Question

Andrews Company has five employees participating in its defined benefit pension plan. Expected years of future service for these employees at the beginning of 2017 are as follows. Future Employee Years of Service Jim 3 Paul 4 Nancy 5 Dave 6 Kathy 6 On January 1, 2017, the company amended its pension plan, increasing its projected benefit obligation by $72,000. Instructions Compute the amount of prior service cost amortization for the years 2017 through 2022 using the years-of-service method, setting up appropriate schedules.

Short answer

The total number of service years is a term used when an employee serves their employmentin an organization. The time duration when an employee keeps working in the company is service years.

Step-by-step solution

Firstly, the computation of the total number of service years will be determined as:

In the year 2017: The total service years will be 5 years for Jim, Paul, Nancy, Dave, and Kathy.

In the year 2018: The total service years will be 5 years for Jim, Paul, Nancy, Dave, and Kathy.

In the year 2019: The total service years will be 5 years for Jim, Paul, Nancy, Dave, and Kathy.

In the year 2020: The total service years will be 4 years for Paul, Nancy, Dave, and Kathy.

In the year 2021: The total service years will be 3 years for Nancy, Dave, and Kathy.

In the year 2022: The total service years will be 2 years for Dave and Kathy.

Step 2:Secondly, the cost per service year will be calculated.

$\begin{array}{rcl}\mathbf{Cost}\mathbf{}\mathbf{per}\mathbf{}\mathbf{service}\mathbf{}\mathbf{year}& \mathbf{=}& \frac{\mathbf{Projected}\mathbf{}\mathbf{benefit}\mathbf{}\mathbf{obligation}}{\mathbf{Total}\mathbf{}\mathbf{service}\mathbf{}\mathbf{years}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{72}\mathbf{,}\mathbf{000}}{\mathbf{24}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\\ & & \end{array}$

Lastly, the computation of annual prior service cost amortization will be as follows:

Year	Total service years (Step 1)	Cost per service year (Step 2)	Annual Amortization
2017	5	$3,000	$15,000
Add: 2018	5	$3,000	$15,000
Add: 2019	5	$3,000	$15,000
Add: 2020	4	$3,000	$12,000
Add: 2021	3	$3,000	$9,000
Add: 2022	2	$3,000	$6,000
		Total annual amortization	$72,000