Definitions and Pension Costs. The Caldwell Manufacturing Corpora- tion – in operation for the past

Definitions and Pension Costs. The Caldwell Manufacturing Corpora- tion – in operation for the past 23 years – decided late in 19A to adopt, be- ginning on January 1, 19B, a funded pension plan for its employees. The pen- sion plan was to be noncontributory and would provide for vesting after five years of service by each eligible employee. A trust agreement was entered into whereby a large national insurance company would receive the yearly pension fund contributions and administer the fund.

Management through extended consultation with the fund trustee, internal

accountants, and independent actuaries, arrived at these conclusions:

(a) The normal pension cost for 19B would be $30,000.

(b) The present value of the past service cost at the date of inception of the pen- sion plan (January 1, 19B) is $200,000.

(c) Because of the large sum of money involved, the past service costs would be funded at a rate of $23,365 per year for the next fifteen years. The first pay- ment is not due until January 1, 19C.

(d) In accordance with Accounting Principles Board Opinion No.8, the “unit credit method” of accounting for the pension costs would be followed. Pen- sion costs would be amortized over a ten-year period. The ten-year accrual factor is $29,805 per year. Neither the maximum nor minimum amortization amounts as prescribed by Accounting Principles Board Opinion No.8 would be violated.

(e) Where applicable, an 8% interest rate would be assumed.

Required: (1) Definition of: (a) normal pension cost; (b) past service cost. (2) The amounts that would be reported in the company's: (a) 19B income statement for Pension Expense ; (b) balance sheet as of December 31, 19B, for Deferred Past Service Costs and Due to Pension Trustee; (c) notes for both of

these financial statements. [If the amount cannot be calculated, use $xxx.]

(3) The amounts that would be reported in the company's: (a) 19C income statement for Pension Expense and Interest on Unfunded Past Service Costs;

(b) balance sheet as of December 31, 19C, for Deferred Past Service Costs and Due to Pension Trustee ; (c) notes for both of these financial statements. [If the amount cannot be calculated, use $xxx.]

(NAA adapted)

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