Computation of Prior Service Cost Funding and Amortization
Staybrite Electronics Co. amended its pension plan effective January 1, 2008. The increase in the PBO occurring as a result of the plan amendment is $6,290,000. Staybrite arranged to fund the prior service cost by equal annual contributions over the next 15 years at 10% interest. The first payment will be made December 31, 2008. The company decides to amortize the prior service cost on a straight line basis over the average remaining service life of its employees. The company has 225 employees at January 1, 2008, who are entitled to the benefits of the amendment. It is estimated that, on the average, 15 employees will retire each year.
Instructions:
1. Compute the amount Staybrite will pay each year to fund the prior service cost arising from the plan’s amendment.
2. Compute Staybrite’s annual prior service cost amortization based on average remaining years of employee service.