Prior service cost is amortized on a:

• A. immediate recognition in the period incurred
• B. straight-line basis over the average remaining service period of employees
• C. units-of-production basis over the expected output
• D. declining balance basis over the useful life of the asset

Answer: (B)

Verified step by step guidance

1. Understand the concept of prior service cost: It refers to the cost associated with granting retroactive benefits to employees for services they provided in the past, typically as part of a pension plan amendment.
2. Learn the accounting treatment for prior service cost: According to accounting standards, prior service cost is not recognized immediately in the period incurred but is amortized over time.
3. Identify the method of amortization: The straight-line basis is commonly used for amortizing prior service cost. This method spreads the cost evenly over the average remaining service period of the employees affected by the amendment.
4. Compare other methods mentioned in the problem: Units-of-production basis and declining balance basis are not applicable for amortizing prior service cost. These methods are typically used for depreciation of tangible assets, not for pension-related costs.
5. Conclude the correct approach: The straight-line basis over the average remaining service period of employees is the appropriate method for amortizing prior service cost, as it aligns with accounting standards and ensures systematic allocation of the cost.