Sandhill, Inc. has a defined-benefit pension plan covering its 50 employees. San

Question

Sandhill, Inc. has a defined-benefit pension plan covering its 50 employees. Sandhill agrees to amend its pension benefits. As a result, the projected benefit obligation increased by $2520000. Sandhill determined that all its employees are expected to receive benefits under the plan over the next 5 years. In addition, 20% are expected to retire or quit each year. Assuming that Sandhill uses the years-of-service method of amortization for prior service cost, the amount reported as amortization of prior service cost in year one after the amendment is

Explanation / Answer

Year Number of Employees Calculation 1 50 2 40 50 - 50*20% 3 30 40 - 50*20% 4 20 30 - 50*20% 5 10 20 - 50*20% 150 Projected Benefit obligation = 2520000 Number of Employees = 150 Obilgation per Service year = 2520000/150 = $ 16800 the amount reported as amortization of prior service cost in year one after the amendment is 16800*50 = $ 840000 Therefore, the right answer is option ( c ) $ 840000

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