2 Pages Posted: 30 May 2017
Dunlap Corporation has just adopted FAS No. 87, "Employers' Accounting for Pensions." Students are asked to perform a variety of calculations in order to determine the amounts of the pension-related items to be included in the company's income statement and balance sheet. This case requires an understanding of present value concepts. It is intended to be used as part of an initial class on pension accounting and reporting or as the basis for a second class on pensions.
Dunlap Corporation was a small, privately held manufacturer of custom cabinets for the commercial and residential markets. It was incorporated in the Commonwealth of Pennsylvania in November 1994, and commenced operations on January 2, 1995. Corporate headquarters and the company's sole manufacturing plant were located in an industrial park that had been created in urban Philadelphia.
Shortly after the company began business, a matching-funds 401K plan was established for all employees. Management found, however, that few of the hourly employees were taking advantage of the plan, apparently because their need for current income made it difficult to set aside any savings for retirement. As a result, in 1997, management began investigating the establishment of either a defined-contribution or a defined-benefit retirement plan. By year-end, the decision was made to adopt a noncontributory defined-benefit plan, effective January 1, 1998, and to grant retroactive credit to all employees for the period of employment prior to the inception of the pension plan. Of the 110 employees originally hired in January 1995, six left the company in 1996 and four left in 1997. No new employees were hired to replace those who had left. Of the 100 employees remaining, all were approximately 28 years old at the time the pension plan was adopted.
The terms of the plan called for full vesting after five years of service and stipulated mandatory retirement at age 65. Pension benefits of $ 50 a month for each year of service were to be paid to the retiree or to the retiree's beneficiary for a period of 15 years. For fiscal years 1998-2000, Dunlap made contributions to the trustee equal to the maximum deduction allowed for federal income-tax purposes. The trustee invested those funds in a mixture of equity and debt securities that did quite well. The operation of the plan required a number of assumptions—the data and assumptions for the plan, for the three years ended December 31, 2000, were as follows:
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Keywords: pension, fixed income, present value, pension accounting
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