Thinking Technology (TT) recently purchased a subsidiary. In performing a comprehensive audit of the subsidiary’s accounting system, Kim Kelly, internal audit manager for TT, discovered that the new subsidiary did not properly record pension related assets and liabilities, subject to GAAP. The net present value of the subsidiary’s pension assets was $15.5 million, the vested benefit obligation was $12.9 million, and the projected benefit obligation was $17.4 million. Kim reported this audit finding to Jeff Howard, the newly appointed controller of the new subsidiary. A few days later, Jeff contacted Kim for possible options to balance the deficit by saying “Can’t we eliminate the negative income effect of our pension dilemma simply by terminating the employment of non-vested employees before the end of our fiscal year?” Requirements: (a) Detail explanations with supporting references of the functions/purposes of employee pension plans (b) Provide evidences of why or why not vested and non-vested employees are relevant to long-term business success? (c) How should Kim professionally respond to Jeff’s remark about firing non-vested employees? (d) What other options (at the least two) would you suggest to Kim and Jeff?
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