Compute the total liability for termination benefits as of December 31, 2016, assuming all employees will accept the offer. The discount rate to be used is 10%.
On August 31, 2016, ABC Co offered an early retirement package to employees who have rendered at least 20 years of service to the company. The termination package consisted of the following:
- Lump-sum payment based on December 31 2016 monthly salary level times the number of years in service.
- Periodic future annual payments based on 50% of December 31, 2016, monthly salary level to be received every December 31 starting on December 31, 2018, and end in the year prior to the commencement of the regular pension, which is on the 30th year from the employment of the employee.
- A complimentary watch with an estimated fair value of 85,000 as of August 31, 2016, subject to availability of its cash equivalent, will be given to employees with at least 25 years of service in the company.
- Medical benefits package costing currently at 15,000 and expected to increase by 10% every year. The medical coverage will end on the 30th year from the employment of the employee, which is the commencement of the regular pension payment.
The company has identified 15 employees with a length of service between 20 to 30 years. The current salaries of these employees are:
- Two employees earning 35,000 per month with 28 years in service record.
- Five employees earning 25,000 per month with 25 years in service record.
- Eight employees earning 20,000 per month with 22 years in service record.
The concerned employees were given a letter of invitation for early retirement and were given until November 15, 2016, to decide. Retirement will take effect on January 1, 2017. The two employees with 28 years in service were each issued a service car with a book value of 285,000 at the end of the year. The employees negotiated to purchase the cars at book value, with proceeds beginning from their lumpsum pay, and the company conceded to their request.
Compute the total liability for termination benefits as of December 31, 2016, assuming all employees will accept the offer. The discount rate to be used is 10%.
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