Pension Q

Jon Horton, CFA, is the Chief Financial Officer (CFO) for Springtown Corporation, a manufacturer of windows for residential and commercial applications. As part of an ongoing diversification strategy, Springtown Corp. has recently entered into a preliminary agreement to purchase all of the assets of Prime Doors, a manufacturer and distributor of doors to the same residential and commercial market in which Springtown sells its windows. Horton is head of the due diligence team that will fully evaluate Prime Doors’ financial statements prior to the proposed acquisition. Prime Doors has been in operation for thirty years, and currently has approximately 800 employees at two operating facilities. Horton observes in the notes to the financial statements that Prime Doors has a defined benefit pension plan, for which all employees are eligible. Employees are vested at the rate of 20% per year of employment, and are fully vested upon completion of five years of employment. Springtown does not offer a pension plan to its employees, but encourages employees to contribute to Individual Retirement Accounts (IRAs) and offers a 401(k) program. Horton wants to fully evaluate the financial implications of Springtown’s assumption of Prime Doors’ pension assets and the associated future liabilities and expenses. Like most companies, the pension plan for Springtown’s employees is not fully funded, but Horton wants to review all assumptions used by Springtown’s accountants in the valuation of the plan’s current liabilities. The most current information regarding the pension plans is as follows: Select Pension Plan Information for Prime Doors (as of 12/31/05) Projected benefit obligation (PBO) $15,500,000 Accumulated benefit obligation (ABO) $13,750,000 Market value of plan assets $11,875,000 Horton notices a paragraph in the pension plan footnotes that the original pension plan was amended last year, effectively increasing the level of benefits to be paid to employees with more than ten years of service. However, he is not able to detect what effect, if any, this change in projected benefits has had on Prime Doors’ financial statements or is expected to have in the future. Horton is aware that a commonly used method can be used to adjust the income statement and provide a better measure of Prime Doors’ economic pension cost than reported pension expense. He is not quite sure which components of the financial statements are utilized to derive an adjusted pension expense, but intends to investigate what analysis he can perform to gain more insight into the company’s position with regards to its pension plan. Part 1) When accounting for pension liabilities in the U.S., a company must make fundamental assumptions to estimate the future liability and expense for each employee. How are the following assumptions required to be treated in the pension footnotes? Required disclosure Not required to be disclosed A) Rate of compensation growth Expected length of employment B) Discount rate Expected return on plan assets C) Discount rate Rate of compensation growth Part 2) What effect will an increased discount rate and increased expected rate of return have on a company’s projected benefit obligation (PBO) and accumulated benefit obligation (ABO) as reflected in the financial statements? A) Both will increase. B) Only one will increase. C) Both will decrease. Part 3) According to U.S. GAAP, companies must account for pension assets and the associated pension obligation in their financial statements. These could be reported in two ways. Method 1 is to report the values of the pension fund assets and liability separately on the balance sheet. Method 2 is to report a net amount for the difference between the value of the fund assets and the fund liabilities. Which of the following statements most accurately describes the requirements of U.S. GAAP? A) Companies are required to use Method 2. B) Companies may choose to use either method. C) Companies are required to use Method 1. Part 4) Prime Doors has recorded a net pension liability of $1.5 million on its balance sheet. According to current U.S. accounting standards, Prime Doors is required to: A) immediately recognize $2,125,000 as additional pension expense in its income statement. B) record $375,000 as additional pension expense on its balance sheet. C) record $2,125,000 as additional pension liability on its balance sheet. Part 5) Which of the following statements regarding the treatment of pension plan amendments under U.S. GAAP standards is most accurate? A plan amendment results in: A) the disclosure in the pension plan footnotes of the nature of the amendment and the projected future financial impact. B) an unrecognized prior service cost that is amortized over the expected remaining service life of the affected employees. C) an immediate increase in pension expense equal to the amount of the amendment. Part 6) Pension expense as reported by a firm is routinely adjusted by analysts to derive a more accurate measure of a firm’s true economic pension cost. Adjusted pension expense is calculated as: A) reported pension expense – service cost + interest cost. B) service cost + interest cost – actual return on plan assets. C) reported pension cost – actual return on plan assets.

i’ll go: C C A C B B

what question id # is this

i agree with bannis–those answers all look right to me…

c b c no idea b c please post the answers

A B C A B B Feel like I disagreed with Bannis on everyone… Thats how i know i am failing

#87365 A,C,A,C,B,B

6/6 HUGE