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Regarding Prior Service Cost Amortization, what is the increase or decrease to Pension Expense on the...

Regarding Prior Service Cost Amortization, what is the increase or decrease to Pension Expense on the Fox Co. Defined Benefit Plan Worksheet for 2019, based on the following info?

Pension data for the 2019 calendar year:Service Cost$ 70,000 Actual return on plan assets 9%

Benefits to retirees 60,000 Expected return on plan assets 7%

Cash contributions 50,000 Settlement rate 6%

Fox's Beginning 2019 Info (December 31, 2018 balances):Plan Assets$ 700,000

Projected Benefit Obligation (PBO) 850,000

Accumulated net other comprehensive loss (average service life is 10 years) 175,000

Prior Service Cost (PSC-Fox uses years of service amortization method) 300,000

(This PSC is attributable to 80 employees who are expected to retire as follows: 10 retire in 2 years, 15 in 3 years, 20 in 4 years, and 35 in 5 years)

75,000 decrease

43,750 decrease

43,750 increase

75,000 increase

Expert Solution

Regarding Prior Service Cost Amortization, the increase or decrease to Pension Expense on the Fox Co:

Correct answer is: 75,000 increase.

Explanation:

Prior Service Cost (PSC-Fox uses years of service amortization method) = 300,000

Service years left :

10 employees retire in 2 years = 10*2 = 20

15 employees retire in 3 years = 15*3 = 45

20 employees retire in 4 years = 20 * 4 = 80

35 employees retire in 5 years = 35 *5 = 175

For 80 employees, total service years left = 20 + 45 + 80 + 175 = 320

In 2019 no one of 80 employees retire.

Amortization of Prior Service Cost Amortization for 2019 = 300,000 * (80 / 320) = 75,000

Pension Expense = Service cost + Interest cost - Expected return on plan assets + Amortization of prior service cost +/- Amortization of actuarial gains and losses

As such due to liability of Prior Service cost, amortization of prior service cost increases Pension expense of 2019 by 75,000.

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Regarding Prior Service Cost Amortization, what is the increase or decrease to Pension Expense on the...

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