Question

On January 1, 2016, Flash and Dash Company adopted a healthcare plan for its retired employees. To determine eligibility for benefits, the company retroactively gives credit to the date of hire for each employee. The following information is available about the plan: Service cost $30,000 Accumulated postretirement benefit obligation (1/1/16) 120,000 Expected return on plan assets 0 Amortization of Prior service cost 10,000 Payments to retired employees during 2016 5,000 Interest rate 10% Average remaining service period of active plan participants (1/1/16) 12 years Required: 1. Compute the OPRB expense for 2016 if the company uses the average remaining service life to amortize the prior service cost. 2. Prepare all the required journal entries for 2016 if the plan is not funded.

Answer 1

STEP 1 :

Flash and Dash Company adopted a healthcare plan for its retired employees. It will compute its post retirement expenses as :

Interest cost = Accumulated post retirement benefit obligation * Interest rate

= $ 120,000 * 10 %

= $ 12,000

STEP 2 :

Calculate OPRB expenses

As OPRB(other post retirement benefits) is not funded, its expected return on plan assets is $0

Post retirement benefit expense
Service cost	$ 30,000
Add : interest cost	$ 12,000
Amortization of prior service cost	$ 10,000
Amortization of net gain	0
Less : expected return on plan assets	0
OPRB EXPENSES	$ 52,000

STEP 3 : Flash and Dash Company recognises the accumulated post retirement benefit obligation on January 1, 2016 as

Date	Particulars	Debit	Credit
2016	Other comprehensive income: prior service cost	$120,000
	Accrued post retirement benefit cost		$120,000

Flash and Dash Company records the expenses as :

Date	Particulars	Debit	Credit
2016	Post retirement benefit expenses	$ 52,000
	Accrued post retirement benefit cost		$ 52,000

Flash and dash company records the payment of retirement as :

Date	Particulars	Debit	Credit
2016	Accrued Post retirement benefit cost	$ 5,000
	Cash		$ 5,000

It reduced the prior service cost from accumulated other comprehensive income. So record the prior service cost and net income as :

Date	Particulars	Debit	Credit
2016	Accrued post retirement benefit cost	$ 10,000
	Other comrehensive income: prior service cost		$ 10,000

Accrued Post retirement benefit cost is calculated as:

Accrued Post retirement benefit cost
Accumulated Post retirement benefit obligation balance on 1-1-2016	$ 120,000
Add : Expenses	$ 52,000
Less : Prior service cost	$ 10,000
Less : Payment of retirement for 2016	$ 5,000
Accumulated Post retirement benefit obligation balance on 31-12-2016	$ 157,000

At the end of the year ,post retirement benefit obligation is calculated as ;

Post retirement benfit obligation
Accumulated post retirement benefit obligation balance on 1-1-2016	$ 120,000
Add : Service cost	$ 30,000
Add : Interest cost	$ 12,000
Less : payment of retirement for 2016	$ 5,000
Accumulated post retirement benefit obligation balance on 31-12- 2016	$ 157,000