beg of 2018 *Actuary Discount rate

= $74,344*9% = $6,691

Therefore interest cost for 2018 is $6,691.

5) Calculation of Projected Benefit Obligation (PBO) at the end of 2018 (Amounts in $)

PBO at the beginning of 2018 (from part 1)	74,344
Service cost (from part 3)	5,788
Interest cost (from part 4)	6,691
PBO at the end of 2018	86,823

Therefore projected benefit obligations at the end of 2018 is $86,823.