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On January 1, x1, Brown Corp initiated a noncontributory definedbenefit pension plan for all six employees in its word processingdepartment. The plan benefit formula provides that each year ofservice earns each employee an annual retirement benefit of $4,000.The benefits are payable at the end of each year of retirement. Allsix employees are expected to retire on December 31, x6, and eachis expected to live for six years following retirement.
Brown Corp also provided retroactive benefits for employeeservices rendered prior to January 1, x1. Total years of servicefor which retroactive benefits were granted equaled 24 years (forall six employees combined rather than 24 years per employee). Theexpected return on plan assets is 10%. The settlement rate is8%.
Brown Corp will contribute an equal amount each year to thepension fund, which together with earnings at 10% is expected tofully 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, x6to settle its pension obligation.
Assume actual results equal the original estimates andassumptions. The tax rate is 40%.
Required:
Draw a time line to show the relationship between the pensionplan and the employment and retirement life of Brown Corp’semployees. Be sure to show the total amount of benefits expected tobe paid each year (to all employees combined) during the expectedretirement period.
Calculate the amount that Brown Corp should contribute to thepension fund each year.
Calculate Prior Service Cost at the inception of the plan.
Calculate Service Cost for each year of service (for allemployees combined).
Using a spreadsheet, prepare a schedule that calculates for eachyear of service:
Pension Expense (you may simply input the numbers calculated in2-4 above)
Prepaid/Accrued Pension Cost (the amount of the debit or creditand the account balance)
The amount funded
The fund balance
The year end projected benefit obligation
The funded status
Include a column for each element of pension expense. You do notneed for the spreadsheet to calculate present values. Instead youmay simply put in the values calculated by hand in parts 2-5. Printyour schedule.
Prepare journal entries for all years.
Show what will appear in financial statements (Balance Sheet,Income Statement, and Statement of Cash Flows) for all years.
