Question

Carla Vista, Inc. has a defined-benefit pension plan covering its 50 employees. Carla Vista agrees to amend its pension benefits. As a result, the projected benefit obligation increased by $2,475,000. Carla Vista determined that all its employees are expected to receive benefits under the plan over the next 5 years. In addition, 10 employees are expected to retire or quit each year. Assuming that Carla Vista uses the years-of-service method of amortization for prior service cost, the amount reported as amortization of prior service cost in year one after the amendment is:

Answer 1

$825,000

Step-by-step explanation:

Number of service years = 50+40+30+20+10

Number of service years = 150

Cost per service year = Projected benefit obligation increase / Number of service years

Cost per service year = $2,475,000 / 150

Cost per service year = $16,500

Amortization of prior service cost in year one = Cost per service year / 50 employees

Amortization of prior service cost in year one = $16,500*50

Amortization of prior service cost in year one = $825,000