Question

In: Accounting

Question 1 Ben Limited has a 31 December year end. Employees work a 5 day week...

Question 1

Ben Limited has a 31 December year end. Employees work a 5 day week and are entitled to 20 paid working days of vacation per annum.

Employee statistics are as follows:

Number of employees : 50 000

Average annual salary 2017 : 100 000

Unused leave 31 December 2017 : 10 Days

Leave taken in the year ended 31 December 2018 : 14 Days

* S1 and S2 : On average, 9 Earned in 2018, 5 Earned in 2017

* S3 : All earned in 2018

Leave expected to be taken during the year ended 31 December 2019 : 15 Days

* S1 and S2 : On average, 12 Days earned in 2019, 3 Days earned in 2018

* S3 : All days earned in 2019

Additional information :

1. No employees left or joined the company in the past 2 years

2. Salaries increased by 20% from 01 January 2018

3. Past estimates show that management is able to correctly forecast the number of vacation days that will be used in the following financial year.

Required :

Determine the Leave Pay Provision, and Provide the Journal at the 31 December 2018 assuming that :

1.1 Leave accumulates and vests indefinitely

1.2. Leave accumulates for one year after it accrues but is non-vesting

1.3. Leave does not accumulate and is non-vesting

Show all workings and journal entries

Solutions

Expert Solution

Answer:

1)

Vesting: It means the cash is paid on termination or resignation of employee for unused vacation leaves, sick leaves etc., provision is required to be recorded in books for unused leaves

Non-vesting: It means cash is not paid on termination or resignation of employee but employees are allowed to take un-used leaves, provision is required to be recorded in books for unused leaves assuming the employees will take their leaves in future.

Accumulating leave refers to unused-leaves carry forward to next years so provision for estimated expense is required to be recorded in books, but if it is non-accumulative then un-used leaves are not carry forwarded to next year so no provision is required to be recognized.

Accounting for leaves:

If Leave accumulates and vests indefinitely:

Number of days in a year = 52 weeks * 5 => 260 days

Salary per day for 2017 = 100,000 / 260 => 385

Salary per day for 2018 = 120,000 / 260 => 462

2)

When the leaves are accumulative only for 1 year then un-used leaves at the end of next year will be expired so no provision is required to be created for expired leaves hence entity has to reverse the provision created for expired leaves or has to adjust the provision for unexpired leaves based on the number of leaves that are not expired.

3)

Entity is not required to create any provision when the vacation leaves are not accumulate because there is no obligation for the entity to pay any unused vacation leaves.


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