Question

Crane Company sponsors a defined benefit pension plan. The corporation's actuary provides the following information about the plan for the year 2025:

1. The expected long-term rate of return on plan assets is 7.5%.
2. The actual return on plan assets for 2025 is 6.8%.
3. The beginning fair value of plan assets for 2025 is $2,000,000.
Required: Calculate the actual return on the plan assets in 2025. You can also determine whether the actual return is favorable or unfavorable compared to the expected long-term rate of return.

Answer 1

The actual return on the pension plan assets in 2025 is calculated to be $136,000, which is considered unfavorable compared to the expected long-term rate of return of 7.5% as it is lower than what would be expected based on that rate.

Step-by-step explanation:

To calculate the actual return on the plan assets in 2025, we multiply the beginning fair value of plan assets by the actual rate of return for the year:

Actual return = beginning fair value of plan assets × actual rate of return

Actual return = $2,000,000 × 6.8%

Actual return = $2,000,000 × 0.068

Actual return = $136,000

The actual return of $136,000 is less than what would have been earned with the expected 7.5% rate of return. Therefore, the actual return is considered to be unfavorable compared to the expected long-term rate of return.