Exhibit 20-3 The Grace Company adopted a defined benefit pension plan on January 1, 2010, and prior service credit was granted to employees.The present value of those benefits was calculated to be $1, 351, 800 at that date.The service cost is funded in full at the end of each year, plus an additional amount of $220, 000 is funded each year-end.The unrecognized prior service cost is being amortized by the straight-line method over the remaining 10-year service life of the company's active employees.Additional information relating to the company's pension plan is presented below:
$\begin{array}{lll}
&2010&2011\
\text { Service cost (annual) } & \$ 95,000 & \$ 105,000 \
\text { Unrecogrized prior service cost } & & \
\text { amortization } & 135,180 & 135,180 \
\text { Interest cost } & 10 \% & 10 \% \
\text { Expected (and actual) return on plan assets } & 10 \% & 10 \%
\end{array}$

- Refer to Exhibit 20-3.What is the correct amount of the projected benefit obligation as of December 31, 2011?

Question

Exhibit 20-3 The Grace Company adopted a defined benefit pension plan on January 1, 2010, and prior service credit was granted to employees.The present value of those benefits was calculated to be $1, 351, 800 at that date.The service cost is funded in full at the end of each year, plus an additional amount of $220, 000 is funded each year-end.The unrecognized prior service cost is being amortized by the straight-line method over the remaining 10-year service life of the company's active employees.Additional information relating to the company's pension plan is presented below:
$\begin{array}{lll}
&2010&2011\
\text { Service cost (annual) } & \$ 95,000 & \$ 105,000 \
\text { Unrecogrized prior service cost } & & \
\text { amortization } & 135,180 & 135,180 \
\text { Interest cost } & 10 \% & 10 \% \
\text { Expected (and actual) return on plan assets } & 10 \% & 10 \%
\end{array}$

- Refer to Exhibit 20-3.What is the correct amount of the projected benefit obligation as of December 31, 2011?

Quizplus · Accepted Answer

The projected benefit obligation (PBO) as of December 31, 2011, can be calculated by considering the initial PBO, service costs, interest costs, and amortization of the unrecognized prior service cost. The initial PBO is $1,351,800. For 2010, add the service cost of $95,000 and interest (10% of $1,351,800 = $135,180), and subtract the amortization of the unrecognized prior service cost ($135,180). For 2011, add the service cost of $105,000, interest (10% of the adjusted PBO from 2010), and subtract the amortization of the unrecognized prior service cost again. The calculation shows the PBO growing each year due to these additions and subtractions, leading to the correct answer of $1,845,178.

Exhibit 20-3 the Grace Company Adopted a Defined Benefit Pension