Question 1:
Smith Construction has a noncontributory, defined benefit pension plan. At December 31, 2011, Smith received the following information:
Projected Benefit Obligation ($ in millions)
Balance, January 1 5360
Service cost 60
Interest cost 36
Benefits paid (27)
Balance, December 31 $429
Plan Assets
Balance, January 1 $240
Actual return on plan assets 27
Contributions 2011 60
Benefits paid (27)
Balance, December 31 $300
The expected long-term rate of return on plan assets was 10%. There were no AOCI balances related to pensions on January 1, 2011. At the end of 2011, Smith amended the pension formula creating a prior service cost of $12 million, one-third of which is related to employees whose pension benefits have vested.
Determine Smith’s pension expense for 2011.
Question 2:
On November 30, the Board of Directors of Johnson Corporation amended its pension plan giving retroactive benefits to its employees. The information below is provided at November 30.
Accumulated benefit obligation (ABO) 5825,000
Projected benefit obligation (PBO) 900,000
Plan assets (fair value) 307,500
Market-related asset value 301,150
Prior service cost 190,003
Average remaining service life of employees 10 years
Useful life of pension goodwill 20 years
Using the straight-line method of amortization, the amount of prior service cost charged to expense during the year ended November 30 is (one of the following)
a. $9,500
b. $19,000
c. $30,250
d. $190,000
Question 3:
Bargain Industries adopted a defined benefit pension plan on April 12, 2011. The provisions of the plan were not made retroactive to prior years. A local bank, engaged as trustee for the plan assets, expects plan assets to earn a 10% rate of return. A consulting firm, engaged as actuary, recommends 6% as the appropriate discount rate. The service cost is $150,000 for 2011 and $200,000 for 2012. Year-end funding is $160,000 for 2011 and $170,000 for 2012. No assumptions or estimates were revised during 2011.
Calculate each of the following amounts as of both December 31, 2011, and December 31, 2012:
1. Projected benefit obligation
2. Plan assets
3. Pension expense.
4. Net pension asset or net pension liability