Question

Amortization of Prior Service Cost

On January 1, 2016, Baznik Company adopted a defined benefit pension plan. At that time, Baznik awarded retroactive benefits to certain employees. These retroactive benefits resulted in a prior service cost of $1,200,000 on that date (which it did not fund). Baznik has six participating employees who are expected to receive the retroactive benefits. Following is a schedule that identifies the participating employees and their expected years of future service as of January 1, 2016:

Employee	Expected Years of Future Service
A	1
B	3
C	4
D	5
E	5
F	6

Baznik decided to amortize the prior service cost to pension expense using the years-of-future-service method. The following are the amounts of the components of Baznik’s pension expense, in addition to the amortization of the prior service cost for 2016 and 2017:

	2016	2017
Service cost	$397,300	$567,423
Interest cost on projected benefit obligation	104,100	150,337
Expected return on plan assets	—	90,300

Baznik contributed $772,700 and $875,300 to the pension fund at the end of 2016 and 2017, respectively.

Required:

1.	Next Level Prepare a set of schedules for Baznik to determine (a) the amortization fraction for each year and (b) the amortization of the prior service cost.
2.	Next Level Prepare all the journal entries related to Baznik’s pension plan for 2016 and 2017.

General Journal

Prepare the entries to record the prior service cost on January 1, 2016, and the pension expense and amortization of prior service costs on December 31, 2016 and 2017.

PAGE 2016PAGE 2017

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7

Next Level

Prepare a set of schedules for the Baznik Company to determine the amortization fraction for each year. Additional Instruction

BAZNIK COMPANY

Amortization Fractions

2016 - 2021

1	Employee	Expected Years of Future Service	Number of Service Years Rendered 2016	Number of Service Years Rendered 2017	Number of Service Years Rendered 2018	Number of Service Years Rendered 2019	Number of Service Years Rendered 2020	Number of Service Years Rendered 2021
2	A
3	B
4	C
5	D
6	E
7	F
8	Total
9	Amortization fraction

Prepare a set of schedules for the Baznik Company to determine the amortization of the prior service cost. Additional Instruction

BAZNIK COMPANY

Prior Service Cost Amortization

2016 - 2021

1	Year	Total Prior Service Cost	Amortization Fraction	Amortization to Increase Pension Expense	Remaining Prior Service Cost
2	2016
3	2017
4	2018
5	2019
6	2020
7	2021

Answer 1

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Ans : 1(a)

Step - (1) - Computation of Service Years –

Years	Projected yr of future service	A	B	C	D	E	F	Total	Amortisation fraction
2016	1	1	1	1	1	1	1	6	6/24 = 1 / 4
2017	3		1	1	1	1	1	5	5 /24
2018	4		1	1	1	1	1	5	5 /24
2019	5			1	1	1	1	4	4 /24
2020	5				1	1	1	3	3 /24
2021	6						1	1	1 /24

1(b) Step 2 : Amortization of prior service cost

Years	Total service cost	Amortization fraction	Amortization of past service cost	Remaining prior service cost
	A	B	C=a/b	D=a-c
2016	1200000	1/4	300000	900000	(1200000 – 900000)
2017	1200000	5/24	249996	650004	(900000 – 249996)
2018	1200000	5/24	249996	400008
2019	1200000	4/24	200000	200008
2020	1200000	3/24	150000	50008
2021	1200000	1/24	50000	8

Ans 2:

Computing pension plan for yr 2016 & 2017

Description	2016 ($$)	2017 ($$)
Service cost	397,300	567,423
Interest cost	104,100	150,337
Expected return on plan assets	-	90,300
Amortization of past service cost	300000	249996
Total service cost	801400	877456
Pension expense ( contribution)	772700	875300
Accrued pension cost	28700	2156

Journal 2016

Pension expense Dr. 801400

Cash                     Cr.                  772700

Accrued pension cost Cr.          28700

Journal 2017

Pension expense Dr. 877456

Cash                    Cr.                  875300

Accrued pension cost Cr.          2156