A company starts a defined benefit pension plan on Jan 1 2020. The service cost is $300,000 each year while funding $200,000 per year (with payments made each Dec 31). Interest on the PBO is 12 percent while the actual and expected income on plan assets is 10 percent per year. What amount of pension expense should the company report for 2021
Question
A company starts a defined benefit pension plan on Jan 1 2020. The service cost is 200,000 per year (with payments made each Dec 31). Interest on the PBO is 12 percent while the actual and expected income on plan assets is 10 percent per year. What amount of pension expense should the company report for 2021
Solution
To calculate the pension expense that the company should report for 2021, we need to consider several components: service cost, interest cost, expected return on plan assets, and any prior service cost or gain/loss.
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Service Cost: This is the present value of the pension benefits earned by employees during the year. In this case, it's given as $300,000.
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Interest Cost: This is the increase in the projected benefit obligation (PBO) during the year due to the passage of time. It's calculated as the beginning PBO times the discount rate. However, since the beginning PBO is not given in the question, we can't calculate this component.
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Expected Return on Plan Assets: This is the amount of income the company expects to earn on the assets set aside to pay future pension benefits. It's calculated as the beginning plan assets times the expected rate of return. In this case, the company funds 200,000 * 10% = $20,000.
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Prior Service Cost and Gain/Loss: These are adjustments for changes in the pension plan or differences between actual and expected returns. However, since these are not mentioned in the question, we'll assume they're zero.
So, the pension expense for 2021 would be:
Service Cost + Interest Cost - Expected Return on Plan Assets + Prior Service Cost + Gain/Loss = 20,000 + 0 + 0 = $280,000 + ?
Without the beginning PBO, we can't calculate the interest cost and thus can't determine the total pension expense.
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