On 1/1/20x1 Platypus Corp. adopted a pension plan for its founder and CEO, Bill Duck. Information concerning the plan is as follows:

• Defined benefit, noncontributory pension plan.
• Retirement benefits paid at year-end, with the first payment one year after retirement.
• Settlement rate (AA bond yield), 8%. Expected return on plan assets, 10%.
• Pension benefit formula: .014 x n x average final two salaries, where n equals the number of years of service that qualify for pension credit, subject to a maximum of 30 years.
• Retirement age, 62.
• Expected retirement period, 18 years.
• Bill Duck is 40 years old when the plan is adopted, and began the company at age 32. Pension credit is given for up to five years of service before adoption of the pension plan.
• Contributions of $1,200 are made to the pension fund at the end of each year; however, an initial funding of $1,200 was also made on 1/1/20x1.
• Various salary levels for Bill Duck follow:

Age Salary

39............ $43,000

40............ 45,000

41............ 48,500

42............ 50,000

61............ 92,000

62............ 96,000

Instructions

1. Draw a time diagram to show the relationship between the pension plan and the employment and retirement life of Bill Duck.
2. Calculate pension expense for years 20x1 and 20x2. Assume the actual return on plan assets equals 10% for both years. Make the necessary journal entries for 20x1 and 20x2.
3. Assume now that there was a sharp decline in the economy in 20x1, with the AA bond yield dropping to 3% and plan assets returning a negative 10%. What is the minimum amount of gain/loss amortization to be included in pension cost for years 20x1 and 20x2?
4. Assume that five years after adoption, the plan benefit formula was amended to .021 x n x average final two salaries (settlement rate remains 8%). Calculate the PBO at the amendment date based on the amended plan formula. What is the amount of prior service cost amortization that would be included in pension expense each year following the amendment date?

Answer rating: 100% (QA)

The answer has been provided below step by step manner To calculate the pension expense for a given year we need to calculate the following items Service cost This is the cost of the benefits earned b... View the full answer