1.deral Companies reported the following information in the footnotes to its most recent financial statements: Beginning Projected Benefit Obligation (PBO) | $65,000,000 | Ending PBO | 106,000,000 | Service Cost | 27,000,000 | Interest Cost | 3,000,000 | Benefits Paid | 5,000,000 | Actual Return on Plan Assets | 7,500,000 |
Given the information above, calculate Federal’s adjusted pension expense for the year. A) $22,500,000. B) $41,000,000. C) $35,000,000. D) $27,500,000. The correct answer was A) Adjusted pension expense = service cost + interest cost – actual return on plan assets Therefore, $27,000,000 + 3,000,000 – 7,500,000 = $22,500,000 2. “adjusted” pension expense can be calculated to better reflect a firm’s true economic pension cost than the reported pension expense. Which of the following adjustments to reported pension cost should be made? A) The inclusion of amortization of unrecognized items. B) The use of actual instead of expected return on assets. C) The inclusion of smoothing mechanisms such as unrecognized prior service cost. D) The use of the recognized actuarial gain or loss. The correct answer was B) Reported pension cost can be adjusted by the removal of both the amortization of unrecognized items and smoothing mechanism, plus the use of actual return on assets rather the expected return. The resulting adjusted pension expense is a more accurate portrayal of the firm’s true pension cost. 3.nancial analysts can use select data from a company’s financial statements to derive an adjusted pension expense in order to better reflect the company’s true economic pension cost. Which of the following formulas will most accurately calculate a company’s adjusted pension expense? A) Service cost + interest cost – actual return on plan assets – benefits paid. B) Service cost + interest cost + employer contributions – benefits paid. C) Beginning fair value of plan assets + service cost + interest cost – ending fair value of plan assets. D) Service cost + interest cost – actual return on plan assets. The correct answer was D) An adjusted pension expense is calculated without reflecting the amortization of unrecognized items and other smoothing mechanisms included in reported pension expense, and in addition uses the plan’s actual return on assets, rather than the plan’s expected return. |