[vodrldnr]

On September 1, year 2, Howe Corp. offered special termination benefits to employees who had reached the early retirement age specified in the company’s pension plan. The termination benefits consisted of lump-sum and periodic future payments. Additionally, the employees accepting the company offer receive the usual early retirement pension benefits. The offer expired on November 30, year 2. Actual or reasonably estimated amounts at December 31, year 2, relating to the employees accepting the offer are as follows:

• Lump-sum payments totaling $475,000 were made on January 1, year 3.
• Periodic payments of $60,000 annually for three years will begin January 1, year 4. The present value at December 31, year 2, of these payments was $155,000.
• Reduction of accrued pension costs at December 31, year 2, for the terminating employees was $45,000.
In its December 31, year 2 balance sheet, Howe should report a total liability for special termination benefits of

$475,000
$585,000
$630,000
$655,000

Answer is $630,000

But I chose 655,000

My calculation is following

Lump sum payment : 475,000
PV of periodic payment : 155,000
Total : 630,000

Then I subtracted 45,000 from Total 630,000 because the problem says that “Reduction of accrued cost”.
I think J/E for “Reduction of accrued cost” is like

DR Pension liability xxxx | CR Pension expense xxxx

Due to this J/E, I thought that I need to subtract 45,000 to get the total liability as of B/S date …
What part I am getting wrong ?

Can someone help me ?

[wombataholic]

The question is asking specifically about special termination benefits, not total pension liability.

So while there's still a 45,000 reduction in accrued pension costs for year 2, it doesn't affect the special termination benefits total of 630,000.

Licensed CPA
Passed each section on the first try with Ninja Notes/MCQ/Audio

[Mscfisher]

why does the calculation use 180 and not the PV of 155?

[vodrldnr]

@wombataholic

Thank you for reply. Then My calculation is for total liability for all transaction incurred for the year?

@Mscfisher

155K was used for my calculation.

[Author]

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