2014 CFAI MOCK - Annual Unit Credit (Pensions)

The question states:

At the end of Smith’s second year of service, the estimated defined benefit obligation arising from his employment is closest to:

Determination of annual unit credit (benefit)

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Estimated final salary (Exhibit 1):


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Estimated annual (end of year) payment in retirement (six years of service, 2014–2019):

$71,261 × 1.75% × 6


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PV of 7,482.41 for 25 years at 7.5% (N = 25, I = 7.5, PMT = 7,482.41 Mode: End; PV = ?)

Present value of estimated future payments as of the start of retirement (keystrokes using a financial calculator):


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Annual unit credit at time of retirement per service year:

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  1. Determination of build-up of pension obligation for the employee

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Calculation for 2014


Calculation for 2015


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Opening obligation

From close of 2014


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Interest cost at 7.5%

$9,683 x 0.075


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Current service cost

Present Value of the unit credit




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Closing obligation

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can anyone explain this? is this going to be tested on exam?

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