Question

Century-Fox Corporation's employees are eligible for postretirement health care benefits after both being employed at the end of the year in which age 60 is attained and having worked 20 years. Jason Snyder was hired at the end of 1998 by Century-Fox at age 33 and is expected to retire at the end of 2026 (age 61). His retirement is expected to span five years (unrealistically short in order to simplify calculations). The company's actuary has estimated the net cost of retiree benefits in each retirement year as shown below. The discount rate is 5%. The plan is not prefunded. Assume costs are incurred at the end of each year. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Year Expected Age Net Cost 2027 62 $ 4,100 2028 63 4,500 2029 64 2,400 2030 65 2,600 2031 66 2,900

Required:

2. Calculate the present value of the net benefits as of the expected retirement date.

3. With respect to Snyder, what is the company's expected postretirement benefit obligation at the end of 2021?

4. With respect to Snyder, what is the company's accumulated postretirement benefit obligation at the end of 2021?

5. With respect to Snyder, what is the company's accumulated postretirement benefit obligation at the end of 2022?

6. What is the service cost to be included in 2022 postretirement benefit expense?

7. What is the interest cost to be included in 2022 postretirement benefit expense?

8. Show how the APBO changed during 2022 by reconciling the beginning and ending balances.

Answer 1

Answer:-

2)

Year	Age	Net cash(A)	Present Value of $ 1(n=1-5;i-5%)(B)	Present value (C)=(A*B)
2027	62	$4,100	0.95238	$3,904.76
2028	63	$4,500	0.90703	$4,081.63
2029	64	$2,400	0.86384	$2,073.21
2030	65	$2,600	0.82270	$2,139.03
2031	66	$2,900	0.78353	$2,272.23
TOTAL	$14,470.86

3) The EPFO( Expected Postretirement Benefit Obligation) is the present value of the Lump sum net benefits.

The present value of $1 rate of 5% for 5 periods is 0.78353

EPFO at the end of 2021= present value of Lump sum net benefit

=$14,470.86 x 0.78353

=$11,338

4) APBO (Accumulted Postretirement Benefit Obligation) at the end of 2021= EPBO x (Full eligibility period /Attribution period)

= $11,338 x (23 years (from 1998 to 2021)/26 years(from1998 to 2024)

=$10,030

5) The EPBO is the present value of Lump Sum net benefits

The present value of $1 at rate of 5% for 4 periods is 0.82270

EPBO at the End of 2022 = Present value of Lump-Sum net benefit

=$14,470.86 x 0.82270

=$11,905

APBO at the End of 2022= EPBO x (Full Eligibility period/Attribution period)

=$11,338 x (24 years ( from 1998 to 2022)/26 years (from 1998 to 2024))

=$10,466