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Chapter 17

Pensions and Other Postretirement Benefits

EXERCISES
Requirement 1

Exercise 17-1
($ in millions)

Service cost
Interest cost
Expected return on the plan assets ($27 actual, less $3 gain)

$60
36
(24)

Pension expense

Requirement 2
Pension expense (calculated above)
PBO

$72

72
72

Plan assets
Cash (given)

60

PBO
Plan assets (given)

27

Exercise 17-2Requirement 1

60

27

($ in

millions)

Pension expense (calculated below)


44*
Plan assets
20
Amortization of net lossOCI (2011 amortization)
1
Amortization of prior service costOCI (2011 amortization)
2
PBO ($40 service cost + $21 interest cost)
61

Alternate Exercise and Problem Solutions

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17-1

* Service cost
Interest cost
Expected return on the plan assets ($16 actual, plus $4 loss)
Amortization of prior service cost
Amortization of net loss
Pension expense

$ 40
21
(20)
2
1
$ 44

Computation of net gain amortization:


Net gainAOCI (previous gains exceeded previous losses)
10% of $300 PBO (greater than $200 plan assets)
Amount to be amortized

$ 40
(30)
$ 10
10 years
$ 1

Amortization

Requirement 2
($ in millions)

PBO..........................................................
7
GainOCI (from change in assumption regarding the PBO)
LossOCI ($16 actual return on assets $20 expected return)
Plan assets............................................

7
4
4

Requirement 3
Plan assets
Cash (given)

60

Requirement 4
PBO
Plan assets (given)

27

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17-2

60

27

Intermediate Accounting, 6e

APBO

Exercise 17-32011

Service Cost

$200,000 x 6/30 = $40,000 $200,000 x 1 /30 =

$6,667
2012
$216,000 x 7/30 = $50,400 $216,000 x 1 /30 = $7,200
30 year attribution period (age 25-55)

Exercise 17-4Requirement 1
($ in millions)

Service cost
Interest cost
Return on plan assets
Amortization of prior service cost
Postretirement benefit expense

$61
12 (5% x [$210 + 30])
(0)
2 ($30 15 yrs)
$75

Requirement 2
($ in millions)

Postretirement benefit expense (calculated above).........................


Amortization of prior service cost-OCI (amortization)............
APBO ($61 service cost + $12 interest cost)................................

Alternate Exercise and Problem Solutions

75
2
73

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17-3

The amortization amount is reported as other comprehensive income in the statement


of comprehensive income.

PROBLEMS

Requirement 1
measurement

1997

Problem 17-1

2011

date
2041

2057

__________________________________________________
15 years
30 years
Service period

18 years
Retirement

Requirement 2
1.5% x 15 x $80,000 = $18,000
Requirement 3
The present value of the retirement annuity as of the retirement date (end of
2041) is:
$18,000 x 10.05909* = $181,064
* present value of an ordinary annuity of $1: n=18, i=7%

The ABO is the present value of the retirement benefits at the end of 2011:
$181,064 x .13137* = $23,786
* present value of $1: n=30, i=7%

Requirement 4
1.5% x 17 x $85,000 = $21,675
$21,675 x 10.05909* = $218,031
$218,031 x .15040** = $32,792

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17-4

Intermediate Accounting, 6e

present value of an ordinary annuity of $1: n=18, i=7%

** present value of $1: n=28, i=7%

Problem 17-2Requirement 1
measurement

2011

1997

date

2041

2059

__________________________________________________
15 years
30 years
Service period

18 years
Retirement

Requirement 2
1.5% x 15 x $250,000 = $56,250
Requirement 3
The present value of the retirement annuity as of the retirement date (end of
2041) is:
$56,250 x 10.05909* = $565,824
* present value of an ordinary annuity of $1: n=18, i=7%

The PBO is the present value of the retirement benefits at the end of 2011:
$565,824 x .13137* = $74,332
* present value of $1: n=30, i=7%

Requirement 4
1.5% x 17 x $250,000 = $63,750
$63,750 x 10.05909* = $641,267
$641,267 x .15040** = $96,447

Alternate Exercise and Problem Solutions

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17-5

present value of an ordinary annuity of $1: n=18, i=7%

** present value of $1: n=28, i=7%

Problem 17-3Requirement 1
1.5% x 14 x $250,000 = $52,500
$52,500 x 10.05909* = $528,102
$528,102 x .12277** = $64,835
*

present value of an ordinary annuity of $1: n=18, i=7%

** present value of $1: n=31, i=7%

Requirement 2
1.5% x 1 x $250,000 = $3,750
Requirement 3
$3,750 x 10.05909* = $37,722
$37,722 x .13137** = $4,955
*

present value of an ordinary annuity of $1: n=18, i=7%

** present value of $1: n=30, i=7%

Requirement 4
$64,835 x 7% = $4,538

Requirement 5

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Intermediate Accounting, 6e

PBO at the beginning of 2011 (end of 2010)


Service cost:
Interest cost: $64,835 x 7%
PBO at the end of 2011
Note:

$64,835
4,955
4,538
$74,328

In requirement 3 of the previous problem this same amount is calculated without


separately determining the service cost and interest elements (allowing for a $4
rounding adjustment)

Problem 17-4Requirement 1
PBO Without Amendment

PBO With Amendment

1.5% x 15 yrs x $250,000 = $56,250

1.65% x 15 yrs x $250,000 = $61,875

$56,250 x 10.05909* = $565,824

$61,875 x 10.05909* = $622,406

$565,824 x .13137** = $74,332

$622,406 x .13137** = $81,765

$7,434
Prior service cost

present value of an ordinary annuity of $1: n=18, i=7%

** present value of $1: n=30, i=7%


Alternative calculation: 1.65 - 1.5 =

0.15% x 15 yrs x $250,000 = $5,625


$5,625 10.05909* = $56,582
$56,582 x .13137** = $7,434

Requirement 2
$7,434 30 years (expected remaining service) = $248
Requirement 3
1.65% x 1 x $250,000 = $4,125
$4,125 x 10.05909* = $41,494
$41,494 x .14056** = $5,832

Alternate Exercise and Problem Solutions

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17-7

present value of an ordinary annuity of $1: n=18, i=7%

** present value of $1: n=29, i=7%

Requirement 4
$81,765 x 7% = $5,724
Requirement 5
Service cost (from req. 3)
Interest cost (from req. 4)
Return on the plan assets (10% x $70,000 )
Amortization of prior service cost (from req. 2)
Pension expense

Problem 17-5

PBO With Previous Rate

$5,832
5,724
(7,000)
248
$4,804

PBO With Revised Rate

1.5% x 15 yrs x $250,000 = $56,250

1.5% x 15 yrs x $250,000 = $56,250

$56,250 x 10.059091 = $565,823

$56,250 x 10.82763 = $609,053

$565,823 x .131372 = $74,332

$609,053 x .174114 = $106,042

$31,710

Loss on PBO
1 present value of an ordinary annuity of $1: n=18, i=7%
2 present value of $1: n=30, i=7%
3 present value of an ordinary annuity of $1: n=18, i=6%
4 present value of $1: n=30, i=6%

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Intermediate Accounting, 6e