Frazier Refrigeration amended its defined benefit pension plan on December 31, 2

Question

Frazier Refrigeration amended its defined benefit pension plan on December 31, 2016, to increase retirement benefits earned with each service year. The consulting actuary estimated the prior service cost incurred by making the amendment retroactive to prior years to be $495,000. Frazier’s 90 present employees are expected to retire at the rate of approximately 9 each year at the end of each of the next 10 years.

Using the service method, calculate the amount of prior service cost to be amortized to pension expense in each of the next 10 years. (Enter you answers in thousands (i.e., 200,000 should be entered as 200).)

     

Using the straight-line method, calculate the amount of prior service cost to be amortized to pension expense in each of the next 10 years.

     

Frazier Refrigeration amended its defined benefit pension plan on December 31, 2016, to increase retirement benefits earned with each service year. The consulting actuary estimated the prior service cost incurred by making the amendment retroactive to prior years to be $495,000. Frazier’s 90 present employees are expected to retire at the rate of approximately 9 each year at the end of each of the next 10 years.

Explanation / Answer

Solution:

1.

The amount amortized is $495,000

2.

$495,000 ÷ 5.5 years* = $90,000/year

* The average service life is the total estimated service years divided by the total number of employees in the group: 495 years ÷ 90 = 5.5 years

Year Number of employees still employed Fraction of total service years Prior Service cost Amount amortized 2016 90 90/495 x $495,000 = 90000 2017 81 81/495 x $495,000 = $81,000 2018 72 72/495 x $495,000 = $72,000 2019 63 63/495 x $495,000 = $63,000 2020 54 54/495 x $495,000 = $54,000 2021 45 45/495 x $495,000 = $45,000 2022 36 36/495 x $495,000 = $36,000 2023 27 27/495 x $495,000 = $27,000 2024 18 18/495 x $495,000 = $18,000 2025 9 9/495 x $495,000 = $9,000 Totals 495 495/495 $495,000

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