Sarasota, Inc. is a furniture manufacturing company with 50
employees. Recently, after a long negotiation with the local labor
union, the company decided to initiate a pension plan as a part of
its compensation plan. The plan will start on January 1, 2020. Each
employee covered by the plan is entitled to a pension payment each
year after retirement. As required by accounting standards, the
controller of the company needs to report the pension obligation
(liability). On the basis of a discussion with the supervisor of
the Personnel Department and an actuary from an insurance company,
the controller develops the following information related to the
pension plan.
Average length of time to retirement | 14 years | |
Expected life duration after retirement | 10 years | |
Total pension payment expected each year after retirement | ||
for all employees. Payment made at the end of the year. | $806,200 per year |
The interest rate to be used is 12%.
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On the basis of the information above, determine the present value
of the pension obligation (liability). (Round factor
values to 5 decimal places, e.g. 1.25124 and final answer to 0
decimal places, e.g. 458,581.)
The present value of pension obligation (liability |
ANSWER:
Expected Annual pension payment for 10 years=Payment made at year end * PVAF_12%,10
Expected Annual pension payment for 10 years = $806,200 * 5.650
Expected Annual pension payment for 10 years= $4555030
Present Value of Annul pension payment = Expected Annual payment for 10 years * PVF_12%,14
Present Value of Annul pension payment = $4555030 * 0.2046
Present Value of Annul pension payment = $931,959
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