Herring Wholesale Company has a defined benefit pension plan. On January 1, 2016, the following pension related data were available:
($ in 000s)
Net gain–AOCI $ 350
Accumulated benefit obligation 3,170
Projected benefit obligation 3,200
Fair value of plan assets 2,700
Average remaining service period of active employees
(expected to remain constant for the next several years) 15 years
What I have so far below, I'm not sure where the Excess comes from?
in (000)
Net Gain 350
ER *of the greater of PA or PBO 320
Excess at beg yr
Avg remain svc period yrs 15
Amount Amortized
Net Gain - ER *of the greater of PA or PBO, then amount amortized = Excess/Avg remain svc period yrs
To calculate the amount to be amortized, you need to determine the excess, which is the greater of the fair value of plan assets (PA) or the projected benefit obligation (PBO), multiplied by the average remaining service period (ER).
In this case, the fair value of plan assets is $2,700, and the projected benefit obligation is $3,200. Since the projected benefit obligation is greater, we will use that value.
Excess = PBO * ER
Excess = $3,200 * 15
Excess = $48,000
Therefore, the excess at the beginning of the year is $48,000. This amount will be used to calculate the amount to be amortized.
To calculate the amount amortized, you will need to calculate the excess of the projected benefit obligation (PBO) over the fair value of plan assets (PA).
The formula to calculate the excess is:
Excess at beginning of the year = PBO - PA
In this case, the PBO is given as $3,200,000 and the PA is given as $2,700,000.
Excess at beginning of the year = $3,200,000 - $2,700,000
Excess at beginning of the year = $500,000
Now that you have the excess at the beginning of the year, you can calculate the amount amortized.
The formula to calculate the amount amortized is:
Amount amortized = Excess at beginning of the year / Average remaining service period
In this case, the average remaining service period of active employees is given as 15 years.
Amount amortized = $500,000 / 15
Amount amortized = $33,333.33
Therefore, the amount amortized in this case is $33,333.33.