Exam #_______
Name: ____________________________________
Exam 2
Acct 414 – Corporate Accounting & Reporting II
Spring 2010
Show any necessary computations if you want to be eligible for partial credit. Present your work in a
neat, well-organized manner. If you are using a PV calculator, spell out what you put in for n, i, PMT, FV,
PV, etc. Follow the instructions and answer all parts of each question as directed.
Major Problems (do all three):
Pension Accounting
1. Work Paper {FASB No. 158} (45 points)
______________
Deferred Income Taxes
2. Deferred Income Taxes (55 points)
______________
Earnings Per Share
3. Earnings per share (50 points)
______________
4.
Short Problems
Construction accounting (20 points)
______________
5.
Stock based compensation (15 points)
______________
Select ONE (1) of the following problems:
6. Prior service cost (15 points) __________
7.
One-person pension (15 points) _________
____________
Maximum = 50 points (I will count the best 1 of 2 pension answers if
both are attempted)
8.
Objective Questions (Extra credit – maximum 10 points)
Total points earned (max = 200)
%
If you tear off the working papers, be sure your name is on the top AND that you staple the exam back
together in page number order.
Do not attempt extra credit section until all other sections of the exam have been completed.
After Exam 2 - Course Grade
Total Points = __________/700 = _________%
Quiz and HW percentage =
___________%
Projects percentage =
___________%
Exam 2 – Acct 414 – Spring 2010
This page intentionally left blank – use for scratch paper if needed
Page 2
Exam 2 – Acct 414 – Spring 2010
Page 3
1.
Pension Accounting (45 points). The Deary Drums Corporation initiated a
noncontributory defined benefit pension plan on January 1, 1980 and applied the provisions of
FASB Statement 87 as of January 1, 1987. FASB Statement No. 158 was implemented as of
January 1, 2006. Plymouth Plows uses the straight-line method, based on average remaining
service period of employees, to amortize prior service costs.
2010
BALANCES AS OF JANUARY 1, 2009
Projected Benefit Obligation
240,000
Plan Assets at market
200,000
Funded status
(40,000)
Unrecognized transition cost/(gain)
0
Straight-line amortization at $0 per year
Unrecognized Prior Service Cost
150,000
Straight-line amortization at $15,000 per year
Unrecognized (gains)/losses
128,000
OTHER INFORMATION:
Service cost for year
Discount rate for year
Expected rate of return on plan assets
Actual return on plan assets: gain/(loss)
Pension plan contribution
Retirement benefits paid during year
Average remaining service years related to active employees
Increase/(decrease) in PBO during year due to revised actuarial
assumptions
45,000
6.00%
8.00%
20,000
60,000
35,000
16
77,000
REQUIRED:
a.
Compute net periodic pension expense for 2010. (Be sure to show all of the components of
pension expense.) Prepare the journal entry needed to record pension expense and funding of
pension plan.
b.
Compute the balances in accumulated other comprehensive income, projected benefit obligation,
and plan assets at 1/1/11
c.
Explain (or show) how the funded status of the pension plan will be displayed on the balance sheet
at 12/31/10. Will there be other pension related accounts on the balance sheet? If so, explain
where and how they are presented. Provide amounts.
Note:
Completing the worksheet provided will be an acceptable answer for a and b and you can also
put your answer to c in the bottom right hand corner of the worksheet.
Exam 2 – Acct 414 – Spring 2010
Page 4
2. Deferred tax asset (55 points)
Yerba Inc. began business on January 1, 2008. Its pretax financial income for the first 3 years
was as follows:
2008
$240,000
2009
560,000
2010
1,725,000
The enacted tax rate in 2008 was 35%. The enacted tax rate existing at Dec. 31, 2009 and 2010
is 40%: The following items caused the only differences between pretax financial income and
taxable income.
1. On January 2, 2008, heavy equipment costing $500,000 was purchased. The equipment
had a life of 5 years and no salvage value. The straight-line method of depreciation is used
for book purposes and the MACRS tax deduction taken each year is shown in the table
below:
2008
2009
2010
2011
2012
Total
For tax
$120,000 $200,000 $150,000
$30,000
0 $500,000
For accounting
100,000
100,000
100,000
100,000
100,000
500,000
2. In 2009, the company collected first and last years’ rent in the total amount of $180,000. Of
this amount, $90,000 was earned in 2009; the other $90,000 will be earned in 2011. The full
$180,000 was included in taxable income in 2009.
3. The company pays $8,000 a year for life insurance on officers.
4. In 2009, the company had a long-term construction contract on which it recognized a gross
profit of $120,000 in 2009 and $150,000 in 2010 on the income statement under the
percentage of completion method. For tax purposes, the company uses the completed
contract method. The contract is expected to be completed in 2012.
5. In 2010, an officer of the company was killed in an automobile accident and the company
collected on the $1,000,000 life insurance policy.
Instructions
(a) The working paper shows the inventory of temporary differences from 2008. You are to
compute taxable income and income tax payable/receivable for the 2009 and 2010 using
the working paper. If you do not use the working paper provided, prepare an inventory of
the deferred tax (asset) and liability and determine the net deferred tax asset or liability as
of 12/31/09 and 12/31/10.
(b) Prepare the journal entry to record income tax expense, deferred taxes, and the income
taxes payable for 2009.
(c) What amounts would appear on the balance sheet related to deferred taxes as of
12/31/2010 (give the section and amount).
Answers to (a) and (c) may be provided on the working paper (page 14) but please write the
formal journal entry either HERE or on the bottom of the working paper.
Exam 2 – Acct 414 – Spring 2010
Page 5
Answers for Problem 2
(a)
Compute taxable income and income tax payable/receivable for the 2009 and 2010 as well
as an inventory of temporary differences to determine net deferred tax liability as of
12/31/09 and 12/31/10.
I can grade from workpaper if used
(b)
Prepare the journal entry to record income tax expense, deferred taxes, and the income
taxes payable for 2009. (Workpaper answer is NOT sufficient for this one!)
(c)
What amounts would appear on the balance sheet related to deferred taxes as of
12/31/2010 (give the section and amount).
You MAY use the worksheet but additional details about computations should be entered
here if that will explain the numbers on the worksheet.
Exam 2 – Acct 414 – Spring 2010
Page 6
3.
Earnings per share (50 points)
In 2009, net income for Winthrop Corp. was $5,575,000. Its tax rate was 40%.
On January 1, 2009 there were 1,000,000 shares of common stock outstanding with another
100,000 shares held as treasury stock. On Feb. 1, Winthrup issued 800,000 new shares of
common stock. On June 30, Winthrop issued a 50% stock dividend. On November 1, Winthrup
sold 50,000 shares of the treasury stock for $53 per share.
There are 750,000 options to buy common stock at $50 a share outstanding. The market price
of the common stock averaged $60 during 2009 (both market price and option price have
already been adjusted for the stock dividend).
During 2009, there were 500,000 shares of convertible 8% preferred stock outstanding. The par
value is $100 and each share is convertible into 30 shares of common stock after the stock
dividend. No preferred shares were converted during 2009.
Winthrop issued $10,000,000 of 9% convertible bonds at face value during 2006. The
semiannual bonds mature in 2016. Each $5,000 bond is convertible into 300 shares of common
stock after the stock dividend. No bonds were converted during 2009.
Instructions
(a) Compute the weighted average number of common shares outstanding.
Dates
Outstanding
Adjustment
Months
Weighted average = ____________________________ shares
Weighted
Exam 2 – Acct 414 – Spring 2010
Page 7
Problem 3 (continued)
Regardless of your answer to (a), assume that the weighted average number of common shares
outstanding is 2,000,000 for parts (b) and (c). You may use the work paper provided below or
formulas but please write your answers in the space provided:
(b) Compute the basic earnings per share for 2009.
$_________________________
(c) Compute the diluted earnings per share for 2009. $___________________________
Net income
Numerator
$5,575,000
Denominator
2,000,000
Per Share
Exam 2 – Acct 414 – Spring 2010
Page 8
4.
Long-term construction accounting (20 points)
On July 14, 2009 Western Construction Co. entered into a contract with the Falls City to build a
bridge for $12,000,000. Construction began immediately and was completed in November 2010.
Data relating to the construction are:
2009
2010
Costs incurred
$2,750,000
$7,250,000
Estimated costs to complete
6,250,000
—
Progress Billings
3,000,000
9,000,000
Instructions
a.
How much revenue should be reported for 2009 under the percentage-of-completion
method? Show your computation. (Please round % to two decimal places, e.g., 14.33%)
b.
Make the entry to record the revenue and gross profit for 2009 (percentage-ofcompletion method).
c.
What is the amount that will appear on the balance sheet for the year ended 12/3109
assuming the percentage of completion method is used? (Give the title as well as the
amount and the section where it will appear.)
d.
What is the amount that will appear on the balance sheet for the year ended 12/3109
assuming the completed contract method is used? (Give the title as well as the
amount and the section where it will appear.)
Exam 2 – Acct 414 – Spring 2010
5.
Page 9
Stock option plan (15 points)
Family Inc. is a publicly traded company. The president, John Brothers, was given stock
options to acquire 60,000 shares of Family’s $5 par value common stock for $35 each. The
options were granted on December 31, 2009 when the stock was selling for $35 per share. Mr.
Brothers cannot exercise his stock options until January 1, 2012. If not exercised, the options
will expire on December 31, 2014. There is no way he will be allowed to receive the cash value
of difference between market price and exercise price. The relevant market prices and fair
values at each date are given in the table below. Assume that John Brothers exercised all the
options on Sept. 25, 2013 when the common stock was selling for $49 per share. If no entry is
needed at the specified dates, the answer is “not applicable.”
Date
12/31/09
12/31/10
12/31/11
12/31/12
9/25/13
Market
Price
$35
$38
$31
$42
$49
Fair
Value
$4
$8
$7
$9
$14
Prepare all necessary entries on Family Inc.’s books, including the exercise of all options in 2012.
Exam 2 – Acct 414 – Spring 2010
Page 10
Work ONE of the two following pension-related problems (If you work both, I’ll count the higher of
the two scores)
6.
Amortization of prior service cost using years-of-service method. (15 points)
On January 1, 2010, Harvard Harvester Inc. amended its pension plan which caused an
increase of $8,000,000 in its projected benefit obligation. The company has 153
employees who are expected to receive benefits under the company's defined benefit
pension plan. The personnel department provided the following information regarding
expected employee retirements:
Number of
employees
20
15
38
80
153
Year of
retirement
(on Dec 31)
2014
2019
2024
2029
Remaining Years of Employment
5 years
10 years
15 years
20 years
Instructions
(a) What is the average remaining service life?
(b) Using the straight-line method, what would amortization of prior service costs be for
2010?
(c) Using the years-of-service method, what would amortization of prior services costs be
for 2023?
Exam 2 – Acct 414 – Spring 2010
Page 11
7.
Time Value of Money (15 points)
Idaho Genetics Inc Inc. has a pension plan for its sole employee. She has already received
credit for 20 years of prior service and is expected to work 15 years more years until retirement.
After retirement, she should collect pension payments for 25 years. The pension plan's benefit
formula is final year’s annual salary times years of service times 2%. Her current salary is
$90,000 with estimated future pay increases to average 5% per year for 15 years. What is the
normal service cost related to the year just ended for the work she performed during 2009?
You may assume ordinary annuities and end-of-year annual payments upon retirement and a
5% per annum discount rate.
Normal service cost for 2009 = $____________________________________
Exam 2 – Acct 414 – Spring 2010
Page 12
8. EXTRA CREDIT: Permanent and temporary differences (10 points maximum)
Listed below are items that are treated differently for accounting purposes than they are for tax
purposes. Indicate whether the items are permanent differences or temporary differences. For
temporary differences, indicate whether they will create deferred tax assets or deferred tax
liabilities.
A
B
C
D
Temporary difference – deferred tax liability
Temporary difference – deferred tax asset
Permanent difference
None of the above
______ 1.
Unrealized gain on marketable securities.
______ 2.
Contingent liability for court costs related to customer injury case.
______ 3.
Estimated future warranty costs.
______ 4.
Estimated bad debt expenses exceed direct write-offs of receivables
______ 5.
Accretion expense recognized on an asset retirement obligation.
______ 6.
Excess of statutory depletion over depletion based on cost of mining coal.
______ 7.
Amortization of goodwill on tax return.
______ 8.
Premium on 3-year fire insurance deducted on return in first year.
______ 9.
Installment method used on tax return for sales of appliances.
______10.
Penalties and fines.
Exam 2 – Acct 414 – Spring 2010
Page 13
For Problem 1
Pension Worksheet
SFAS NO. 158
Name:
1
2
Income Stmt
BS
Pension
Expense
Cash
3
4
5
Accounts on Employer's Books
Other comprehensive income stmt
Transition
(Gain)/Loss
Net actuarial
(gain)/loss
Debit
Credit
Prior Service
Cost
6
BS
Funded Status
7
8
Not on Books
Memorandum Amounts
Projected
Benefit
Obligation
BALANCE FORWARD
Service Cost
Interest Cost
Expected return on plan assets
Corridor Amount
AOCI Actuarial (BoY)
Excess
AMORTIZATIONS:
Unrecognized gain/loss
Prior Service Cost
Transition Amount
Contributions to Pension Plan
Retirement Benefits Paid by Plan
Actual Return on Plan Assets
Actuarial Adjustments to PBO
Amounts for journal entry:
AOCI balance forward
BALANCES AT YEAR END
Balance sheet presentation:
Summary journal entry
Pension expense
Cash
AOCI - transition loss
AOCI - actuarial gain/loss
AOCI - prior service cost
Net pension obligation or asset
Plan Assets
Exam 2 – Acct 414 – Spring 2010
Page 14
For Problem 2
Name:______________________________
Remember – you need to do the 2009 & 2010 columns
Deferred Tax Problems - Worksheet
2008
Pre-tax accounting income
Permanent differences:
Book TI
Temporary differences:
Taxable income
Applicable tax rate
Income taxes payable/(receivable)
Inventory of temporary differences
Depreciation
(20,000)
Total net temp differences
(20,000)
Applicable tax rate
35%
Deferred taxes (net) ending
(7,000)
Deferred taxes (net) beginning
Change in net deferred taxes
(7,000)
Taxes (payable)/receivable from above
Income tax expense
Classification:
Current deferred tax assets
Noncurrent deferred tax assets
Current deferred tax liabilities
Noncurrent deferred tax liabilities
Total net deferred tax
2009
2010
Exam 2 – Acct 414 – Spring 2010
Page 15
SOLUTIONS
Problem 1
Pension Working Paper
Pension Worksheet
SFAS NO. 158
Deary Drums Corporation
1
Income Stmt
Pension
2010
Expense
BALANCE FORWARD
Service Cost
45,000
6% Interest Cost
14,400
8% Expected return on plan assets -16,000
24,000 Corridor Amount
128,000 AOCI Actuarial (BoY)
104,000 Excess
AMORTIZATIONS:
16 Unrecognized gain/loss
6,500
Prior Service Cost
15,000
Transition Amount
0
Contributions to Pension Plan
Retirement Benefits Paid by Plan
Actual Return on Plan Assets
Actuarial Adjustments to PBO
Amounts for journal entry:
64,900
AOCI balance forward
BALANCES AT YEAR END
Summary journal entry
Pension expense
Cash
AOCI - actuarial gain/loss
AOCI - prior service cost
Net pension obligation or asset
$
Debit
64,900
2
4
5
Accounts on Employer's Books
BS
AOCI
Net
Prior
actuarial
Service
Cash
(gain)/loss
Cost
66,500
131,400
7
8
Not on Books
BS
Memorandum Amounts
Projected
Funded
Benefit
Plan
Status
Obligation
Assets
-40,000
-240,000
200,000
-45,000
-14,400
16,000
-6,500
-15,000
-60,000
35,000
-60,000
-20,000
77,000
66,500
128,000
194,500
60,000
-35,000
20,000
-77,000
-15,000
150,000
135,000
-56,400
-96,400
-341,400
245,000
Credit
$ 60,000
$
$
$
$
6
$
$ 15,000
$ 56,400
$ 131,400
C. Balance sheet
Noncurrent liabilities
Funded status of pension plan
96,400
credit
Owners equity section
Acc'd other comprehensive income
329,500
debit
2.
Deferred taxes
(a), and (c) on working paper (next page)
(b)
Income Tax Expense ($175,200 + 53,000) ..............................................
Deferred Tax Asset ..................................................................................
Income Tax Payable ($350,000 × 35%) ......................................
228,200
53,000
175,200
Comments on Problem 2:
You could consider the construction gross profit as noncurrent because it
won’t be taxed until 2015. You could also argue that it would be current if the company’s operating cycle
is longer than one year (in other words, construction in progress is a current asset account). I accepted
either choice but the unearned rent will be a current liability in 2010 since it will be collected in 2011 (it
was a noncurrent liability in 2009). Depreciation amounts are always classified as noncurrent. The
working paper (next page) assumes construction in progress is current.
Exam 2 – Acct 414 – Spring 2010
Page 16
Deferred Tax Problems - Worksheet
Pre-tax accounting income
Permanent differences:
Life insurance premium
Proceeds from life insurance policy
Book TI
Temporary differences:
Depreciation
Unearned rental income
Construction accounting
2008
240,000
2009
560,000
2010
1,725,000
8,000
8,000
248,000
568,000
(20,000)
(100,000)
90,000
(120,000)
(150,000)
8,000
(1,000,000)
733,000
(50,000)
Taxable income (a)
Applicable tax rate
Income taxes payable/(receivable) (a)
Inventory of temporary differences (b)
228,000
35%
79,800
438,000
40%
175,200
533,000
40%
213,200
Depreciation (noncurrent all years)
Unearned rental income (NC 2009, C 2010)
Construction profit (Current all years)
(20,000)
-
(120,000)
90,000
(120,000)
-
(170,000)
90,000
(270,000)
-
(20,000)
35%
(7,000)
(7,000)
(79,800)
86,800
(150,000)
40%
(60,000)
(7,000)
(53,000)
(175,200)
228,200
(350,000)
40%
(140,000)
(60,000)
(80,000)
(213,200)
293,200
(7,000)
(7,000)
(48,000)
(12,000)
(60,000)
(72,000)
(68,000)
(140,000)
0
Total net temp differences
Applicable tax rate
Deferred taxes (net) ending
Deferred taxes (net) beginning
Change in net deferred taxes
Taxes (payable)/receivable from above
Income tax expense
Classification on balance sheet (d)
Current deferred tax assets
Noncurrent deferred tax assets
Current deferred tax liabilities
Noncurrent deferred tax liabilities
Total net deferred tax
See comment on previous page – this one is more likely to be GAAP if we converge with IFRS’s definition
of current which is always 12 months.
Alternate (assuming construction profit is noncurrent until next-to-last year of contract
Classification on balance sheet (d)
Current deferred tax assets
Noncurrent deferred tax assets
Current deferred tax liabilities
Noncurrent deferred tax liabilities
Total net deferred tax
2009
(60,000)
(60,000)
2010
36,000
(176,000)
(140,000)
Exam 2 – Acct 414 – Spring 2010
Problem 3-a
Transactions in Common Shares
Jan 1 to Jan 31
Feb, 1 issued new shares
Feb 1 to June 30
June 30, 50% stock dividend
July 1 to Oct 31
Nov 1, sold treasury stock
Nov 1 to Dec 31
Page 17
Cumulative
Adjustment
1,000,000
1.50
800,000
1,800,000
1.50
900,000
2,700,000
1.00
50,000
2,750,000
1.00
Months
Weighted average shares
Net income
Preferred dividend
Options
Cumulative convertible preferred
Bonds
Numerator
Denominator
5,575,000
-4,000,000
1,575,000
2,000,000 basic=
125,000
1,575,000
2,125,000
4,000,000 15,000,000
5,575,000 17,125,000 diluted=
540,000
600,000
6,115,000 17,725,000
1
Weighted
1,500,000
5 13,500,000
4 10,800,000
2 5,500,000
12 31,300,000
2,608,333
EPS
$
0.79
$
0.74
$
0.33
$
0.34
Treasury stock, 750,000 * $50 strike price = 37,500,000 in proceeds, divide by market price of
$60 and company can buy back 625,000 shares. So the net new shares = 750,000 – 625,000.
The index is 0/125,000 = 0 (the smallest item)
Convertible preferred, 500,000 shares * $100 par * 8% = $4,000,000 dividend. Each of the
500,000 shares converts to 30 shares of common so the index is $0.27 ($4M/$15M) which is
the second smallest per share amount.
There are 2,000 convertible bonds ($10,000,000 face divided by $5,000) and each one converts
to 300 shares of common for a total of 500,000 shares of common. The interest expense is
$900,000 (9% * face value) but we have to multiply by (1-t) so the index is $0.90 ($540,000
after-tax interest divided by 600,000). If you take each item into the computation as
demonstrated, the EPS with options and preferred is now SMALLER than the index number for
the bonds. At that point, you should realize that the bonds are anti-dilutive and should not be
included in the EPS computation.
Approximately 5 points were associated with knowing and applying the process (algorithm) that
makes sure you get the lowest possible EPS figure : determine all the “index numbers” and
then do the diluted computation in the proper order from smallest item to largest until the next
index number is larger than the most recent “tentative” diluted EPS figure.
Exam 2 – Acct 414 – Spring 2010
Page 18
4. Construction accounting
(a)
(b)
$2,750
———---—— = Percent of completion = 30.56% × $12,000,000 = $3,667,200 revenue
$2750+6250
(rounded to 2 decimal places)
Construction Expenses................................................................ 2,750,000
Construction in Process .............................................................. 917,200
Revenue from Long-Term Contracts ...............................
3,667,200
(c) Construction in progress under the percentage of completion method contract method
contains just the costs plus profit or the total revenue from (a) of $3,667,200.
The following entry would be made to record progress billings – giving a balance of $2,000,000
credit
Accounts Receivable .................................................................. 3,000,000
Billings on Construction in Process .................................
3,000,000
The two accounts (construction in progress and partial billings) are combined and since the
debits are bigger than the credits, the net amount is reported under current assets on the
balance sheet:
Current assets:
Costs on uncompleted contracts in excess of related billings ... $667,200
(d) Construction in progress under the completed contract method contains just the costs
incurred or $2,750,000 debit.
The two accounts (construction in progress and partial billings) are combined and since the
credits are bigger than the debits, the net amount is reported under current liabilities on the
balance sheet:
Current liabilities:
Billings in excess of costs on related uncompleted contracts .... $250,000
5. Employee stock options – this is an equity award so the fair value is measured at the grant date
and is not changed thereafter. The service period is the grant date to the vesting date (December 31, 2009
to January 1, 2012) which is a two year period (2010 and 2011).
12/31/09 – NO ENTRY on grant date because the options have not yet been earned
12/31/10 & 12/31/11
Compensation expense (60,000 * $4 fair value * 1/2 earned)
120,000
APIC – stock options
120,000
Same entry would be made at 12/31/11 because the service period is two years and the compensation
expense would be recognized equally in each of the 2 years.
9/25/13 – all options are exercised
Cash (60,000 * $35 each)
2,100,000
APIC – stock options (60,000 * $4 each)
240,000
Common stock (60,000 * $5 par value)
300,000
APIC – common stock (what it takes to balance)
2,040,000
Exam 2 – Acct 414 – Spring 2010
Page 19
Problem 6. Years of service method
Number of expected retirements
20
15
38
80
153
Year of retirement (on Dec 31)
2014
2019
2024
2029
Years of Work
Remaining
5 years
10 years
15 years
20 years
TOTAL
100
150
570
1,600
2,420
a. Average remaining service life =2,420/153 employees = 15.82 years
b. For SL, divide total by average remaining service life: $8,000,000/15.82 years = $505,785
c. For the first five years, there are 153 employees so 153/2420 * $8,000,000 = $505,785 (same as straight-line
method). For the next 5 years, there are only 133 employees left so 133/2420 * $8,000,000 = $439,669 per year. For
2020 thru 2024 (including 2023) there are only 118 employees left and the fraction will be 118/2420 * $8,000,000 =
$390,083, The schedule below is not necessary!
Fractions for
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
100.00%
Problem 7
Current salary
Annual raise
Years until retirement
PMT
Salary at retirement
Future salary
Benefit formula
Benefit per yr
Life expectancy
Benefit for service cost
PMT =
N=
FV =
INT RATE =
PV =
PMT =
N=
INT RATE =
FV =
PV =
$505,785
$505,785
$505,785
$505,785
$505,785
$439,669
$439,669
$439,669
$439,669
$439,669
$390,083
$390,083
$390,083
$390,083
$390,083
$264,463
$264,463
$264,463
$264,463
$264,463
8,000,000
153/2420
153/2420
153/2420
153/2420
153/2420
133/2420
133/2420
133/2420
133/2420
133/2420
118/2420
118/2420
118/2420
118/2420
118/2420
80/2420
80/2420
80/2420
80/2420
80/2420
100.00%
Normal Service Cost
90,000
Step 1
5%
15
0
187,104
$
187,104 at retirement
Step 2
2.0% per year of service
$
3,742.07
25 years after retirement
20 years credited for prior service (not relevant)
$
74,841.41 Not relevant to this problem
Step 3
$
(3,742.07) benefit from having worked one more year
25 life expectancy after retirement
$0.00 no final payment
5% discount rate
$
52,740.54 Needed at retirement
0 (not an annuity)
Step 4
15 years until retirement
5% discount rate
$
(52,740.54) Needed at retirement for the addl yr of service
$
25,368.58 service cost for the one additional year
Note that I asked for normal service cost – not the prior service cost.
8 Matching – extra credit
1. A
2. B
6. C
7. A
3. B
8. A
4. B
9. A
5. B
10. C