The most likely amount ABC Corp. will report as its net pension liability on its 2023 financial statements is approximately $3.81 million, considering PBO, plan assets, and discount rate.
The net pension liability is determined by subtracting the fair market value of plan assets ($8 million) from the Projected Benefit Obligation (PBO) estimated at $12 million. Therefore, the unfunded status is $12 million - $8 million = $4 million.
To calculate the present value of the net pension liability, the unfunded status is discounted using the risk-adjusted discount rate of 5%. The formula is:
Net Pension Liability = Unfunded Status / (1 + Discount Rate).
Substituting the values, the net pension liability is approximately $4 million / (1 + 0.05) ≈ $3.81 million.
Thus, the most likely amount ABC Corp. will report as its net pension liability on its 2023 financial statements is approximately $3.81 million.
Complete question:
ABC Corp. adopted a defined-benefit pension plan in 2023. During its first year, the company contributed $7 million to the plan and the actuary estimated the Projected Benefit Obligation (PBO) to be $12 million by year-end. However, due to unexpected market fluctuations, the fair market value of the plan assets only reached $8 million. Considering these figures and a risk-adjusted discount rate of 5%, what is the most likely amount ABC Corp. will report as its net pension liability on its 2023 financial statements?