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Pension Plan Accounting And Analysis: Winona Corp's Defined Benefit Pension Plan

Understand pension plan accounting with this solved assignment.

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    Pension Plan Accounting And Analysis: Winona Corp's Defined Benefit Pension Plan, page 1Pension Plan Accounting and Analysis: Winona Corp's Defined BenefitPension PlanWinona Corp's defined benefit pension plan had an amendment as of January 1, 2014, thatretroactively included benefits of $1,500,000. The remaining service life of the employeesimpacted by this change is 10 years.Winonauses the straight-line method to amortize the priorservice cost.As of January 1, 2014, Winona had the following information related to its pension plan,including adjustments for the plan amendment:Accrued/prepaid pension cost (credit)$3,790,000Projected benefit obligation5,200,000Accumulated other comprehensive income (debit)1,500,000Fair value of plan assets1,410,000Interest (discount) rate10%Expected rate of return on plan assets12%The actuary reported service cost of $600,000 in both 2014 and 2015. Annualpayments toretirees totaled $90,000. The trustee of the plan assets reported the actual rate of return to be 11%in 2014.Winona's annual year-end contribution to the plan equals the current years’service cost lessactualreturn on plan assets plus interest growth of the projected benefit obligation andamortization of prior service costs and/or gains and losses as calculated for pension expense.Required(a through g….see both pages below):a.Compute Winona's 2014contribution.Answer:To compute Winona Corp's 2014 contribution to the pension plan, we need to follow theformula provided in the problem statement:Annual Contribution = Service Cost-Actual Return on Plan Assets + Interest Growthof the Projected Benefit Obligation + Amortization of Prior Service Costs (if applicable)Given Data:•Service cost for 2014= $600,000•Actual return on plan assets in 2014= 11% of the fair value of plan assets at thebeginning of the year = 11% of $1,410,000•Interest growth of the projected benefit obligation (PBO)= Interest rate * PBO atthe beginning of the year•Amortization of prior service costs= This is amortized over 10 years (straight-linemethod). The prior service cost (retroactive benefit) is $1,500,000, and theamortization is done over the employees' remaining service life (10 years).Step-by-step Calculation:

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    Pension Plan Accounting And Analysis: Winona Corp's Defined Benefit Pension Plan, page 2

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    Pension Plan Accounting And Analysis: Winona Corp's Defined Benefit Pension Plan, page 31. Actual Return on Plan AssetsThe actualreturn on plan assets for 2014 is:ActualReturnonPlanAssets=FairValueofPlanAssets×ActualRateofReturn\text{ActualReturn on Plan Assets} =\text{Fair Value of Plan Assets}\times\text{Actual Rate ofReturn} ActualReturnonPlanAssets=1,410,000×11%=155,100\text{Actual Return on PlanAssets} = 1,410,000\times 11\% = 155,1002. Interest Growth of the Projected Benefit Obligation (PBO)The interest growth on the PBO for 2014 is:InterestGrowthofPBO=PBOatBeginningofYear×InterestRate\text{Interest Growth ofPBO} =\text{PBO at Beginning of Year}\times\text{Interest Rate}InterestGrowthofPBO=5,200,000×10%=520,000\text{Interest Growth of PBO} =5,200,000\times 10\% = 520,0003. Amortization of Prior Service CostsThe prior service cost (retroactive benefit) is $1,500,000, and it is amortized over theremaining service life of 10 years. The annual amortization is:AmortizationofPriorServiceCosts=PriorServiceCostRemainingServiceLife\text{Amortization of Prior Service Costs} =\frac{\text{Prior Service Cost}}{\text{Remaining ServiceLife}} AmortizationofPriorServiceCosts=1,500,00010=150,000\text{Amortization of PriorService Costs} =\frac{1,500,000}{10} = 150,0004. Annual Contribution CalculationNow we can calculate the2014 Contributionby plugging all the calculated values into theformula:Contribution=ServiceCost−ActualReturnonPlanAssets+InterestGrowthofPBO+AmortizationofPriorServiceCosts\text{Contribution} =\text{Service Cost}-\text{Actual Return onPlan Assets} +\text{Interest Growth of PBO} +\text{Amortization of Prior Service Costs}Contribution=600,000−155,100+520,000+150,000\text{Contribution} = 600,000-155,100 +520,000 + 150,000 Contribution=600,000−155,100+670,000=1,114,900\text{Contribution} =600,000-155,100 + 670,000 = 1,114,900Final Answer:Winona Corp's 2014 contribution to the pension plan is $1,114,900.If you have any further questions or need additional details on other parts of the problem, feelfree to ask!b.Compute Winona's 2014 pension expense.Answer:To computeWinona's 2014 pension expense, we need to use the formula that considersthe following components:Formula for Pension Expense:PensionExpense=ServiceCost+InterestonPBO−ExpectedReturnonPlanAssets+Amortizat

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