#### Question Details

Pension Plan Problem

Fred began work on 1/1/2002. On 1/1/2010 the company introduced a pension plan that would

pay him an annual retirement benefit equal to:

1.5% x years of employment x highest salary earned

Fred must work for at least 10 years (until 12/31/2011) before being eligible to receive his

pension. He is expected to retire on 12/31/2019 (after 18 years with the company). Company

will make his first retirement benefit payment on 12/31/2020. Fred will receive his 10th and final

payment on 12/31/2029 and will promptly croak on that date (in actuality it?s a mortality

estimate).

Fred receives full credit for the 8 years of prior service. His salary (\$61,400 at 1/1/2010) will

increase 5% each year. A 10% discount rate is used for calculating pension obligations.

On 1/1/2010 the company pays \$5,000 into a pension fund (a 6% return is expected and actually

Required:

a. Calculate the vested benefit obligation (VBO), the accumulated benefit obligation (ABO) and

the PBO (projected benefit obligation) on 1/1/2010. Write the relevant journal entry(ies) on

1/1/2010.

b. Calculate the Pension Expense for the year ended 12/31/2010 using the Pension Worksheet.

Write the journal entry to record the Pension Expense. What are the balances in the

Pension Asset/Liability accounts and the OCI-Prior Service Accounts on 12/31/2010?

(indicate debit or credit balances)

c. Assume on 1/1/2011, the company contributes \$30,000 cash into plan. A 6% return on plan

assets is expected but the actual return in 2011 is a loss of \$3,000. Calculate the Pension

Expense for the year ended 12/31/2011 using the Pension Worksheet. Write the journal

entry to record the Pension Expense and any unexpected gains/losses on plan assets on

12/31/2011. What are the balances in the Pension Asset/Liability accounts, the OCI-Prior

Service and the OCI-Gains and Losses Accounts on 12/31/2011? (Indicate debit or credit

balances).

d. Assume all the facts in c. are true except that assume PBO on 12/31/2011 = \$35,000.

Expected return in 2012 is \$2,000. Actual Return in 2012 is \$2100. Calculate the Pension

Expense for the year ended 12/31/2012 using the Pension Worksheet. Write the journal

entry (ies) to record the Pension Expense, any unexpected gains/losses on plan assets, and

amortization of any accumulated gains/losses for the year ended 12/31/2012.

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