Chapter 17, Problem 17.18P

(1)

To determine

Other postretirement benefits: The postretirement benefits which are provided by employers, other than pensions, like medical insurance, life insurance, and legal services, and healthcare benefits, are referred to as other postretirement benefits.

Accumulated benefit obligation (ABO): This is the estimated present value of future retirement benefits, accumulated based on the current compensation levels.

To draw: The time line that depicts S’s attribution period for retiree benefits and expected retirement period.

Explanation of Solution

Draw the timeline.

Figure (1)

(2)

To determine

To calculate: The present value of the net benefits as of expected retirement date.

Explanation of Solution

Calculate the present value of net benefits.

Calculation of present value of net benefits
Year	Net Cost (a)	Present Value of $1 (n=1-5; i=6%) (b)	Present value $\left(\text{c}\right)\text{=}\left(\text{a}\right)\text{×}\left(\text{b}\right)$
2022	$4,000	0.94340	$3,774
2023	$4,400	0.89000	$3,916
2024	$2,300	0.83962	$1,931
2025	$2,500	0.79209	$1,980
2026	$2,800	0.74726	$2,092
Total			$13,693

Table (1)

Note: Refer Table 2 in Appendix for the present value factor of $1.

Conclusion

Therefore, the present value of the net benefits as of expected retirement date is$13,693.

(3)

To determine

To calculate: Company’s expected postretirement benefit obligation at the end of 2016 with respect to S.

Explanation of Solution

The EPBO is the present value of lump-sum net benefits.

The present value of $1 at the rate of 6% for 5 periods is 0.74726 (Refer to Table 2 in Appendix).

$\begin{array}{c}\text{EPBO at the end of 2016= Present Value of Lump-sum net benefit}\\ \text{=}\text{\$13,693}\times 0.74726\\ =\$10,232\end{array}$

Conclusion

Therefore, the expected postretirement benefit obligation(EPBO) at the end of 2016 is$10,232.

(4)

To determine

To calculate: The Company’s accumulated postretirement benefit obligation at the end of 2016 with respect to S.

Explanation of Solution

Calculate the accumulated postretirement benefit obligation.

$\begin{array}{c}\text{APBO at the end of 2016}=\text{EPBO}\times \frac{\text{Full eligibility period}}{\text{Attribution period}}\\ =\text{\$10,232}\times \frac{\text{23 years}\left(\text{From}\text{1993 }\text{to}\text{2016}\right)}{\text{26 years}\left(\text{From}\text{1993 }\text{to}\text{2019}\right)}\\ =\$9,051\end{array}$

Conclusion

Therefore, the accumulated postretirement benefit obligation (APBO) at the end of 2016 is$9,051.

(5)

To determine

To calculate: Company’s accumulated postretirement benefit obligation at the end of 2017 with respect to S.

Explanation of Solution

Calculate APBO at the end of 2017.

$\begin{array}{c}\text{APBO at the end of 2017}=\text{EPBO}\times \frac{\text{Full eligibility period}}{\text{Attribution period}}\\ =\text{\$10,846}\text{(1)}\times \frac{\text{24 years}\left(\text{From}\text{1993}\text{to}\text{2017}\right)}{\text{26 years}\left(\text{From}\text{1993}\text{to}\text{2019}\right)}\\ =\$10,012\end{array}$

Working Note:

Calculate company’s expected postretirement benefit obligation at the end of 2017.

The EPBO is the present value of lump-sum net benefits.

The present value of $1 at the rate of 6% for 4 periods is 0.79209 (Refer to Table 2 in Appendix).

$\begin{array}{c}\text{EPBO at the end of 2017= Present Value of Lump-sum net benefit}\\ \text{=}\text{\$13,693}\times 0.79209\\ =\$10,846\end{array}$ (1)

Conclusion

Conclusion: Therefore, the accumulated postretirement benefit obligation(APBO) at the end of 2017 is$10,012.

(6)

To determine

To calculate: The service cost to be included in 2017 postretirement benefit expense.

Explanation of Solution

Calculate the service cost for 2017.

$\begin{array}{c}\text{Service cost for 2017 = EPBO at the end of 2017}\times \frac{\text{Full eligibility period}}{\text{Attribution period}}\\ =\text{\$10,846}\times \frac{\text{1 year}\left(\text{For}\text{2017}\right)}{\text{26 years}\left(\text{From}\text{1993 }\text{to}\text{2019}\right)}\\ =\$417\end{array}$

Conclusion

Therefore, the service cost to be included in 2017 postretirement benefit expense is $417.

(7)

To determine

To calculate: The interest cost to be included in 2019 postretirement benefit expense.

Explanation of Solution

Calculate the interest cost for 2017.

$\begin{array}{c}\text{Interest cost for 2017 = APBO at the end of 2016×Discount rate}\\ \text{=\$9,051×6\%}\\ =\$543\end{array}$

Conclusion

Therefore, the interest cost to be included in 2017 postretirement benefit expense is $543.

(8)

To determine

To show: The changes APBO during 2017 by reconciling the beginning and ending balances.

Explanation of Solution

The following table shows the APBO at the end of 2017.

Calculation of APBO
APBO at the beginning of 2017	$9,051
Add: Service cost	$417
Add: Interest cost	$543
APBO at the end of 2017	$10,011

Table (2)

Note: The difference of $1 in APBO at the end of 2017 is due to rounding. Refer to Requirements (4), (5), and (6) for APBO at the beginning, service cost, and interest cost.