Neotech Industries (NI) was created in \(20 \mathrm{X} 0\). The company is in the optical equipment industry. Its made-to-order scientific and medical equipment requires large investments in research and development. To fund these needs, Neotech completed a public stock offering, in 20X4. Although the offering was reasonably successful, NI's ambitious management is convinced that the company must report a good profit this year (20X5) to maintain the current market price of its stock. NI's president recently stressed this point when he told his controller, "We need to report at least \(\$ 1.1\) million in pre-tax profit or our stock price will plummet!" NI's pre-tax profit was \(\$ 1.1\) million, before adjustments. However, appropriate pension accounting has yet to be resolved.

As of the beginning of fiscal year 20X5, NI instituted an employee pension plan with defined benefits. The plan is operated by a trustee. At the inception of the plan, the unfunded past service cost was \(\$ 3,000,000\). NI agreed to fund this amount through equal payments over 20 years, and made the first payment on 1 January 20X5. A \(7 \%\) interest rate is appropriate and the funding is calculated as an annuity due. The payments were blended payments, including both principal and interest. For \(20 X 5\), current service cost was \(\$ 650,000\), funded at year-end. The average vesting period of employees covered by the plan is 24 years. No payments were made to pensioners during the year. NI has expensed all payments made to the trustee. Expected earnings are \(7 \%\).

The president has also asked what estimates could be revised to minimize pension expense.

Required:

Respond to the issues raised and make appropriate recommendations. Your answer should include a recalculation of pre-tax income.