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Maggie Moo, age 40, begins employment with Farm Corporation on January 1, 2020 at a starting salary of $ 40,000. It is expected that Maggie will work for the company for 25 years, retiring on December 31, 2044, when Maggie is 65 years old. It is expected that her salary at retirement will be $ 140,000. Further assume that mortality tables indicate the life expectancy of someone age 65 in 2044 is 12 years.
Farm Corporation sponsors a defined benefit pension plan with the following formula
Annual pension benefit on retirement = 3% of salary for each year of service, or 3% final salary x years of service.
Assume a discount rate of 6%
-Determine the current service cost for Maggie Moo at December 31, 2020.

Question

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The current service cost is calculated as the present value of the pension benefits earned in the current year. Maggie's annual pension benefit at retirement is 3% of her final salary for each year of service, which is 3% x $140,000 x 25 = $105,000 per year. The present value of this annuity for 12 years at a 6% discount rate is calculated, and then the portion attributable to the current year is determined.

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