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    Five elements of periodic pension expense

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    (Major Pension Concepts) Lyons Corporation is a medium-sized manufacturer of paperboard containers and boxes. The corporation sponsors a noncontributory, defined benefit pension plan that covers its 250 employees. Spring Meissner has recently been hired as president of Lyons Corporation. While reviewing last year's financial statements with Sara Montgomery, controller, Meissner expressed confusion about several of the items in the footnote to the financial statements relating to the pension plan. In part, the footnote reads as follows.

    Note J. The company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's compensation during the last four years of employment. The company's funding policy is to contribute annually the maximum amount allowed under the federal tax code. Contributions are intended to provide for benefits expected to be earned in the future as well as those earned to date.

    Effective for the year ending December 31, 2004, Lyons Corporation adopted the provisions of Statement of Financial Accounting Standard No. 87?Employer's Accounting for Pensions. The net periodic pension expense on Lyons Corporation's comparative Income Statement was $72,000 in 2005 and $57,680 in 2004.

    The following are selected figures from the plan's funded status and amounts recognized in the Lyons Corporation's Statement of Financial Position at December 31, 2005 ($000 omitted).

    Actuarial present value of benefit obligations:
    Accumulated benefit obligation (including vested $ (870)
    benefits of $636)

    Projected benefit obligation $(1,200)
    Plan assets at fair value 1,050

    Projected benefit obligation in excess of plan assets $ (150)

    Given that Lyons Corporation's work force has been stable for the last 6 years, Meissner could not understand the increase in the net periodic pension expense. Montgomery explained that the net periodic pension expense consists of several elements, some of which may increase or decrease the net expense.


    a. The determination of the net periodic pension expense is a function of five elements. List and briefly describe each of the elements.

    b. Describe the major difference and the major similarity between the accumulated benefit obligation and the projected benefit obligation.

    c. 1. Explain why pension gains and losses are not recognized on the income
    statement in the period in which they arise.

    2. Briefly describe how pension gains and losses are recognized.

    d. Under what conditions must Lyons recognize an additional minimum liability?


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    Solution Preview

    Instruction a
    Net periodic pension expense is comprised of:
    1. Service cost which is the value of the benefits earned by employees for services performed during the period
    2. Interest cost of the pension obligations
    3. Return on plan assets - funded portion of the fund earns interest which decreases pension expense
    4. Amortization of unrecognized prior service cost occurs whenever a company changes the benefits offered to participants in the pension plan
    5. Amortization and deferral of gains and loss resulting from ...

    Solution Summary

    The solution examines major pension concepts for Lyon Corporation.