Question

Classified Electronics has an unfunded retiree health care plan. Each of the company’s three employees has been with the firm since its inception at the beginning of 2017. As of the end of 2018, the actuary estimates the total net cost of providing health care benefits to employees during their retirement years to have a present value of $56,000. Each of the employees will become fully eligible for benefits after 26 more years of service but aren’t expected to retire for 35 more years. The interest rate is 5%.

Required:
1. What is the expected postretirement benefit obligation at the end of 2018?
2. What is the accumulated postretirement benefit obligation at the end of 2018?
3. What is the expected postretirement benefit obligation at the end of 2019?
4. What is the accumulated postretirement benefit obligation at the end of 2019?

Answer 1

1	Expected Postretirement benefit obligations 2018	$56,000
2	Accumulated Postretirement benefit obligations 2018	$4,000
3	Expected Postretirement benefit obligations 2019	$58,800
4	Accumulated Postretirement benefit obligations 2019	$5,880

Explanation;  

1. $56,000 is given

2. APBO 2018 = EPBO × Fraction Earned

= $56,000 × 2 / [2 +26] = $4,000

3. EPBO 2019 = EPBO 2018 × Accure Interest

= $56,000 × 1.05 = $58,800

4 . APBO 2019 = EPBO 2019 × Fraction Earned

= $58,800 × 3/ 30 = $5,880