Towson Ltd.has experienced tough competition, leading it to seek concessions from its employees in the company's pension plan.In exchange for promises to avoid layoffs and wage cuts, the employees agreed to receive lower pension benefits in the future.As a result , Towson amended its pension plan on January 1,2012, and recorded unrecognized past service cost of €225,000.The average period to vesting for the benefits affected by this plan is 6 years.What is the unrecognized past service cost amortization for 2012?

Question

Quizplus · Accepted Answer

The unrecognized past service cost amortization for 2012 can be calculated using the straight-line method, which divides the total unrecognized past service cost by the average period to vesting. Therefore, the amortization for 2012 would be €225,000/6 years = €37,500. However, since the question asks for the unrecognized past service cost amortization for 2012 only, we need to divide the total unrecognized past service cost by the number of years remaining until the benefits vest. As the plan was amended on January 1, 2012, there were only 5 years remaining until the benefits vest (6-1=5). Therefore, the unrecognized past service cost amortization for 2012 would be €225,000/5 years = €45,000. However, since the benefits only became effective on January 1, 2012, the unrecognized past service cost amortization for the year would be half of the annual amount, which is €45,000/2 = €22,500. Therefore, the best choice is B) €112,500, because this would be the total unrecognized past service cost amortization from 2012 to 2016 (5 years).