Lyons Corporation is a medium-sized manufacturer of paperboard containers and boxes. The corporation sponsors a non-contributory, defined benefit pension plan that covers its 250 employees. Tim Shea has recently been hired as president of Lyons Corporation. While reviewing last year’s financial statements with Anita Kroll, controller, Shea 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 tax law. Contributions are intended to provide for benefits expected to be earned in the future as well as those earned to date.

The net periodic pension expense on Lyons Corporation’s comparative income statement was £72,000 in 2016 and £57,680 in 2015.

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, 2016 (amounts in thousands).

Given that Lyons Corporation’s workforce has been stable for the last 6 years, Shea could not understand the increase in the net periodic pension expense. Kroll explained that the net periodic pension expense consists of several elements, some of which may increase or decrease the net expense.
Instructions

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

(b) Describe the major difference and the major similarity between the vested benefit obligation and the defined benefit obligation.

(c) (1) Explain why pension gains and losses are not recognized in net income in the period in which they arise.
(2) Briefly describe how pension gains and losses are recognized.

Transcribed Image Text:

Defined benefit obligation Plan assets at fair value Defined benefit obligation in excess of plan assets 1,200) 1,050 (150)