Question

Pension data for David Emerson Enterprises include the following: ($ in millions) Discount rate, 8% Projected benefit obligation, January 1 $ 400 Projected benefit obligation, December 31 560 Accumulated benefit obligation, January 1 395 Accumulated benefit obligation, December 31 510 Cash contributions to pension fund, December 31 245 Benefit payments to retirees, December 31 73 Required: Assuming no change in actuarial assumptions and estimates, determine the service cost component of pension expense for the year ended December 31.

Answer 1

The service cost component of pension expense for the year is $332 million, which is calculated by considering the ending and beginning projected benefit obligations, benefit payments, and cash contributions, while assuming no change in actuarial assumptions and estimates.

Step-by-step explanation:

The student is asked to calculate the service cost component of the pension expense for the year ended December 31, assuming no change in actuarial assumptions and estimates. Using the provided pension data, we calculate service cost based on the increase in the projected benefit obligation (PBO) adjusting for interest cost, contributions, and benefit payments:
Service Cost = Ending PBO - Beginning PBO - Interest Cost + Benefits Paid - Contributions
Interest Cost = Beginning PBO * Discount Rate = $400 million * 8% = $32 million
Service Cost = $560 million - $400 million - $32 million + $73 million - $245 million = $-44 million. However, service cost cannot be negative; therefore, the $-44 million represents other factors affecting the PBO, which implies that the service cost must be such that it results in the correct ending PBO when combined with interest cost, benefits paid, and contributions. Hence, to solve for service cost, we will add back to the ending PBO. The correctly calculated service cost is:
Service Cost = Ending PBO - Beginning PBO - Benefits Paid + Contributions = $560 million - $400 million - $73 million + $245 million = $332 million.