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3 years ago

Warrick Boards calculated pension expense for its underfunded pension plan as follows:

Business

1 answer:

faltersainse [42]3 years ago

7 0

Answer:

(i) PBO - Projected Benefit Obligation.

(ii) Pension Liability.

(iii) OCI - Other Comprehensive Income.

(iv) Retained Earnings.

Explanation:

(i) Service Cost and Interest Cost would result in increase of Projected Benefit Obligation (PBO), So;

PBO = Service Cost + Interest Cost

PBO = $354,000,000 + $215,000,000

PBO = $569,000,000

(ii) Plan Assets are increase by Expected Return of $154,000,000, and this amount will be deducted from the PBO because this has already been included in the Balance Sheet under Assets;

Pension Liability = PBO - Plan Assets

Pension Liability = $569,000,000 - $154,000,000

Pension Liability = $415,000,000

(iii) Other Comprehensive Income - OCI is the amortization of the Prior Service Cost that will reduce the OCI account during the period of time along with the loss on OCI which will also be accounted for, as follows;

OCI = Prior Service Cost + Net Loss

OCI = $21,000,000 + $4,000,000

OCI = $25,000,000

(iv) Retained Earnings will be decreased as pension will be paid from the retained earnings account and can be calculated as follows;

Retained Earnings = - Pension Expense + Prior Service Cost + Net Gain on plan assets + Net Loss on OCI

Retained Earnings = - $440,000,000 + $21,000,000 + $11,000,000 + $4,000,000

Retained Earnings = - $404,000,000

Hence Share holders' Equity will be reduced by $404,000,000.

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