Question 1 Payroll Professionals reported the following information in the footnotes to its financial statements: ----------------------------------------------------------------------- Reconciliation of Beginning and Ending PBO Beginning PBO - $1,250 + Current Service Cost - $580 + Interest Cose - $70 + Plan Amendements - $440 - Benefits Paid - ($90) -------------------------------------------------- = Ending PBO = $2,250 -------------------------------------------------- ----------------------------------------------------------------------- Reconciliation of Plan Assets Beginning fair value of plan assets - $1,000 + Actual return on plan assets - $150 + Employer contributions - $340 - Benefits Paid - ($90) --------------------------------------------------------------------- = Ending fairvalue of plan assets = $2,250 --------------------------------------------------------------------- ----------------------------------------------------------------------- Pension Expense Current Service Cost - $580 + Interest Cost - $70 - Expected return on plan assets - ($80) + Amortization of actuarial loss - $30 + Amortization of prior service cost - $10 --------------------------------------------------------------------- = Net periodic benefit expense = $610 --------------------------------------------------------------------- Calculate the economic pension expense A) $940 B) $720 C) $570 Question 2 Use the following information to reclassify the components of pension expense between operating and non-operating items: -------------------------------- Partial Income Statement: -------------------------------- Operating Profit - $145,000 Interest Expense - ($12,000) Other Income - $2,000 Income before tax = $135,000 -------------------------------- Other Data: -------------------------------- Current Service Cost = $7,000 Interest Cost = $5,000 Expected return on assets = $8,000 Actual return on assets = $9,500 1) Calculate the adjusted Operating Profit A) $142,000 B) $138,000 C) $147,500 2) What is the adjusted Income before tax? A) $136,500 B) $132,500 C) $135,000 3) What is the adjusted Interest Expense? A) ($17,000) B) ($7,000) C) ($24,000)
I’m not getting any of those answers (with the exception of 2 C)). Here’s my output: Q1: 1) $690 ($590 using contributions minus change in funded status approach) Q2: 1) $148,500 2) $133,500 3) $17,000 Damn, I thought I was comfortable with pensions too. Haha.
Correction: 2B) should be $135,000
My humble contribution. Don’t know if is correct Q1) Economic costs - Actual return = (580+70+440) - 150 = 940 Happy 2010 guys!
Q1: There seems to be a copy-paste error on the End FV of Plan Assets. It should be 1400 Change in FS = -850-(-250) = -600 Employer Contrib = -340 Total= 940 --------------------
Calculate the adjusted Operating Profit A) $142,000 145-12+7+2 = 142 What is the adjusted Income before tax? C)135 142+5-12 = 135 What is the adjusted Interest Expense? +5-12 = -7 B)(7000)
cpk123 Wrote: ------------------------------------------------------- > Q1: > There seems to be a copy-paste error on the End FV > of Plan Assets. It should be 1400 > > Change in FS = -850-(-250) = -600 > Employer Contrib = -340 > Total= 940 > -------------------- Sorry for the error: ----------------------------------------------------------------------- Reconciliation of Plan Assets Beginning fair value of plan assets - $1,000 + Actual return on plan assets - $150 + Employer contributions - $340 - Benefits Paid - ($90) --------------------------------------------------------------------- = Ending fairvalue of plan assets = $1,400 ---------------------------------------------------------------------
Correct Answers: 1) A - $940 2) i - $142,000 ii - $136,500 iii - ($17,000)
I’m still unsure on the $142,000. To my understanding, in order to arrive at the adjusted operating profit, one would have to add back the entire pension expense (in this case $7,000 + $5,000 + $8,000) and subtract the current service cost of $7,000 in order to isolate that amount. Sure enough, we’re left with $158,000 after this adjustment. Can someone explain the discrepancy?
bodulog, Operating Profit is shown as 145,000, which has been reduced by the reported Pension Expense. Reported Pension Expense is 7,000 (Service Cost) + 5,000 (Interest Cost) - 8,000 (Expected Return on Plan Assets) = 4,000 Step 1. First, lets remove all of this expense (4,000) from our reported Operating Profit. Which will cause Operating Profit to increase by 4000, right? It will swell to 145,000 + 4,000 = 149,000 as a result. Step 2. Now, just factor in the expense of Service Cost component of PE into it. The adjusted Operating Profit becomes 149,000 - 7,000 = 142,000 Hope it helps.
bpdulog, Operating Profit is shown as 145,000, which has been reduced by the reported Pension Expense. Reported Pension Expense is 7,000 (Service Cost) + 5,000 (Interest Cost) - 8,000 (Expected Return on Plan Assets) = 4,000 Step 1. First, lets remove all of this expense (4,000) from our reported Operating Profit. Which will cause Operating Profit to increase by 4000, right? It will swell to 145,000 + 4,000 = 149,000 as a result. Step 2. Now, just factor in the expense of Service Cost component of PE into it. The adjusted Operating Profit becomes 149,000 - 7,000 = 142,000 Hope it helps.
rus1bus Wrote: ------------------------------------------------------- > bpdulog, Operating Profit is shown as 145,000, > which has been reduced by the reported Pension > Expense. > > Reported Pension Expense is 7,000 (Service Cost) + > 5,000 (Interest Cost) - 8,000 (Expected Return on > Plan Assets) = 4,000 > > Step 1. First, lets remove all of this expense > (4,000) from our reported Operating Profit. Which > will cause Operating Profit to increase by 4000, > right? It will swell to 145,000 + 4,000 = 149,000 > as a result. > > Step 2. Now, just factor in the expense of Service > Cost component of PE into it. The adjusted > Operating Profit becomes 149,000 - 7,000 = > 142,000 > > Hope it helps. Thanks!
Nice, rus1bus.