Question

The following data are for Guava Company's retiree health care plan for the current calendar year. Number of employees covered 5 Years employed as of January 1 4 (each) Attribution period 20 years EPBO, January 1 $ 55,000 EPBO, December 31 $ 58,850 Interest rate 7 % Funding and plan assets None What is the correct entry to record postretirement benefit expense for the current year

Answer 1

The correct entry to record postretirement benefit expense for Guava Company includes a service cost of $192.50 and an interest cost of $3,850, summing up to a total expense of $4,042.50. Since there are no contributions to offset the expense, the entire amount should be recorded as an increase in the company's liability.

The question pertains to recording the postretirement benefit expense for the Guava Company's retiree health care plan. When looking at the change in the Expected Post-retirement Benefit Obligation (EPBO), it increased from $55,000 at the beginning of the year to $58,850 at the end of the year, indicating that the expense will include an increase in EPBO.

To calculate the service cost component of the expense, we divide the increase in EPBO ($3,850 = $58,850 - $55,000) by the attribution period (20 years), resulting in an annual service cost of $192.50. The interest cost is calculated by applying the interest rate (7%) to the January 1 EPBO balance, which amounts to $3,850 (7% of $55,000).

The total postretirement benefit expense would therefore be the sum of the service cost and the interest cost: $192.50 (service cost) + $3,850 (interest cost) = $4,042.50. This is the amount that should be recorded as postretirement benefit expense for the current year.

It's important to note that since there is no funding or plan assets mentioned, the total expense is not offset by any actual contributions made to the plan during the year. Thus, the journal entry would be a debit to postretirement benefit expense and a credit to the related liability account.

Answer 2

Postretirement Benefit Expense 4,042.50

Accumulated Postretirement Benefit Obligation 192.50

Interest on Accumulated Postretirement Benefit Obligation 3,850.00

The calculations for the journal entry are as follows:

Service Cost** = (Ending EPBO - Beginning EPBO) / Attribution period = ($58,850 - $55,000) / 20 years = $1,925

Interest on Accumulated Postretirement Benefit Obligation** = Beginning EPBO * Interest rate = $55,000 * 7% = $3,850

Postretirement Benefit Expense** = Service Cost + Interest on Accumulated Postretirement Benefit Obligation = $1,925 + $3,850 = $4,042.50

Therefore, the correct journal entry to record postretirement benefit expense for the current year is:

Postretirement Benefit Expense 4,042.50

Accumulated Postretirement Benefit Obligation 192.50

Interest on Accumulated Postretirement Benefit Obligation 3,850.00