Response to the following problem:
Tabby Pet Foods recently acquired Smartee Pet Toys. In auditing Smartee's accounting records, Richard Conti, internal audit manager for Tabby, discovered that the new subsidiary had not been accounting for the pension assets and liabilities as required under FASB Statement No. 87.
The net present value of Smartee's pension assets is $15.5 million, the vested benefit obligation is $12.9 million and the projected benefit obligation is $17.4 million. Richard reported this finding to Bob Winkler, CEO of Tabby Pet Foods.
A few days later, Bob called Richard and asked him for some advice on the pension fund of Smartee. Bob asked Richard if the negative income effect of the pension dilemma could be eliminated by terminating all the nonvested employees before the end of the fiscal year.
From this information, answer the following:
1.What should Richard's answer be to the accounting question of terminating the nonvested employees before the end of the year?
2.What, if any, ethical issues do you see with the approach of terminating nonvested employees prior to the end of the year?