Question

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10.)	Calculate the total prior service cost using the following information. Write your answer on the cover sheet.
	FACTS:
	The company has a defined benefit plan
	Seth's salary at the end of 2017	$    135,000
	Retirement expected after	45	years of service
	Retirement period is expected to be	20	years
	Interest Rate	4.0%
	Benefits are calculated as a formula as the product of:
	Service already provided	15	years
	Percentage	2.0%
	Final year's salary is projected to be	$    250,000
	AFTER THE PLAN IS INITALLY ADOPTED A CHANGE IS MADE TO THE BENEFITS CALCULATION AS FOLLOWS:
	Percentage of service yrs. & salary	2.5%	Changed from 2.0% previously
	Change made at the beginning of	2017

Answer 1

Calculations of total prior service cost :-

Benefits = sercvice already provided*petcentage*final year

salary

Benefits =15*2%*250000

=75000 for 15years

Now changes is made in benefits calculations so now calculations :

Service already provided *2.5%*final salary

=14*2.5%*250000

=87500

Total Prior service cost =

salary = 135000

Benefit = 75000

new benefit=12500(87500-75000)

Total cost=222500 dollar

+ retirement interest = 115000*20*4%=92000

So total prior service cost = 225000+92000

=317000