Question

Methods to Amortize Prior Service Cost

Wolz Company, a small business, has had a defined benefit pension plan for its employees for several years. At the beginning of 2016, Wolz amended the pension plan; this amendment provides for increased benefits based on services rendered by certain employees in prior periods. Wolz's actuary has determined that the related prior service cost amounts to $140,000. Wolz has four participating employees who are expected to receive increased benefits. The following is a schedule identifying the employees and their expected years of future service:

Employee Numbers	Expected Years of Future Service
1	2
2	3
3	4
4	5

Required:

1 a. Using the straight-line method, compute the average remaining service life. If required, round your answer to one decimal place.
years

Feedback

To compute the straight-line amortization of prior service costs, you should first calculate the average remaining service life of the participating employees. Consider what years of service should be included when computing the average remaining service life of the participating employees.

1 b. Using the straight-line method, prepare a schedule to amortize the prior service cost. Enter all amounts as positive numbers.

WOLZ COMPANY
Prior Service Cost Amortization
2016 - 2019
	Total Prior Service Cost	Amortization	Remaining Prior Service Cost
2016	$	$	$
2017
2018
2019

Feedback

Consider the effect the amortization of the prior service cost has on the pension expense. Be sure to update the remaining prior service costs for each year.

2 a. Using the years-of-future-service method instead, prepare a set of schedules to determine the amortization fraction for each year. Enter the amortization fraction as a fraction. For example: 3/10.

WOLZ COMPANY
Years of Future Service
Amortization Fractions
	Expected Years of Future Service	Number of Service Years Rendered in 2016	Number of Service Years Rendered in 2017	Number of Service Years Rendered in 2018	Number of Service Years Rendered in 2019	Number of Service Years Rendered in 2020
1
2
3
4
Total
Amortization fraction		4/14	4/14	3/14	2/14	1/14

Answer 1

1(a) Calculation of Average remaining service life Expected Years Employee of Future numbers service 2 3 3 4 4 5 Total 14 (2+3+4+5) /4 = 3.5 Therefore, Average remaining service life is 3.5 Years.