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    Pension forecasting and Interest Cost

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    Question 1.

    Interest cost included in the net pension cost recognized for a period by an employer sponsoring a defined benefit pension plan represents the

    a.shortage between the expected and actual returns on plan assets.
    b.increase in the projected benefit obligation due to the passage of time.
    c.increase in the fair value of plan assets due to the passage of time.
    d.amortization of the discount on unrecognized prior service cost.

    Question 5.

    Effective January 1, 2007 Quayle Co. established a defined benefit plan with no retroactive benefits. The first of the required equal annual contributions was paid on December 31, 2007. A 10% discount rate was used to calculate service cost and a 10% rate of return was assumed for plan assets. All information on covered employees for 2007 and 2008 is the same. How should the service cost for 2008 compare with 2007, and should the 2007 balance sheet report an accrued or a prepaid pension cost?

    Service Cost Pension Cost
    for 2008 Reported on the
    Compared to 2007 2007 Balance Sheet
    a.Equal to Accrued
    b.Equal to Prepaid
    c.Greater than Accrued
    d.Greater than Prepaid

    Question 6.

    On December 31, 2008, Ellworth, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement and income tax purposes. The change will result in a $1,200,000 increase in the beginning inventory at January 1, 2008. Assume a 30% income tax rate. The cumulative effect of this accounting change reported for the year ended December 31, 2008 is?___________________

    Question 7.

    On January 1, 2004, Bryan Co. purchased a machine for $528,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2007, Bryan determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $48,000. An accounting change was made in 2007 to reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, 2007 of?___________________

    Question 8.

    During 2006, a textbook written by Jackel Co. personnel was sold to Grand Publishing, Inc., for royalties of 10% on sales. Royalties are receivable semiannually on March 31, for sales in July through December of the prior year, and on September 30, for sales in January through June of the same year.
    ?Royalty income of $72,000 was accrued at 12/31/06 for the period July-December 2006.
    ?Royalty income of $80,000 was received on 3/31/07, and $104,000 on 9/30/07.
    ?Jackel learned from Grand that sales subject to royalty were estimated at $1,080,000 for the last half of 2007.

    In its income statement for 2007, Jackel should report royalty income at

    a. $184,000.
    b. $192,000.
    c. $212,000.
    d. $220,000.

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    Solution Preview


    1. b
    5. d
    6. 1,200,000 (1 - 0.3) =$840,000
    7. 528,000 * ...

    Solution Summary

    The solution examines pension forecasting and interest costs recognized over the period of a year. The shortage between the expected and actual returns on plan assets is determined.