Question

Asia Pacific Ltd started operating on 1 July 2017 with 12 employees. Three years later all of those employees were still with the company. On 1 July 2019 the company hired 15 more people but by 30 June 2020 only 10 of those employed at the beginning of that year were still employed by Asia Pacific Ltd.
All employees are entitled to 13 weeks’ long-service leave after a conditional period of 10 years of employment with Asia Pacific Ltd.
At 30 June 2020 Asia Pacific Ltd estimates the following:
 The aggregate annual salaries of all employees hired on 1 July 2017 is now $1,200,000.
 The aggregate annual salaries of all current employees hired on 1 July 2019 is now $800,000.
 The probability that employees hired on 1 July 2017 will continue to be employed for the duration of the conditional period is 40 per cent.
 The probability that employees hired on 1 July 2019 will continue to be employed for the duration of the conditional period is 20 per cent.
 Salaries are expected to increase indefinitely at 1 per cent per annum.
The interest rates on high-quality corporate bonds are as follows:
Corporate bonds maturing in seven years 6%
Corporate bonds maturing in eight years 8%
Corporate bonds maturing in nine years 8%
Corporate bonds maturing in ten years 10%
At 30 June 2019 the provision for long-service leave was $12,000.
Required:
a) Calculate the total accumulated long-service leave benefit as at 30 June 2020.
b) What amount should be reported for the long-service leave provision as at 30 June 2020 in accordance with AASB 119?
c) Prepare the journal entry for the provision for long-service leave for 30 June 2020 in accordance with AASB 119.
d) Which employee benefits are required to be discounted in accordance with AASB 119? (1 mark, maximum 100 words)

Answer 1

Answer-

a)

year of service life	current salary	no of employees	total salary	inflation rate	no of years to maturity	projected salry	entitlements
3	$1200000	12	$14400000	1%	7	$15438.749	$157906
1	$800000	10	8000000	1%	9	$8749482	$218737

note:

projected salry =total salary / (1+inflation rate)^no of years to maturity

entitlement amount =projected salary * 13 weeks/52 weeks *no of years of service/years of conditional period

b)

year of service life	no of years to maturity	entitlements	corporate bond rates	present value	probability	long service leave benefit
3	7	$1157906	0.06	$770074	0.4	$308029
1	9	$218737	0.08	$109423	0.2	$21885

total accumilated long service leave benefit

$329914

note:

long service leave benefit =PV * probablity

present value =amount of entitlement / (1+rate of corporation bond)^years to maturity

rate of corporate bond is decided by the number of years left until the date of maturity.thus the rate of corporate bond for the service life 3 years (and maturity remaining is 7) is 6% and for the service life of 1 year is 8%

c)

date	particulars	debit	credit
30.june.2020	long service leave accrual expense	$16800
	provision for long service leave		$16800

d) annual leave benefit which are classified as other long term employee benefit will need to be discounted allowing for expected salary levels in the future period when the leave is expected to be taken.