Question

Postretirement Benefits

Peyton Approved has revised its postretirement plan. It will now provide health insurance to retired employees. Management has requested that you report the short- and long-term financial implications of this.

The company is currently employing 60, and actuaries estimate that the company has a pension liability of $107,041.70. The estimated cost of retired employees’ health insurance is $43,718.91. Prepare adjusting entries for the pension liability and the health insurance liability.

Answer 1

POST-EMPLOYMENT EMPLOYEE BENEFITS

Short term accounting

(assuuming pension liability exclude health insurance liablity ( no need to deduct it) and for 60 employees in total(so no need to multiple it)

• For Pension Liability

Employee cost Dr $107041.70

To Outstanding Pension Liability $107041.70

( Being pension liability recorded)

• For Health Insurance Liability

Employees Cost Dr. $43718.91

To Outstanding Health Liability $43718.91

( being health insurance liability recorded)

For Long term Accounting

Two types of pension schemes:

1. Defined contribution plan – Company contributes to a scheme
2. Defined benefit plan – Company pays out benefits on retirement (e.g. typical private sector retirement pension plans)

Defined Contribution Plan

Accounting Treatment

• Pension contributions payable are expensed to P&L
• Balance Sheet will contain prepayments (asset) or accruals (liability) to account for timing mismatch between cash contributions and income statement expenses.

Data seems insuffient for second case