Question

The following information pertains to Havana Corporation's defined benefit pension plan: ($ in thousands) 2021 2022 Beginning balances Beginning balances balances Projected benefit obligation $ (6,000 ) $ (6,504 ) Plan assets 5,760 6,336 Prior service cost-AOCI 600 552 Net loss-AOCI 720 786 At the end of 2021, Havana contributed $696 thousand to the pension fund and benefit payments of $624 thousand were made to retirees. The expected rate of return on plan assets was 10%, and the actuary's discount rate is 8%. There were no changes in actuarial estimates and assumptions regarding the PBO. What is the 2021 service cost for Havana's plan? $528 thousand. $276 thousand. $648 thousand.

Answer 1

The 2021 service cost for Havana's plan is $912 thousand.

Step-by-step explanation:

The service cost for Havana's plan in 2021 can be calculated using the formula:

Service Cost = Projected Benefit Obligation (ending balance) - Projected Benefit Obligation (beginning balance) + Benefit Payments - Contributions + Interest Cost.

From the given information, we have:

Projected Benefit Obligation (ending balance) = $6,504 thousandProjected Benefit Obligation (beginning balance) = $6,000 thousandBenefit Payments = $624 thousandContributions = $696 thousandInterest Cost = ($6,000 thousand x 0.08) = $480 thousand

Substituting these values into the formula:
Service Cost = $6,504 - $6,000 + $624 - $696 + $480 = $912 thousand

Therefore, the 2021 service cost for Havana's plan is $912 thousand.

Answer 2

The service cost for 2021 is -$475,200.

The actual experience was better than what was expected, and the plan did not need to accrue as much expense.

How to solve

Calculate the expected return on assets for 2021

expected_return_on_assets_2021 = 5,760,000 * 0.1 = $576,000

Calculate the service cost for 2021

service_cost_2021 = (-6,504,000 - (-6,000,000)) - (576,000 - 5,760,000) - (624,000 - 696,000)

= -475,200

Since the service cost is a negative number, it means that the plan experienced a favorable deviation in 2021.

The service cost for 2021 is -$475,200. Since the service cost is a negative number, it means that the plan experienced a favorable deviation in 2021.

This means that the actual experience was better than what was expected, and the plan did not need to accrue as much expense.