Question

Javier recently graduated and started his career with DNL Inc. DNL provides a defined benefit plan to all employees. According to the terms of the plan, for each full year of service working for the employer, employees receive a benefit of 1.5 percent of their average salary over their highest three years of compensation from the company. Employees may accrue only 30 years of benefit under the plan (45 percent).

Determine Javier’s annual benefit on retirement, before taxes, under each of the following scenarios (Use Exhibit 13-1): (Do not round intermediate calculations. Leave no answer blank. Enter zero if applicable.)

Problem 13-50 Part a

a. Javier works for DNL for three years and three months before he leaves for another job. Javier’s annual salary was $55,000, $65,000, $70,000, and $72,000 for years 1, 2, 3, and 4, respectively. DNL uses a five-year cliff vesting schedule.

b. Javier works for DNL for three years and three months before he leaves for another job. Javier’s annual salary was $55,000, $65,000, $70,000, and $72,000 for years 1, 2, 3, and 4, respectively. DNL uses a seven-year graded vesting schedule.

c. Javier works for DNL for six years and three months before he leaves for another job. Javier’s annual salary was $75,000, $85,000, $90,000, and $95,000 for years 4, 5, 6, and 7, respectively. DNL uses a five-year cliff vesting schedule.

d. Javier works for DNL for six years and three months before he leaves for another job. Javier’s annual salary was $75,000, $85,000, $90,000, and $95,000 for years 4, 5, 6, and 7, respectively. DNL uses a seven-year graded vesting schedule.

e. Javier works for DNL for 32 years and three months before retiring. Javier’s annual salary was $175,000, $185,000, $190,000, and $195,000 (note that he didn't work for the entire year in the year he retired so he received only a portion of the annual salary in the year he retired) for his final four years of employment.

Answer 1

Requirement a :

Javier worked for 3 years and 3 months.

However , for the purpose of defined benefit plan, only three years should be considered

because of terms of the plan states that full year of service shall be counted.

DNL inc., uses a 5 year cliff vesting schedule and javier worked for DNL less than 5 years..

Therfore, javieris not eligible to vest in any of his benefit plans.

So, His annual benefit- before taxes from DNL on retirement is $0

Requirement b:

Javier worked for 3 years and 3 months.

However , for the purpose of defined benefit plan, only three years should be considered

because of terms of the plan states that full year of service shall be counted.

Javier has vested in 20% of his total benefit because DNL uses a seven-year graded vesting schedule.

Javier worked for 3 full years and he is eligible to receive 4.5% [ 1.5% per year x 3 years ]of the average of of his 3 highest years of compensation.

Average of his three highest years of salary =   [ 55,000 + 65,000 +70,000 ]/3 = $63,333

Javier’s annual benefit on retirement, before taxes = 63,333 x 4.5% x 20% = $569.997

Requirement c :

Javier worked for 6 years and 3 months. Only 6 full years will be considered for retirement benefits.

Because DNL inc., uses a 5 year cliff vesting schedule and javier worked for DNL more than 5 years, he has vested 100% in his total retirement benefits.

Therefore , calculate retirement benefits for 6 years.

Average of his three highest years of salary =   [ 75,000 + 85,000 + 90,000 ]/3 = $83,333     [ From year 4 to 6 ]

Javier will receive 9% (6 × 1.5%) of $83,333

His annual before-tax benefit will be = $7,499.97   (9% × $83,333)

Requirement d :

Javier worked for 6 years and 3 months.

However , for the purpose of defined benefit plan, only 6 years shall be considered because of terms of the plan states that full year of service shall be counted.

Javier has vested in 80% of his total benefit because DNL uses a seven-year graded vesting schedule.

Therefore , calculate retirement benefits for 6 years.

Average of his three highest years of salary =   [ 75,000 + 85,000 + 90,000 ]/3 = $83,333     [ From year 4 to 6 ]

Javier will receive 9% (6 × 1.5%)

His annual before-tax benefit will be = $5,999.976   ( $83,333 x 80% x 9%)

Requirement e :

Javier worked for 32 years but only 30 years to be considered for retirement plans

Javier has vested 100% in his total retirement benefit and is eligible for the maximum 45% as specified in terms of plan.

Therefore , calculate retirement benefits for 30 years.

Average of his three highest years of salary =   [ 175,000 +185,000 +190,000 ]/3 = $83,333     [ last year shall not be considered as he worked for 3 months only ] ]

His annual before-tax benefit will be = $82,499.85 ( $183,333 x 45%)