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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).

 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%