Changing Assumptions Ltd

question 48

Essay

Changing Assumptions Ltd.has the following details related to its defined benefit pension plan as at December 31,2013: Pension fund assets of $1,900,000 and Actuarial obligation of $1,806,317.
The actuarial obligation represents the present value of a single benefit payment of $3,200,000 that is due on December 31,2019,discounted at an interest rate of 10%; i.e.,$3,200,000 / 1.10⁶ = $1,806,317.
The pension has no unamortized experience gains or losses,and no past service costs at the end of 2013.Funding during 2014 was $55,000.The actual value of pension fund assets at the end of 2014 was $2,171,000.As a result of the current services received from employees,the single payment due on December 31,2019 had increased from $3,200,000 to $3,380,000.
Required:
a.Compute the current service cost for 2014 and the amount of the accrued benefit obligation at December 31,2014.Perform this computation for interest rates of 8%,10%,and 12%.
b.Derive the pension expense for 2014 under various assumptions about the expected return and discount rate.Complete the following table:
c.Briefly comment on the different amounts of pension expense in relation to the assumptions for expected return and discount rate.How does a change in the discount rate affect the accrued benefit obligation?

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Definitions:

Predetermined Overhead Rate

A rate calculated before a period begins, used to allocate overhead costs to products or job orders based on a chosen activity base.

Overapplied Overhead

A situation in cost accounting where the allocated overhead for a period exceeds the actual overhead incurred.

Job Order Cost System

This system is a cost accounting method that assigns costs to specific production batches or jobs, making it easier to track the financial resources spent on each job.