Question

Problem 17-2 PBO calculations; present value concepts (LO17-3] Sachs Brands' defined benefit pension plan specifies annual retirement benefits equal to: 1.4% 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 $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 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 2. Estimate by the projected benefits approach the amount of Davenport's annual retirement payments earned as of the end of 2018. 3. What is the company's projected benefit obligation at the end of 2018 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.) 4. If no estimates are changed in the meantime, what will be the company's projected benefit obligation at the end of 2021 (three years later) with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.) 2. Annual retirement payments 3. Projected benefit obligation 2018 4. Projected benefit obligation 2021

Answer 1

2). Amount of annual retirement payments earned as of the end of 2018 = 1.4%*salary at retirement = 1.4%*315,000 = 4,410

3). Annual retirement benefit at the end of 2018 = 1.6%*number of years of service*salary at retirement

= 1.6%*15*315,000 = 75,600

PV of the annual retirement benefit at the time of retirement = 75,600*PVIFA(7%,18) = 75,600*10.0591 = 760,466.97

PV of the PBO at the end of 2018 = 760,466.97*PVIF(7%,20) = 760,466.97*0.2584 = 196,519

4). Annual retirement benefit at the end of 2021 = 1.6%*number of years of service*salary at retirement

= 1.6%*18*315,000 = 90,720

PV of the annual retirement benefit at the time of retirement = 90,720*PVIFA(7%,18) = 90,720*10.0591 = 912,560.36

PV of the PBO at the end of 2021 = 912,560.36*PVIF(7%,17) = 912,560.36*9.7632 = 288,893

Note: Since factor tables were not posted with the question, the factors have been calculated using formulas, so answers may differ slightly due to rounding off.