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Hi I come across the below question and I have not been able to find out how to come up with the answer… can you please help?
Company G operates a post employment medical benefit plan for its employees. At 1 Jan and 31 Dec 2007, the actuarial valuations of the related defined benefit oligation were $290,000 and $345,500 respectively. Company G does not use the corridor method in accounting for defined benefit plans.
For 2007, the following facts are relevant:
– the rate used to the obligation is 5.0%
– current and past service costs for the year wer e$45,000 and $20,000 respectively
– an amount of $30,000 was paid by the company to a qualifying insurance policy
– benefits paid during the year totalled $24,000What is the actuarial gain/loss for this plan for 2007?
A. Gain of $24,000
B. Gain of $500
C. Loss of $19,500
D. Gain of $30,500I know the answer to this question but I cannot understand how the answer is reached.
Can you all please help me with this question.
Many thanks.
Evelyn
Are you sure that you have typed correctly the actuarial valuation as at 31 December 2007? You have typed $345,500
Please check it, thanks
Hi Mike
Yes it is 500. Can you please advise how to come to this answer?
Many thanks.
Hi Evelyn
Sorry not to have replied earlier – I didn’t have my workings with me – they were in the hotel.
I’m not 100% sure because my figures only work if there is a misprint in your original post! Or a misprint in the text from which you have taken the question – it can happen.
In my T account for the pension obligation, I have debit entries of 24,000 (benefits paid during the year) and 345,500 (actuarial value of the obligation to carry forward)
In credits, I have 290,000 (obligation brought forward), 14,500 (5% of 290,000 interest cost), 45,000 (current service costs) and 20,000 (past service costs)
The debits add up to 369,500 and the credits add up to 369,500.
To make the answer equal “a gain of 500” one of the credits must be understated – maybe 14,500 should be 15,000 (not possible, because it’s 5% of the brought forward obligation) or 45,000 should be 45,500, or 20,000 should be 20,500.
If any of those figures should be as suggested, the credit side would then add to 370,000 of which the actuary valued the obligation at 345,500 and the amount paid is fixed at 24,000 and, to make the account balance to 370,000 would require a further debit of 500 which would be credited as a gain to the Income Statement
The only other possible correction may be that 24,000 paid is in fact 23,500. That would then allow a debit of 500 to make the account balance to 369,500 and that debit would be credited to Income Statement as a gain
But, if none of those suggestions is applicable, I don’t know what else to suggest
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