Case #6: Future SalaryOn January 1, 2021, a lump-sum benefit is payable on termination of service,...

Question

Case #6: Future SalaryOn January 1, 2021, a lump-sum benefit is payable on termination of service, i.e December 31, 2025 and equal to 4% of final salary for each year of service. The salary in 1 year is P1,000,000 and is assumed to increase at 7% (compounded) each year. The discount rate used is 10% per year.Required: Show how the obligation builds up over the employee's service.

Tanmoy · Accepted Answer

Case #6: Future Salary		4
CASE #6: FUTURE SALARY
Table of Contents
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References	6
Solution
	The future value or the benefits which are available for the termination of the service retiring on 31st December, 2025 will be as follows:
	Future Value of 1 for 4 years and at the rate of 7% will be 1 x (1+0.07) ^4 = 1.3108
	Since, the salary for 1 year is given a P1000000. Therefore, the amount will be 1.3108 x 1000000 = 1310796. Hence, the benefit available on the salary at the rate of 4% will be 1000000 x 4% = 1310796 x 4% = 52432.
The calculation of benefits from 2021 till 2025 will be as follows:
	 
	2021
	2022
	2023
	2024
	2025
	Prior Year
	 
	52432
	104864
	157296
	209727
	Current Year
	52432
	52432
	52432
	52432
	52432
	 
	52432
	104864
	157296
	209727
	262159
The benefits can be calculated from 2021 till 2025 by using the current year and present year’s value which is 52432. Therefore, at the end of 2025,

Case #6: Future Salary On January 1, 2021, a lump-sum benefit is payable on termination of service, i.e December 31, 2025 and equal to 4% of final salary for each year of service. The salary in 1...

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