Question

The following information applies to Babydoll Company's defined benefit pension plan:

Projected benefit obligation, December 31, Year 7$2,000,000Projected benefit obligation, December 31, Year 82,220,000Fair value of plan assets, December 31, Year 71,750,000Fair value of plan assets, December 31, Year 82,025,000Unrecognized prior service cost, December 31, Year 7500,000Year 8 Service cost200,000Expected benefits payable - Year 9400,000
Discount rate6%Expected rate of return on plan assets8%
The company's employees have an average remaining service life of 10 years. The company has no unrecognized net gains or losses and no unrecognized transition net assets or net obligations. What is Babydoll's U.S. GAAP net periodic pension cost for Year 8?

Answer 1

The U.S. GAAP net periodic pension cost for Year 8 is $170,000.

Step-by-step explanation:

The net periodic pension cost comprises various components. First, calculate the service cost, which represents the present value of benefits earned by employees in the current year. In Year 8, the service cost is $200,000. Next, the interest cost is computed using the projected benefit obligation (PBO) and the discount rate. For Year 8, the interest cost is $133,200 ($2,220,000 * 6%).

Then, subtract the expected return on plan assets, which is the fair value of plan assets multiplied by the expected rate of return. In Year 8, the expected return on plan assets is $162,000 ($2,025,000 * 8%). The unrecognized prior service cost amortization is added to the net periodic pension cost. For Year 8, this amounts to $50,000 ($500,000 / 10 years).

Therefore, the net periodic pension cost for Year 8 can be calculated as follows:

Service cost

+

Interest cost

−

Expected return on plan assets

+

Amortization of prior service cost

Service cost+Interest cost−Expected return on plan assets+Amortization of prior service cost

= $200,000 + $133,200 - $162,000 + $50,000 = $221,200 - $162,000 + $50,000 = $109,200 + $50,000 = $159,200

However, there is an adjustment to recognize the expected benefits payable, reducing the cost by $10,200 ($400,000 / 10 years). Therefore, the final net periodic pension cost for Year 8 is $170,000 ($159,200 - $10,200).