In order to help induce Jill Gregory to remain as president of the Reed Company,

Question

In order to help induce Jill Gregory to remain as president of the Reed Company, in 2000 it promises to pay her (or her state) $200,000 per year for the next 15 years - even if she leaves the company or dies. Reed wants to properly record this transaction as deferred compensation but is unsure of how many years it should use to amortize this cost. Moreover, Reed also purchased a "whole life" life insurance policy for Jill, naming the company as the sole beneficiary. Reed wants to ascertain if it can offset the cash surrender value of the policy against the above deferred compensation liability.

Facts: Issue: Conclusion: Authorities: Applying Authorities

Explanation / Answer

The amount payable post retirement to Jill should be amortised on straight line basis over the remaning period of service by the Reed which in the present case is 15 years.

Reed Company can offset the cash surrender value of the policy against the above deferred compensation liability if it intends to keep the policy in force and pay the loan from the death proceeds.

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