Troy Van Beek, assistant controller for Cizek Electric Company, is preparing for a meeting with the loan committee of First City Bank. The loan committee will be reviewing Cizek’s financial statements and projections as part of the company’s loan-renewal process. Troy expects some questions concerning Cizek’s defined benefit plan. The following year-end information is available ($ in millions) for Cizek.

Projected benefit obligation ..............$5,285

Pension assets .....................................$4,725a

Accumulated OCI (Prior service cost) ...$640

Pension expense ....................................$325

Total assets ........................................$21,162

Troy expects the loan committee to ask about the impact of recent changes in the stock and bond capital markets on Cizek’ pension plan. For example, one of Cizek’s loans has a covenant that is based on the debt to asset ratio.

Instructions

Prepare brief responses to the flowing questions to help Troy prepare for the meeting.

(a) What is the effect of the defined-benefit plan on Cizek’s debt to equity ratio?

(b) Recently, market interest rates and returns in the stock market have increased, and similar performance is expected in the next year. What are the implications of these developments for the funded status of Cizek’s pension plan and their impact on the debt to total assets ratio?

(c) Troy is also concerned with cost of the pension plan and its drag on earnings. What are some actions that Cizek management could take to decrease the cost of its pension plan?