Patel Industries has a noncontributory, defined benefit pension plan. Since the inception of the plan, the actuary has used as the discount rate the rate on high quality corporate bonds, which recently has been 7%. During 2016, changing economic conditions caused the rate to change to 6% and the actuary decided that 6% is the appropriate rate. Required: 1. Does the change in discount rate create a gain or does it create a loss for Patel under U.S. GAAP? Why? 2. Assume the magnitude of the change is $13 million. Prepare the appropriate journal entry to record any 2016 gain or loss under U.S. GAAP. If Patel prepares its financial statements according to U.S. GAAP, how will the company report the gain or loss? 3. Would your response to requirement 2 differ if Patel prepares its financial statements according to International Financial Reporting Standards?
Patel Industries has a noncontributory, defined benefit pension plan. Since the inception of the plan, the actuary has
used as the discount rate the rate on high quality corporate bonds, which recently has been 7%. During 2016, changing
economic conditions caused the rate to change to 6% and the actuary decided that 6% is the appropriate rate.
Required:
1. Does the change in discount rate create a gain or does it create a loss for Patel under U.S. GAAP? Why?
2. Assume the magnitude of the change is $13 million. Prepare the appropriate
gain or loss under U.S. GAAP. If Patel prepares its financial statements according to U.S. GAAP, how will
the company report the gain or loss?
3. Would your response to requirement 2 differ if Patel prepares its financial statements according to International
Financial Reporting Standards?
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