AJ Ltd is engaged in the business of trading of chemicals having a net worth of 150 crores. The company's profitability is good and hence the…

(i) Computation of benefit attributed to prior years and current year: Year 1 2 3 4 5 Benefit attributed to: Prior years 131 262 393 524 Current year (Refer W.N.1) 131 131 131 131 131 Total (i.e. current and prior years) 131 262 393 524 655 a. Computation of the obligation for an employee who is expected to leave at the end of year 5 (taking discount rate of 10% p.a.) Year 1 2 3 4 5 Opening obligation (A) - 89 196 324 475 Interest at 10% (B = A X 10%) - 9 20 32 47 Current service cost (C) (Refer WN 2) 89 98 108 119 131 Closing obligation D = (A+B+C) 89 196 324 475 653 Figures have been rounded off in the above table. Working Notes: 1. A lump sum benefit is payable on termination of service and equal to 1 per cent of final salary for each year of service. The salary in year 1 is 10,000 and is assumed to increase at 7% (compound) each year. The year on year salary would be as follows: Year 1 2 3 4 5 Salary 10,000 10,700 (10,000 x 107%) 11,449 (10,700 x 107%) 12,250 (11,449 x 107%) 13,108 (12,250 x 107%) Accordingly, for the purpose of above-mentioned employee benefit, 1% of final salary to be considered for each year of service would be - 131. 2. Computation of current service cost: Year 1 2 3 4 5 1% salary at the end of year 5 131 PV factor at the end of each year to be considered at 10% p.a. (E) 0.683 0.751 0.826 0.909 1.000 PV at the end of each year 89 (131 x E) 98 (131 x E) 108 (131 x E) 119 (131 x E) 131 (131 x E) Accordingly, for the purpose of above-mentioned employee benefit, 1% of final salary to be considered for each year of service would be - 131.