chapter 12 solution

chapter 12 solution - Chapter 12 Solutions Problem Overview...

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Chapter 12 – Solutions Problem Overview Problem #s {S} 1, 6, 9 - 11, 13, 15, 18, 22 {M} 4, 5, 8, 12, 16, 19, 21 {L} 2, 3, 7, 14, 17, 20 1.{S}a. The effect of an increase in the discount rate: (i) The projected benefit obligation (PBO) will decrease in the year of the change because the present value of a stream of cash declines when discounted at a higher rate. (ii) Assuming that the rate change is applied at the end of the year, it will have no effect on pension cost in the year of the change. (iii) The interest component of the pension cost will increase in the year following the change because a higher rate will be applied to the (lower) PBO. However, the service cost component will be lower due to the higher discount rate and this effect may overwhelm the effect on the interest cost. Note that in a mature plan, the interest cost effect may be greater than the impact on the service cost. b. The effect of an increase in the assumed rate of compensation growth: (i) The PBO will increase in the year of the change because the benefits are expected to increase. (ii) Assuming that the rate change is applied at the end of the year, it will have no effect on pension cost in the year of the change. (iii) Pension cost will increase in the year following the change because both interest cost (based on the higher PBO) and service cost will rise as PBO increases. c. The effect of an increase in the expected rate of return on plan assets: (i) The increase will have no effect on the PBO because it does not change the benefits provided by the plan. 12 - 1
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(ii) Pension cost will decline in the year of the change because a higher return will be deducted in computing the net pension cost. (iii) Pension cost will decline in the year following the increase for the reason cited in answer c. (ii). 2.{L}a. The most likely reason for the actuarial loss in 1998 was the decrease in the discount rate from 7.25% in 1997 to 6.75% in 1998, whereas the 1999 gain likely reflects changes in one or more actuarial assumptions because neither the discount rate nor the rate of compensation increases was changed in that year. b. The amortization of prior service cost rose every year during the 1997-1999 period because the company has recorded plan amendments increasing the PBO in each of those years. The amortization of those annual increases generated successively higher amortization amounts each year. c. Note : All amounts in the tables that follow are in $millions Beginning balance of unrecognized net gain $ 860.223 Amortization of net gain (10.270) Actuarial gain 13.833 Deferred ROA (actual - expected ROA) 153.493 Ending balance of unrecognized net gain $1,017.279 d. Return on Plan Assets At October 31 1998 1999 Plan assets (open) $2,088.419 $2,337.713 Actual ROA 291.895 324.716 Actual % ROA 13.98% 13.89% Expected % ROA 9.50% 8.75% The actual return on plan assets was 13.98% in 1998 compared to the assumed 9.5% and the plan earned 13.89% in 1999 whereas the company assumed 8.75%. The
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This note was uploaded on 03/09/2011 for the course ACTG 516 taught by Professor Staff during the Spring '08 term at Ill. Chicago.

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chapter 12 solution - Chapter 12 Solutions Problem Overview...

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