Question

g Floyd Corporation had a projected benefit obligation of $3,142,000 and plan assets of $3,308,000 at January 1, 2020. Floyd also had a net actuarial loss of $438,720 in accumulated OCI at January 1, 2020. The average remaining service period of Floyd's employees is 7.10 years. Compute Floyd's minimum amortization of the actuarial loss. What amount should pension expense be debited due to minimum amortization of the actuarial loss

Answer 1

Answer:

Floyd Corporation

a. Projected benefit obligation, 01/01/2020 =  $ 3,142,000

b. Plan asset value, 01/01/2020   =                  $ 3,308,000

Corridor:

10% of greater of (a) or (b) [(b) in this case] =     $330,800

Actuarial loss =                                                    ($438,720)

a) Minimum Amount to be amortized =              $107,920

Average remaining service life of employees = 7.10  years

b) Amount to include in pension cost for 2020 = $15,200

Explanation:

Floyd is required to use the Corridor approach to determine the amount of gains and losses to recognize (amortize) in pension expense each period.  The corridor approach is a technique used to reduce the amounts of gains and losses to be recognized as an adjustment to pension expense.

With this technique gains and losses in excess of 10 percent of the greater of the projected benefit obligation or the market-related asset value are recognized.  The 10 percent is the corridor.

Any excess over the 10 percent should be amortized over the average remaining service period of active employees expected to participate in the plan.  This amount represents the minimum amount a company can recognize.   No gain or loss is recognized when the gains or losses are not in excess of 10% of the appropriate amount.

The corridor reduces the volatility of the pension expense.