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):

$71,261

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

$71,261 × 1.75% × 6

$7,482.41

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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):

$83,406

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83,406/6

$13,901

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

2014

Calculation for 2015

2015

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0

Opening obligation

From close of 2014

$9,683

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0

Interest cost at 7.5%

$9,683 x 0.075

$726

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Current service cost

Present Value of the unit credit

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$9,683

$10,409

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Closing obligation

$20,818 page9image3112 page9image3808

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

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