headquartered in hong kong cathay pacific is one of the world rsquo s leading airlin 600807

Comprehensive pension review problem: Cathay Pacific

Headquartered in Hong Kong, Cathay Pacific is one of the world’s leading airlines. The disclosures shown below are taken from Note 19 in the Company’s 2010 annual report.

Required

(a) Describe what is meant by service cost and interest cost.

(b) How much pension expense does Cathay Pacific report in 2009 and 2010 for its defined benefit plans?

(c) Cathay Pacific reports a HK$518 million expected return on plan assets as an offset to 2010 pension expense. How was this amount determined? What is the actual gain or loss realized on its 2010 plan assets? What is the purpose of using this estimated amount instead of the actual gain or loss?

(d) What factors affected Cathay Pacific’s 2010 pension liability? What factors affected its 2010 plan assets?

(e) What does the term “funded status” mean? What is the funded status of the pension plans over the previous five years, from 2006 until 2010?

(f) The company reduced its discount rate from 4.8% in 2009 to 4.4% in 2010. What effect(s) did this change have on the balance sheet and the income statement?

(g) Assume that Cathay Pacific decreased its estimate of expected annual wage increases used to determine its defined benefit obligations in 2010. What effect(s) does this decrease have on its financial statements? In general, how does such a decrease affect income?

(h) What journal entry was needed to record pension plan expense in 2010 for Cathay’s defined contribution plans?