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| Problem
3-7 |
|
| Analyzing Pension Plan
Disclosures |
|
| Campbell Soup |
| Refer
to the financial statements of Campbell Soup Company in Appendix A. The Note
on Pension Plans and Retirement Benefits describes computation of pension
expense, projected benefit obligation (PBO), and other elements of the
pension plan (all amounts in millions). |
|
| Required: |
| a. Explain what the service
cost of $22.1 for Year 11 represents. |
| This could be explained as the service
cost/liability to the company created during 2011 or the benefit/credit
employees get for their service in 2011. |
| b. What discount rate did the
company assume for Year 11? What is the effect of Campbell’s change from the
discount rate used in Year 10? |
| The discount rate for year 11 was 8.75% |
| The discount rate for year 10 was 9.00%,
the effect of the reduction in the discount rate from 9.00% to 8.75% led to
the increase in the service cost for year 11. |
| c. How is the “interest on
projected benefit obligation” computed? |
| Interest on projected benefit obligation
(PBO) is computed by multiplying the beginning-period PBO by the discount
rate of 8.75%. |
| d. Actual return on assets is
$73.4. Does this item enter in its entirety as a component of pension cost?
Explain. |
| This item enters as a component of
pension cost because it shows the return on the investment. |
| e. Campbell shows an
accumulated benefit obligation (ABO) of $714.4. What is this obligation? |
| The Accumulated Benefit Obligation (ABO)
is the present value of the obligations that Campbell owes to people who have
retired or are about to retire. |
| f. Identify the PBO amount and
explain what accounts for the difference between it and the ABO. |
| The PBO
is the ‘projected benefit obligation’ – this amount is a projection of what
employees are expected to be earning when they retire. The difference between the ABO and the PBO
is that the ABO is usually a smaller number because it is the amount that the
employer is liable legally, for the present value of payments to be made in
the future but they are based on current wages, where PBO is a projection
based on the wages employees are expected to be earning at the time they
retire. To reflect to true financial
position of the retirement plan, the PBO number is used for the funded status
on the balance sheet. |
| g. Has Campbell funded its
pension expense at the end of Year 11? |
| It does not look like Campbell has funded
its pension expense at the end of year 11. |
| CHECK |
| (b) Year 11 rate, 8.75% |
