Question

Lender Company provides postretirement health care benefits to employees with at least 10 years of service and who reach the age of 65 while in service. On January 1 of the current calendar year, the following plan-related data were recorded. On January 1 of the current year, Lender amends the plan to provide dental benefits. The actuary determines that the cost of making the amendment increases the accumulated postretirement benefit obligation (APBO) by $20,000,000. Management chooses to amortize this amount on a straight-line basis. The service cost is $40,000,000, and the appropriate interest rate is 10%.What is the total postretirement benefit cost after the amendment?

a) $40,000,000
b) $60,000,000
c) $20,000,000
d) $80,000,000

Answer 1

The total postretirement benefit cost after the amendment is $60,000,000. It consists of the service cost, interest cost, and the amortization of the amendment amount.

Step-by-step explanation:

The total postretirement benefit cost after the amendment is $60,000,000.

The postretirement benefit cost consists of the service cost, interest cost, and the amortization of the amendment amount.

The service cost is $40,000,000 and represents the present value of benefits earned by employees in the current year.

The interest cost is calculated by multiplying the beginning APBO by the discount rate. In this case, the beginning APBO is $0, since it is the first year of the plan, and the discount rate is 10%. Therefore, the interest cost is $0.

The amendment amount of $20,000,000 is amortized on a straight-line basis over the remaining service years of the employees. Since there are 10 years remaining, the annual amortization amount is $20,000,000 / 10 = $2,000,000.

Therefore, the total postretirement benefit cost after the amendment is $40,000,000 (service cost) + $0 (interest cost) + $2,000,000 (amortization) = $60,000,000.