Question

(S.0.3) Larsen Company has a defined benefit pension plan which covers 220 employees. Based upon negotiations with the employees, Larsen Company amends its pension plan as of 1/1/17 and grants $111,600 of prior service cost to its employees. The following schedule reflects employee groups based on expected years of retirement. Group A B C D E Number of Employees 30 40 35 70 45 220 Expected Retirement on 12/31 2017 2018 2019 2020 2021 . Instructions: Compute the annual amortization of the prior service cost using the 1) years­ of ­service method, and 2)straight­line amortization over the average remaining service life of employees.

Answer 1

Question 1.

Years of service Method:-

Group	No. of Employees	Expected Retirement date	Remaining Years	Total Remaining Years for all employees	Calculation	Amount to be amortized
A	30	31-12-2017	1	30	=(220/720)*111600	$34100
B	40	31-12-2018	2	80	=190/720*111600	$29450
C	35	31-12-2019	3	105	=150/720*111600	$23250
D	70	31-12-2020	4	280	=115/720*111600	$17825
E	45	31-12-2021	5	225	=45/720*111600	$6975
Total	220	Total Service Years	15	720		$111600

As per years of service method, If the employees are going to retire according to a fixed pattern, Each year receives its own amortization fraction. The numerator will the number of employees who worked this year; the denominator (which represents the total service period) is determined under the following formula:

Denominator = [(n x (n + 1))/2] x d

d represents the decrease in employees each year, n represents the number of physical years remaining from the point the prior service costs are created until the last of the employees affected by these service costs retires.

Question 2

Straight line amortization over the average remaining service life of employees

Group	No. of Employees	Expected Retirement date	Remaining Years	Total Remaining Years for all employees
A	30	31-12-2017	1	30
B	40	31-12-2018	2	80
C	35	31-12-2019	3	105
D	70	31-12-2020	4	280
E	45	31-12-2021	5	225
Total	220	Total Service Years	15	720

If we use straight-line amortization, we divide the $111,600 by the average number of years remaining. The average is determined by dividing the total remaining years of all employees (720) by the number of employees (220), yielding 3.272727273,

= $111,600/3.272727273 = $34,100 per year

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