Question

Howard Corp. sponsors a defined benefit pension plan for its employees. On january 1, 2011, the following balances are related to its defined benefit pension plan: 520,000 660,000 140,000 60,000 95,000 Plan assets (market-related value) Projected benefit obligation Pension asset liability Prior service cost VEGL - Loss On December 31, 2011, the actuary provides the following additional data: Service cost for 2011 Actual return on plan assets in 2011 Amortization of prior service cost Contributions in 2011 Benefits paid retirees in 2011 Settlement rate Expected return rate Average remaining service life of active employees (years) 72,000 42,000 8,000 60,000 40,000 8% 9% 6 On its 2011 Statement of Comprehensive Income, amortization of unexpected gain or loss should be $5,742 $4,833 $4,765 $5,169

Answer 1

solution : 4833

explanation :Unexpected gains or losses on the pension plan may be due to

1. sudden changes in the market value of plan assets or
2. changes in actuarial assumptions which affect the PBO

The FASB allows these unexpected gains/losses to be smoothed over time. In fact, we only recognize these gains/losses if they become LARGE.

Use a CORRIDOR APPROACH to determine whether the gains/losses are large:

1. Determine the balance in the Unexpected Gains/Losses account at the beginning of the year.
2. Compute the corridor, 10% of the larger of

a)the beginning balance of PBO or

b)the beginning balance of the market related value of plan assets

3.If the balance < corridor, no amortization occurs. If the balance > corridor:
Subtract corridor from balance to determine excess.
Divide excess by average remaining service life of active employees expected to receive benefits under the plan.

so unexpected loss (given) = 95,000

calculation of Corridor: 10 % larger of

1.the beginning balance of PBO = 660,000 x 10 % = $66,000 OR

2.the beginning balance of the market related value of plan assets = $520,000x10% = $52,000

so Corridor = $66,000

here balance of unexpected loss > corridor

so amortization of unexpected loss = (95,000 - 66000) / 6 years

= $4833

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