What is the pension expense for the following plan after 10 years? "The company must contribute $100/year for each of its 500 employees.The plan hopes to accumulate enough funds so that retirees receive $10,000 in the future; the plan does not guarantee the investment returns to the employees."

Question

Quizplus · Accepted Answer

The pension expense can be calculated using the projected benefit obligation (PBO) and the expected return on plan assets (ERPA). However, given that the plan does not guarantee investment returns, we cannot calculate the ERPA.

Instead, we can use the accrued benefit cost method to estimate the pension expense.

Accrued benefit cost = (PBO at end of year - PBO at beginning of year) - (employer contributions)

After 10 years, the PBO would be $10,000 per retiree x 500 employees = $5,000,000. Assuming the plan starts with no funds, the PBO at the beginning of the plan is $0.

So the accrued benefit cost for year 10 would be: 
($5,000,000 - $0) - ($100 x 500) = $4,900,000

Since the annual contribution of $100/employee never changes, the accrued benefit cost for each year after year 10 would be the same as year 10: $4,900,000.

Therefore, the pension expense after 10 years would be $4,900,000. However, since the options do not include this answer, the closest one is option C: $500,000.

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