Case 168 Ballooning out of ControlLLCC BLOC or the "Company) is a of hot air balloons. Due to decreased demand for hot air balloons and challenging industry conditions. BLOC'smanagement is exploring ways to reduce the Company'srapidly on and benefit costs. Management has detemminedit wileither I) rising compen ati amend the Company s single empleyer defined benefit pension plan by eliminating the future eaming of pension benefits for its employees freeze its pension plan reduce headcount across the Company by Either option will require approval by BLOC's board of directors, BLOC decides to feeze its current pension plan, it will not ofter any new benefits to its employees through another plan. BLOC scumentpension plan is the only retirement benefit amangement it provides to its employees. The plan's pension benefits are based on years of service and average salary for the lat five years he employee service period, and all employees both hourly and salaried, who have attained six months of service are participants in the pension plan. Under the plan freeze, the Company will eliminate the accrual ofadditional pension benefits for future service. However, the Company will continue to take future salary into account in computing the average salary for the last five years before retirement when determining the pension benefits eamed for service prior to the plan freeze. This type of plan amendment is commonly refemed to as a freeze. The pension plan freeze will be effective on October 1, the beginning of BLOC's next fiscal year, and is expected to be approved and communicated to employees priorto BLOC's September 30 year-end. f BLOC's management decides instead to reduce costs by reducing headcount by 5 anticipates that the board of directors would approve the reductions and management would communicate its plans to the affected employees prior to September Before choosing which cost-cutting plan to recommend to the board of directors, management would like to determine how to account for each alternative. Required: 1. Determine how to account for each of the following altemative actions toreduce BLOC s increasing compensation and benefit costs: Management decides amend the pension plan by eliminating the accrual of pension benefits for future service, while continuing to take future salary increases into account ining pension benefits at retirement (ie a soft freeze). Case 168 Ballooning out of ControlLLCC BLOC or the "Company) is a of hot air balloons. Due to decreased demand for hot air balloons and challenging industry conditions. BLOC'smanagement is exploring ways to reduce the Company'srapidly on and benefit costs. Management has detemminedit wileither I) rising compen ati amend the Company s single empleyer defined benefit pension plan by eliminating the future eaming of pension benefits for its employees freeze its pension plan reduce headcount across the Company by Either option will require approval by BLOC's board of directors, BLOC decides to feeze its current pension plan, it will not ofter any new benefits to its employees through another plan. BLOC scumentpension plan is the only retirement benefit amangement it provides to its employees. The plan's pension benefits are based on years of service and average salary for the lat five years he employee service period, and all employees both hourly and salaried, who have attained six months of service are participants in the pension plan. Under the plan freeze, the Company will eliminate the accrual ofadditional pension benefits for future service. However, the Company will continue to take future salary into account in computing the average salary for the last five years before retirement when determining the pension benefits eamed for service prior to the plan freeze. This type of plan amendment is commonly refemed to as a freeze. The pension plan freeze will be effective on October 1, the beginning of BLOC's next fiscal year, and is expected to be approved and communicated to employees priorto BLOC's September 30 year-end. f BLOC's management decides instead to reduce costs by reducing headcount by 5 anticipates that the board of directors would approve the reductions and management would communicate its plans to the affected employees prior to September Before choosing which cost-cutting plan to recommend to the board of directors, management would like to determine how to account for each alternative. Required: 1. Determine how to account for each of the following altemative actions toreduce BLOC s increasing compensation and benefit costs: Management decides amend the pension plan by eliminating the accrual of pension benefits for future service, while continuing to take future salary increases into account ining pension benefits at retirement (ie a soft freeze)
