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Exercise 18-9

Exercise 18-9. Postretirement benefits; negative plan amendment. Southeast Technology provides postretirement health care benefits to employees. On January 1, 2003, the following plan-related data were available:. ($ in 000s). On January 1, 2003:.

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Exercise 18-9

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  1. Exercise 18-9 Postretirement benefits; negative plan amendment

  2. Southeast Technology provides postretirement health care benefits to employees. • On January 1, 2003, the following plan-related data were available:

  3. ($ in 000s)

  4. On January 1, 2003: • Southeast amends the plan in response to spiraling health care costs. • The amendment establishes an annual maximum of $3,000 for medical benefits that the plan will provide.

  5. The actuary determines: • The effect of this amendment is to decrease the APBO by $80,000. • Other facts given: • Management amortizes prior service cost on a straight-line basis. • Interest rate is 8%. • Service cost for 2003 is $114,000.

  6. Required: • Calculate the prior service cost amortization for 2003. • Calculate the postretirement benefit expense for 2003. • Suppose Southeast had an unrecognized transition obligation of $120,000 at January 1. Calculate the prior service cost amortization for 2003.

  7. Requirement 1Prior Service Cost Amortization • Offset first by unrecognized prior service cost, then use straight-line basis to amortize the negative over the period to full eligibility (50,000 – 80,000)/15= -2,000

  8. Requirement 2Calculate the postretirement benefit expense for 2003 (in 000’s) Service Cost 114 Interest Cost (530 x 8%) 42.4 Return on Assets 0 Amortization of: transition of obligation 0 prior service cost (2) Post Retirement Expense 154.4

  9. Requirement 3 • Suppose Southeast had an unrecognized transition obligation of $120,000 at January 1. Calculate the prior service cost amortization for 2003.**Since a negative amendment should first offset unrecognized prior service cost then unrecognized transition obligation: (50,000 – 80,000 + 120,000) / 20 = 4,500 The unrealized prior service cost would be completely offset.

  10. SFAS No. 106:Employers Accounting for Postretirement Benefits Other Than Pensions • Establishes accounting standards for employers’ accounting for postretirement benefits other than pensions. This statement focuses principally on postretirement health care benefits significantly changing the pay-as-you-go (cash) basis by requiring accrual, during the years that the employee renders the necessary service, of expected cost of providing those benefits to an employee and the employee’s beneficiaries and covered dependents.

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