Employee Benefits

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  • Topic: Pension, Cash balance plan, Actuary
  • Pages : 5 (1119 words )
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  • Published : February 27, 2013
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Employee benefits

1.) Pogi Company has established a defined benefit pension plan for its employees. Annual payments under the pension plan are equal to 3% of an employee’s highest lifetime salary multiplied by the number of years with the entity. An employee’s salary in 2011 was P500,000. The employee is expected to retire in 10 years, and the salary increase are expected to average 4% per year during the period. On December 31, 2011, the employee has worked for 15 years, The future value of 1 at 4% for 10 periods is 1.48. What is the annual pension payment that should be used in computing the projected benefit obligation on December 31,2011? a. 555,000

b. 375,000
c. 333,000
d. 225,000
Answer: c
Solution:
Future salary (500,000 x 1.48)740,000
Annual pension payment – PBO333,000
(740,000 x 3% x 15years)
Annual pension payment - ABO225,000
(500,000 x 3% x 15years)

The projected benefit obligation (PBO) is based on future salary while accumulated benefit obligation (ABO) is based on current salary. 2.) Warlock Company has established a defined benefit pension plan for its lone employee. Annual payments under the pension plan are equal to the employee’s highest lifetime salary multiplied by 2% multiplied by number of years with the entity. On December 31, 2011, the employee had worked for Warlock Company for 10 years. The salary in 2011 was P500,000. The employee is expected to live 15 years after retiring and will receive first annual pension payment one year after retirement. The discount rate is 8%. The relevant present value and future value factors are: Future value of 1 at 3% for 25 periods2.094

PV of an ordinary annuity of 1 at 8% for 15 periods8.559
PV of 1 at 8% for 25 periods0.146
What is the projected benefit obligation on December 31, 2011? a. 209,400
b. 261,669
c. 100,000
d. 124,961
Answer: b
Solution:
Future salary – PBO (500,000 x 2.094)1,047,000
Annual pension payment – PBO
(1,047,000 x 2% x 10years)209,400
Multiply by PV of an ordinary annuity of 1 at 8% for
15 periods8.559
Present value – December 31, 2036 1,792,255
Multiply by PV of 1 at 8% for 25 periods0.146
Projected benefit obligation- December 31,2011 261,669

3.) Rampage Company has an unrecognized actuarial gain of P425,000 relating to its pension plan on Jan. 1, 2011. Management has chosen to amortize this deferral on a straight line basis over the 10-year average remaining service life of its employees. Additional facts about the pension plan on January 1,2011 are as follows: Projected benefit obligation2,050,000

Accumulated benefit obligation1,900,000
Fair value of plan assets1,500,000
Market related value of pension fund
(5-year weighted average)1,350,000

What is the minimum amortization of unrecognized actuarial gain for 2011? a. 22,000
b. 23,500
c. 25,500
d. 29,000
Answer: a
Solution:
Unrecognized actuarial gain425,000
Corridor(10%x 2,050,000)205,000
Excess to be amortized220,000
Amortization of actuarial gain (220,000/10)22,000

4.) Naix Company had the following pension-related balances on January 1,2011: Projected benefit obligation2,000,000
Fair value of pension fund2,300,000
Unrecognized net pension loss310,000
Unrecognized past service cost100,000
The average remaining service period of employees working on January 1,2011 is five years. What is the amortization of the unrecognized net pension loss during the year? a. 62,000
b. 16,000
c. 20,000
d. 36,000
Answer: b

Solution:
Unrecognized net pension loss-January 1, 2011 310,000
Corridor(10%x2,300,000)230,000
Excess to be amortized80,000
Amortization of unrecognized net pension loss (80,000/5)16,000

5.) POOR Company operates a defined benefit plan and recognizes actuarial gains and losses in profit or loss under the corridor approach. On...
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