Judgment Case An alternative conceptualization of pension expense that had been proposed at various times before the current standards, would have based annual pension expense on the required annual contribution needed to fully fund the estimated total pension benefit at retirement. It is called the cost approach because pension expense for a period is considered to be the contribution (annuity amount) required in that year to fund the plan. This approach is not allowed under GAAP.

Required

a. Using the following example developed in the text, determine 2020 pension expense using the cost approach, where funding is assumed to take place equally over Nicole's service period.

Nicole (age 40) started working at 5M on January 1, 2020, at a starting annual salary of \(\$ 45,000\). Nicole's expected retirement date is December 31,2044 , with an annual salary of \(\$ 150,000\). Benefits vest as follows: \(10 \%\) after the first year, \(15 \%\) after the second year, and \(20 \%\) each year after until \(100 \%\). Nicole's expected retirement period is 10 years. The relevant discount rate is \(10 \%\). The applicable pension benefit formula for the defined benefit plan is Annual benefit payment during retirement \(=2 \% \times\) Number of service years \(\times\) Final salary

b. Assume the company funds its obligation to Nicole at the date she retires. How much funding is required?

c. Based on your findings above and your knowledge of GAAP, provide your opinion as to whether the cost approach would be a better approach to measuring pension expense than the current standards.