Question
On January 1, 2016, Delta Company agrees to pay a lump-sum pension to George Parker, the company's only employee, equal to 5% of his final
On January 1, 2016, Delta Company agrees to pay a lump-sum pension to George Parker, the company's only employee, equal to 5% of his final year's pay times the number of years worked after January 1, 2016. You estimate George's salary for December 31, 2024, his estimated last year with the company, will be $100,000. The appropriate rate of interest is 12%. Also, assume on January 1, 2018 the company changes their set percentage from 5% to 7%. Assume George will retroactively receive credit for this new percentage. Assume the company has agreed to fund George Parker's retirement plan on December 31 each year, starting at December 31, 2016, the end of the first year. The amounts they agree to fund for each of the first three years are in the following table along with the total FMV of all plan assets that is reported by the plan trustee at year-end.
Yearly Funding Amounts Trustee Reported FMV of total plan assets
December 31,2016 $1,000 $1,000
December 31, 2017 $1,500 $3,300
December 31, 2018 $1,700 $5,500
The company expects the plan trustee to invest the money and make a return of 10% per year.
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