Question

On January 1, 2018, Derek Co.’s defined benefit pension plan had plan assets with a fair value of $750,000, and a projected benefit obligation of $875,000. In addition:

Actual and expected return on plan assets – 7%

Interest cost – 9%

Service costs - $24,000

Unamortized prior service cost - $120,000

Employer contributions to the plan - $45,000

Distributions to employees from the plan - $60,000

Unamortized prior service cost is being amortized over the expected remaining service lives of covered employees, which consists of a total of 9 employees:

2 employees are each expected to have 9 years remaining

3 employees are each expected to have 6 years remaining

4 employees are each expected to have 1 year remaining

How much amortization of prior service cost will be included in Derek Co.’s pension expense for 2018?

Multiple Choice

$13,333

$27,000

$7,500

$0

Answer 1

Option (B) $27,000 is correct.

Calculation of no. of years for total 9 employees

2 employees remaining life of 9 years = 2*9 = 18 years

3 employees remaining life of 6 years = 3*6 = 18 years

4 employees remaining life of 1 years = 4*1 = 4 years

No. of years = 18 + 18 + 4 = 40 years

Assuming all employees will be working

Amortization of prior period service cost included in pension expense = 9/40 * $120,000

                                                                                                                  = $27,000