Intermediate acct 305

You have joined Member Company as an accounting manager. You were reviewing the financial statements to get yourself familiar with the company. While conducting the review, you had some concerns about their pension assets.

Member Company had pension assets of $14 million and vested pension obligation of $12 million, but the projected benefit obligation was about $16 million. The pension assets were underfunded because the obligations were $16 million compared to the assets of $14 million.

You approached the controller Bill Jensen and said to him, “Bill, while reviewing the financial statements, I noticed that we have a problem with the pension assets being underfunded by $2 million. We have pension assets worth $14 million compared to our outstanding obligations of $16 million. We need to clean that up and put some more funds in the pension assets.”

Bill looked unconcerned. He replied, “I noticed that. No problem! Why don’t we fire the employees who are not vested because the vested pension obligation is $12 million compared to the pension assets of $14 million? What do you think?”

• How should you respond?
• What should you do?