Illustrating the projected unit credit method

On Jan 01, 01, entity E hires Mr X. Upon termination of service, a lump sum is payable to Mr X equaling 1% of final annual salary for each year of service. Mr X”s salary in 01 is CU 100, which is assumed to increase at 8% (compound) p.a. The discount rate is 10% p.a. It is expected that Mr X will leave entity E on Dec 31, 04. For simplification purposes it is assumed that there are no changes in actuarial assumptions. Moreover, the additional adjustment needed to reflect the probability that Mr X may leave entity E at an earlier or later date is ignored in this example.

Required

Determine (a) the carrying amount of the liability as at Dec 31 and (b) the current service cost and interest cost in E”s financial statements as at Dec 31 for the years 01–04.

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