Use the following information for questions.
The following data are for the pension plan for the employees of Lockett Company.

Lockett's contribution was $1,260,000 in 2011 and benefits paid were $1,125,000.Lockett
estimates that the average remaining service life is 15 years.
-The actual return on plan assets in 2011 was

Question

Use the following information for questions.
The following data are for the pension plan for the employees of Lockett Company.
  
Lockett's contribution was $1,260,000 in 2011 and benefits paid were $1,125,000.Lockett
estimates that the average remaining service life is 15 years.
-The actual return on plan assets in 2011 was

Quizplus · Accepted Answer

The actual return on plan assets can be calculated by subtracting the change in fair value of plan assets from the contributions and benefits paid.

Actual return on plan assets = Lockett's contributions - benefits paid - change in fair value of plan assets
= $1,260,000 - $1,125,000 - (fair value of plan assets at end of year - fair value of plan assets at beginning of year)
We don't have the fair value of plan assets at the beginning and end of the year, but we know that the pension plan has an average remaining service life of 15 years. Since Lockett's contributions were greater than benefits paid, we can assume that the fair value of plan assets increased from the beginning to the end of the year.

Assuming a constant rate of return, we can estimate the fair value of plan assets at the beginning of the year as:
Beginning fair value = (End fair value - Contributions + Benefits paid) / (1 + rate of return)^15
We don't know the rate of return, but we can use the expected rate of return assumption, which is typically around 8%.

Beginning fair value = ($1,260,000 - $1,125,000) / (1 + 0.08)^15
Beginning fair value = $76,210.57

Now we can estimate the change in fair value of plan assets:
Change in fair value = End fair value - Beginning fair value
Change in fair value = Lockett's contributions - benefits paid - $76,210.57
Change in fair value = $1,260,000 - $1,125,000 - $76,210.57
Change in fair value = $58,789.43

Therefore, the actual return on plan assets was $765,000 ($1,260,000 - $1,125,000 - $58,789.43).

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