Question 1: Pension Accounting and Worksheet The Wicked Witch Water Company provides a defined benefit pension plan for its employees. For 2006 and 2007 Wicked Witch used a discount rate of 9% and an expected rate of return on plan assets (ERR) of 11%. Wicked Witch's tax rate is 40%. Wicked Witch's accountant, Flying Monkey #1, has trouble with pension accounting and you have been hired to help him out. He tells you that no amendments were made to the plan in 2007, although he believes the actuaries may have changed some assumptions. He also tells you that Wicked Witch uses the corridor method for unrecognized gain/loss amortization. Additionally, he mentions that the plan paid out benefits to a number of retired Winkies, although he has lost the documentation and can't recall the amount. Flying Monkey #1 provides you with the following information: Plan Parameter Dec. 31, 2006 Dec. 31, 2007 Projected Benefit Obligation 250,000 290,000 Plan Assets 300,000 ? Unamortized Prior Service Cost 20,000 17,000 Unrecognized Gain 38,000 ? Service Cost n/a 14,000 Actual Return on Plan Assets n/a 23,000 Firm Contributions n/a 19,000 Actuarial Loss n/a 12,500 Average Remaining Service Period of 16 15 Active Employees (years) 1. Complete the pension worksheet provided on the next page. Show all the calculations necessary to complete this worksheet either below the table or on the following blank page. Note: you must show your work to receive credit. (27 points) Wicked Witch's 2007 Pension Worksheet 1 Income Statement Components of Pension Expense Balance Sheet Off-B/S Memo Accounts Assets Liabs SE Accounts Misc Date/Item [1] [2] [3] Service Interest Exp. Ret. Cost Cost PA [4] [5] [6] [7] [8] [9] PSC Amort. Pension Cash Pension OCI Amort. G/L Expense Funding A/Liab [10] Deferred Plan Taxes Assets [11] [12] [13] [14] [15] PBO Unamort Unrec. PSC Total G/L Unrec. 2007 Beg. Bal. 50,000 (10,800) 2007 Pen. Exp. 14,000 22,500 (33,000) 3,000 (500) 6,000 (19,000) (7,000) 12,000 2007 Act. Ret. (7,200) ||300,000 250,000 (20,000) 38,000 18,000 8,000 19,000 36,500 3,000 (33,500) (20,000) 2007 PBO G/L 2007 Benefits 2007 Balance 23,000 12,500 (9,000) (9,000) 43,000 1,200 800 333,000 290,000 (17,000) 15,000 (2,000) 23,000 (12,500) ERR: 11% Actual PBO: Discount Rate: 9% Beginning PBO: 290,000 -250,000 Actual PBO: Expected PBO: 290,000 9,000 Tax Rate: 40% Service Cost: (14,000) 299,000 Corridor. 30,000 Interest Cost: (22,500) G/L out of Corridor. 8,000 PBO Loss: (12,500) Avg. Service Life: 16 Benefits Paid: (9,000)