Question

Elm City reported the following information pertaining to its pensions for fiscal year 2014, based on GASB standards applicable to the employer.

Net Pension Obligation (NPO), 1-1-14 (arising from prior contribution deficiencies): $2,800,000
Annual Required Contribution (ARC): $6,000,000
Actual contribution for FY 2014: $5,700,000
Discounted present value of NPA, 1-1-14: $152,000
Based on the preceding information, and assuming the interest rate applicable to the NPO is 8 percent, Elm City's annual pension cost for the year 2014 is:
A) $6,328,000.
B) $6,276,000.
C) $6,072,000.
D) Some other amount.

Answer 1

The annual pension cost for Elm City in 2014 can be calculated using the ARC, interest component, and principal component. The correct option is B) $6,276,000.

Step-by-step explanation:

The annual pension cost for the year 2014 can be calculated using the formula:

Annual Pension Cost = ARC + Interest Component - Principal Component

where ARC is the Annual Required Contribution, Interest Component is the change in the net pension obligation due to interest, and Principal Component is the change in the net pension obligation due to contributions made.

In this case, the ARC is $6,000,000. The Interest Component can be calculated as the discount rate (8%) multiplied by the net pension obligation at the beginning of the year, which is $2,800,000.

The Principal Component is the actual contribution made during the year, which is $5,700,000.

Plugging in these values into the formula:

Annual Pension Cost = $6,000,000 + (8% * $2,800,000) - $5,700,000 = $6,276,000.

Therefore, the correct option is B) $6,276,000.