Question

The following data are available pertaining to Household Appliance Company's retiree health care plan for 2021:

Number of employees covered 2
Years employed as of January 1, 2021 4 [each]
Attribution period 25 years
Expected postretirement benefit obligation, Jan. 1 $67,000
Expected postretirement benefit obligation, Dec. 31 $70,000
Interest rate 5%
Funding none

Required:
a. What is the accumulated postretirement benefit obligation at the beginning of 2021?
b. What Is Interest cost to be included in 2021 postretirement benefit expense?
c. What is service cost to be included in 2021 postretirement benefit expense?
d. Prepare the journal entry to record the postretirement benefit expense for 2021.

Answer 1

Task a:

Answer: $10,720

Task b:

Answer: $536

Task c:

Answer: $2,800

Task d:

Answer:

Debit: Post retirement benefit expense ($536 + $2,800) $3,336

Credit: Post-retirement benefit liability ($536 + $2,800) $3,336

Step-by-step explanation:

Task a:

What is the accumulated post-retirement benefit obligation at the beginning of 2021?

Accumulated post-retirement benefit obligation = $67,000 × 4/25

Accumulated post-retirement benefit obligation = $10,720

Task b:

What Is Interest cost to be included in 2021 post-retirement benefit expense?

Interest cost = Accumulated post-retirement benefit obligation × 5%

Interest cost = $10,270 × 5%

Interest cost = $536

Task c:

What is service cost to be included in 2021 post-retirement benefit expense?

Ending post-retirement benefit obligation attributed service - 2021 = $70,000 × 1/25 = $2,800 = service cost.

Service cost = $2,800

Task d:

Prepare the journal entry to record the post-retirement benefit expense for 2021.

Debit: Post retirement benefit expense ($536 + $2,800) $3,336

Credit: Post-retirement benefit liability ($536 + $2,800) $3,336

Note: Interest cost and service cost are expenses, therefore, an expense and a liability will be created.