Question

Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the operation of the plan for the year 2015.

Service cost $ 230,000
Contributions to the plan 220,000
Actual return on plan assets 180,000
Projected benefit obligation (beginning of year) 2,400,000
Fair value of plan assets (beginning of year) 1,600,000

The expected return on plan assets and the settlement rate were both 10%. The amount of pension expense reported for 2015 is:

a. $230,000.

b. $290,000.

c. $310,000.

d. $470,000.

Answer 1

C) $310,000.

Step-by-step explanation:

the pension expense for the year = service cost + (projected benefit obligation PBO x 10%) - (fair value of assets x 10%) = $230,000 + ($2,400,000 x 10%) - ($1,600,000 x 10%) = $230,000 + $240,000 - $160,000 = $310,000

The pension expense includes all the service costs related to the pension plan plus the difference between the PBO and fair market value times the return rates. Since the FMV is lower than the PBO, the expense increases.