Accounting for Pensions- Corridor Amortization On January 1, 2012, Melvin Corp h

Question

Accounting for Pensions- Corridor Amortization

On January 1, 2012, Melvin Corp had a cumulative unrecognized gain of $1,500,000. It had the following amounts

The average remaining service period for employees is 10 years.

What effect would the corridor approach have on pension expense for 2012? Give the amount, indicating whether it would increase or decrease the expense. Show Calculations.

1/1/12 12/31/12 Fair Value of Plan assets 12,000,000 14,000,000 Projected Benefit Obligation 12,500,000 13,000,000

Explanation / Answer

Solution.

Using Corridor approach in the given situation the unrecogized gain in excess of the greater of the two amounts given below (the limit of corridor) will be recognised:

1. 10% of Fair value of plan assets at the beginning of the year i.e., 10% of 12000000 = 1,200,000

or

2. 10% of Projected Benefit obligation at the beginning of the year i.e., 10% of 12500000 = 1,250,000

So the limit of corridor = $1,250,000

Unrecognized gain = $1,500,000

Excess gain over limit of corridor = $1,500,000 - $1,250,000 = $250,000

Remaining life = 10 years

Gain to be amortized in current year = $250,000 / 10 = $25,000

The above gain when amortized shall be reduced from the pension expense i.e., it would decrease the expense.

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