On January 1, x1, Brown Corp initiated a non-contributory defined benefit pension plan for all six employees in its word processing department. The plan benefit formula provides that each year of service earns each employee an annual retirement benefit of $4,000. The benefits are payable at the end of each year of retirement. All six employees are expected to retire on December 31, x6, and each is expected to live for six years following retirement.
Brown Corp also provided retroactive benefits for employee services rendered prior to January 1, x1. Total years of service for which retroactive benefits were granted equalled 24 years (for all six employees combined rather than 24 years per employee). The expected return on plan assets is 10%. The settlement rate is 8%.
Brown Corp will contribute an equal amount each year to the pension fund, which together with earnings at 10% is expected to fully fund the projected benefit obligation by December 31, x6. Brown Corp will make six annual contributions, beginning January 1, x1. Brown Corp will purchase annuity contracts on December 31, x6 to settle its pension obligation.
Assume actual results equal the original estimates and assumptions. The tax rate is 40%.
Required:
1) Calculate the amount that Brown Corp should contribute to the pension fund each year.
2) Calculate Prior Service Cost at the inception of the plan.
3) Calculate Service Cost for each year of service (for all employees combined).
4) Prepare journal entries for all years.
5) Show what will appear in financial statements (Balance Sheet, Income Statement, and Statement of Cash Flows) for all years.