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Future CPA
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Posted: 19 Nov 2009 at 21:57 \| IP Logged

CPA 00681:

Jan Corp. amended its defined benefit pension plan, granting a total credit of $100,000 to four employees for services rendered prior to the plan's adoption. The employees, A, B, C, and D, are expected to retire from the company as follows:

"A" will retire after three years.
"B" and "C" will retire after five years.
"D" will retire after seven years.

What is the amount of prior service cost amortization in the first year?
Answer: $20,000

Becker explanation: Amortization of unrecognized prior service cost is calculated by assigning an equal amount of the cost to the future periods of service of each employee at the date of amendment to the plan. The average service life of the four employees is five years.

$100,000 ÷ 5 years = $20,000

But isn't it GREATER of the average service life or 15 years? I was doing $100,000/15 years. Where did I go wrong?

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joecjr
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Posted: 19 Nov 2009 at 22:42 \| IP Logged

B and C are 5 years EACH, It appears you omitted one of B or C in your calculation.

A= 3

B= 5

C= 5

D = 7

Total = 20/4

= 5

= $100,000/5= $20,000 per year.

the basis to recognize prior service cost is either straight line method(which I just did) or expected years of service(too difficult)

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roswellpodsquad
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Posted: 19 Nov 2009 at 22:44 \| IP Logged

I could be wrong but I think its because it an amendment to a plan that
resulted in a prior service cost. I think its the A of the SIRAGE in this
situation. So the amortization is calculated using the average service life.

If it were a existing net obligation/asset the you would use the 15 years or
greater average employee job life. The E of the SIRAGE.

Hope that makes sense. Good luck on your exam. I be taking mine on the
30th. So, fingers crossed to all of us.

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joecjr
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Posted: 19 Nov 2009 at 22:54 \| IP Logged

the A is the actual return on plan assets.

expected years of service and straight line method both give you the same answer.

expected years of service is expressed as a %

straight line is expressed as a #units, like we do in depreciation calcs.

__________________
FAR [83] 1109 Yaeger
AUD [90] 0510 Roger CPA
BEC [76] 0810 Yaeger/Gleim
REG [80] 1110 Yaeger
Done 12/16/2010
1year & 4months

Philadelphia, PA
joey_cjr@yahoo.com

lovethepirk
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Posted: 20 Nov 2009 at 00:50 \| IP Logged

Joe,

i think the A is:
amortization of prior service cost

And to reiterate what roswell said...

The existing net obligation is amortized by 15yrs or great avg employee life.
--Fun fact :) For the UTO which is like the existing net obligation for Post Retirement Benefits other than Pensions you can use 20 years.

So for the last item in Pensions:
use 15 yrs or greater yadda yadda yadda
So for the last item in Post Retirement Benfits:
use 20 yrs or greater yadda yadda yadda

=====

Joe,

Do you have a grasp of the expected years of service, I think it is very understandable with the right outlook....

Basically you just add up the employees that are working year to year.

In this case we would have
Year
1......4 employees still working
2......4 employees still working
3......4 employees still working
4......3 ('A' quit working finally so 3 employees left)
5......3
6......1 ('B' and 'C' quit working finally)
7......1
........20 total for denominator

first year would be 4/20 times cost given in problem, then year 2 would be 4/20 again and same for year 3. Year 4 would be 3/20....

Now that tough one in Wiley p.397 has 8 employees leaving per year with starting workforce of 200 so:
Year
1......200
2......192
3......184
and so on....all that equals 2,600

First year is 200/2,600 times cost given.

The equation for all that is a bit tricky but not to bad...
Since 8 employees leaving(divide the 200 or original employee count by 8) to get the n:
8n(n+1)/2=2,600

8 x 25 x 26 / 2 = 2,600

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