Exercise 17-4 Postretirement benefits; determine expense LO17-11 Text: E 17-29 T

Question

Exercise 17-4 Postretirement benefits; determine expense LO17-11 Text: E 17-29 Tomorrow, Inc. provides postretirement health care benefits to employees who provide at least 14 years service and reach age 61 while in service. On January 1, 2016, the following plan-related data were available: (S in millions) Accumulated postretirement benefit obligation $210 Fair value of plan assets none Average remaining service period to retirement 20 years Average remaining service period to full eligibility 15 years On January 1, 2016, Tomorrow amends the plan to provide certain dental benefits in addition to previously provided medical benefits. The actuary determines that the cost of making the amendment Management chooses to amortize the prior service cost retroactive increases the APBO by $30 million. on a straight-line basis. The service cost for 2016 is $61 million. The interest rate is 5%. Required: 1. Calculate the postretirement benefit expense for 2016. 2. Prepare the journal entry to record the expense Problem 17-5 Loss on PBO; present value concepts LO17-3 L017-6 Text: P 17-5 D&C; Advisory's defined benefit pension plan specifies annual retirement benefits equal to: 1.5% x service years x final year's salary, payable at the end of each year. Bobby Flay was hired by D&C; at beginning of 2002 and is expected to retire at the end of 2046 after 45 years' service. His retirement expected to span 18 years. Flay's salary is $80,000 at the end of 2016, and the company's actuary projects his salary to be $250,000 at retirement. The actuary's discount rate is 7%. At the beginning of 2017, changing economic conditions caused the actuary to reassess the applicab discount rate. It was decided that 6% is the approp ate. Required: Calculate the effect of the change in the assumed discount rate on the PBO at the beginning of 20 with respect to Flay Note: 10.059091= present value of an ordinary annuity of $1: n:18, i=7% .131372-present value of $ 1: n=30, i=7% 10.82763-present value of an ordinary annuity of $1: n=18, i-6% .174114 = present value of $ 1: n=30, i-6%

Explanation / Answer

Solution 17-4:

1.

Service cost                                                $61

Interest cost                                                  40.5   [5% x $210 + $30]

Amortization of prior service cost                2       [$30/15 years]

Postretirement benefit expense                   $103.5

2.

APBO ($61 service cost + $40.5 interest cost) = $101.5

The amortization amount is reported as other comprehensive income in the statement of comprehensive income.

2.

APBO ($61 service cost + $40.5 interest cost) = $101.5

The amortization amount is reported as other comprehensive income in the statement of comprehensive income

Solution 17-5:

PBO with previous rate

1.5% x 15 x $250,000 = $56,250

$56,250 x 10.059091 = $565,824

$565,824 x 0.131372 = $74,333

PBO with revised rate

1.5% x 15 x $250,000 = $56,250

$56,250 x 10.82763 = $609,054

$609,054 x 0.174114 = $106,045

Loss on PBO = $106,045 - $74,333 = $31,711

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