Solve Problem 13-16 Raider Company

BA 114.2 Employee Benefits Notes

Solve Problem 13-16 Raider Company

Definitions:

• FV of plan assets (FVPA) – is the source of fund set aside in meeting future benefit payments.

• Projected benefit obligation (PBO) or defined benefit obligation – is the PV of expected future payments required to settle the obligation arising from employee service in the current and prior periods.

• Prepaid or Accrued benefit cost – is the item that appears on the FS of the employer entity.

o Prepaid benefit cost = FVPA > PBO (Non-current asset)

o Accrued benefit cost = FVPA < PBO (Non-current liability)

• Current service cost – is the increase in the PV of the defined benefit obligation resulting from employee service in the current period.

• Interest cost – is the increase during a period in the PV of the defined benefit obligation which arises because the benefits are one period closer to settlement. (This is based on the beginning balance of the defined benefit obligation.)

• Return on plan assets – is interest, dividend and other revenue derived from the plan assets + unrealized gain/loss on plan assets – plan administration costs – tax payable.

o Expected return on plan assets – is a component in the computation of benefit expense. (This is based on market expectations at the beginning of the period, for returns over the entire life of the related obligation.)

o Actual return on plan assets – increases the FV of plan assets.

o Actuarial gains/loss – difference between the actual return and expected return on plan assets.

 Actuarial gains =Actual Return > Expected Return

 Actuarial losses = Actual Return < Expected Return

o Corridor approach: [Net cumulative UAGL (beginning balance) less (10% of PBO or FVPA whichever is higher)] divided by average remaining service period.

• Contributions to the fund will increase the FVPA and Prepaid/Accrued Benefit Cost and decrease Cash.

Solve Problem 13-23 Milan Company

• Past service cost (PSC) – is the cost to an entity under a defined benefit plan for services rendered by employees in prior periods resulting from the introduction of a retirement benefit plan or amendment of an existing plan.

o PSC is expensed immediately when additional benefits vest immediately.

o PSC is amortized on a straight line basis over the period until the benefits