Question

Prince Distribution Inc. has an unfunded postretirement benefit plan. Medical care and life insurance benefits are provided to employees who render 10 years service and attain age 55 while in service. At the end of 2013, Jim Lukawitz is 33. He was hired by Prince at age 29 (4 years ago) and is expected to retire at age 62. The expected postretirement benefit obligation for Lukawitz at the end of 2013 is $42,000 and $48,000 at the end of 2014. Calculate the accumulated postretirement benefit obligation at the end of 2013 and 2014 and the service cost for 2013 and 2014 as pertaining to Lukawitz.

Answer 1

Answer:

a. Accumulated post-retirement benefit obligation at the end of 2013 and 2014 are $6,461.54 and $9,230.77 respectively.

b. Service costs of 2013 and 2014 are $1,615.38 and $1,846.15 respectively.

Explanation:

a. Calculation of accumulated post-retirement benefit obligationat the end of 2013 and 2014

Attribution period = (55 - 29) = 26 years

Accumulated post-retirement benefit obligation (APRBO) at a year end equal to the expected post-retirement benefit obligation multiply by the division of the number of years he was hired and attribution period. That is,

APRBO at the end of 2013 = $42,000 × (4 ÷ 26) =  $6,461.54  

APRBO at the end of 2014 = $48,000 × (5 ÷ 26) =  $9,230.77

Therefore, accumulated post-retirement benefit obligation (APRBO) at the end of 2013 and 2014 are $6,461.54 and $9,230.77 respectively.

b. Calculation of the service cost for 2013 and 2014

Service cost for a particular year is equal to expected post-retirement benefit obligation for the year divided by the attribution period. Therefore, we have:

Service cost of 2013 = 42,000 ÷ 26  = $1,615.38

Service cost of 2014 = 48,000 ÷ 26  = $1,846.15

Therefore, service costs of 2013 and 2014 are $1,615.38 and $1,846.15 respectively.