PROBLEM 18-6 Woodstock Company

Woodstock Company has established a defined benefit pension plan for the employees. Annual
payments under the pension plan are equal to an employee’s highest lifetime salary multiplied by 2%
multiplied by number of years with the entity. As of the end of 2017, an employee had worked for
Woodstock Company for 10 years. The current salary of the employee is P500,000. The employee is
expected to retire in 25 years and the salary increases are expected to average 3% per year during that
period. The employee is expected to live for 15 years after retiring and will receive the first annual
pension payment one year after retirement. The discount rate is 8%. The relevant present value and
future value factors are:

Future value of 1 at 3% for 25 periods 2.094

PV of an ordinary annuity of 1 at 8% for 15 periods 8.559
PV of 1 at 8% for 25 periods 0.146

Required:

Determine the projected benefit obligation on December 31, 2017.

Solution:

Current salary P 500,000

Future value of 1 at 3% for 25 periods 2.094

Future salary P1,047,000

Annual benefit (1,047,000 x 2% x 10) P 209,400

PV of an ordinary annuity of 1 at 8% for 15 periods 8.559

Present value, Dec. 31, 2042 P1,792,255

PV of 1 at 8% for 25 periods 0.146

Project benefit obligation P 261,669