Amount of Funding and Amortization of Prior Service Cost
Da Vinci Inc. has a workforce of 400 employees. A new pension plan is negotiated on January 1, 2008, with the labor union. Based on the provisions of the pension agreement, prior service cost related to the new plan amounts to $4,823,000. The cost is to be funded evenly with annual contributions over a 10 year period, with the first payment due at the end of 2008. The cost is to be amortized over the average remaining service life of the covered employees. The interest rate for funding purposes is 12%. It is anticipated that, on the average, 10 employees will retire each year over the next 40 years.
1. Compute the annual amount Da Vinci will pay to fund its prior service cost.
2. Compute the amount of amortization of prior service cost for 2008, 2010, and 2015.