Mr. A has joined a company XYZ Ltd. on 1st April, 2025. The terms of his appointment was as follows; (i) Mr. A will get - 18,62,764 as annual…

CA Intermediate · Advanced Accounting · PYQS · May 2026
Mr. A has joined a company XYZ Ltd. on 1st April, 2025. The terms of his appointment was as follows; (i) Mr. A will get - 18,62,764 as annual emoluments. (ii) The salary of Mr. A is expected to grow @ 10% per annum. The company also has a policy of giving lump sum payment of 30% of the last drawn annual salary of the employee for each completed year of service if the employee retires after completing minimum 5 years of service. Since the company has inducted Mr. A in the beginning of the year and it is expected that he will complete the minimum five-year term before retiring. Thus, he will get 5 yearly increments. You are required to: (1) Compute the amount that should be charged by XYZ Limited in its Profit & Loss account every year as cost for the Defined Benefit Obligation. (ii) Calculate the current service cost and the interest cost to be charged per year assuming the discount rate is 8% p.a. (P.V. factor for 8% -0.735, 0.794, 0.857, 0.926, 1)

Suggested Answer and Working Notes:

(i) Calculation of Defined Benefit Obligation (DBO) Expected last drawn salary = 18,62,764 x 110% x 110% x 110% x 110% x 110% = 30,00,000 Defined Benefit Obligation (DBO) = 30,00,000 x 30% x 5 = 45,00,000 Amount of 9,00,000 will be charged to Profit and Loss Account of the company every year as cost for Defined Benefit Obligation. (ii) Calculation of Current Service Cost Year Equal apportioned amount of DBO [i.e. 45,00,000/5 years] Discounting @ 8% PV factor Current service cost (Present Value) a b c d = b x c 1 9,00,000 0.735 (4 Years) 6,61,500 2 9,00,000 0.794 (3 Years) 7,14,600 3 9,00,000 0.857 (2 Years) 7,71,300 4 9,00,000 0.926 (1 Year) 8,33,400 5 9,00,000 1 (0 Year) 9,00,000 Calculation of Interest Cost to be charged per year Year Opening balance Interest cost Current service cost Closing balance a b c = b x 8% d e = b + c + d 1 0 0 6,61,500 6,61,500 2 6,61,500 52,920 7,14,600 14,29,020 3 14,29,020 1,14,322 7,71,300 23,14,642 4 23,14,642 1,85,171 8,33,400 33,33,213 5 33,33,213 2,66,787 9,00,000 45,00,000 *Due to approximations used in calculation, this figure is adjusted accordingly.

Topics: AS 15

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