Pannell Resources has a defined benefit pension plan for their 280 employees. In 2019, they decided to amend the pension plan, resulting in an increase of $3,840,000 to the projected benefit obligation. Pannell believes that 15% of its employees will leave the company in each of the next six years, and 10% in the seventh year. If Pannell uses straight-line amortization to expense prior service costs, how much will they expense in 2022?

They will expense $843,956 in 2022

Explanation:

First we need to calculate the numbers of remaining employees each year

2019

Employees= 280

2020

Employees = 280 x ( 1 - 15% ) = 238

2021

Employees = 238 x ( 1 - 15% ) = 202

2022

Employees = 202 x ( 1 - 15% ) = 172

2023

Employees = 172 x ( 1 - 15% ) = 146

2024

Employees = 146 x ( 1 - 15% ) = 124

2025

Employees = 124 x ( 1 - 10% ) = 112

Now Calculate Total service life of employees as follow

Total service life of employees = Accumulated Numbers of employees from 2019 to 2022

Total service life of employees = 280 + 238 + 202 + 172 + 146 + 124 + 112 = 1,274

Now calculate average service life = Total service life of employees / Total employee = 1,274 / 280 = 4.55 years

Calculate the amount of amortisation

Amortization = Increase in project benefit obligation / Average service life = $3,840,000 / 4.55 years = $843,956 per year

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