Question

Question 9

Bluebell Ltd provides credit services. Bluebell Ltd provides its employees with long service leave entitlements of 13 weeks of paid leave for every 10 years of continuous service. As the company has been operating for only 5 years, no employees have become entitled to long service leave. However, the company recognises a provision for long service leave using the projected unit credit approach required by AASB 119/IAS 19. The following information is obtained from Bluebell Ltd's payroll records and actuarial reports for the non-managerial staff of its debt collection business at 30 June 2019.

Unit credit (years)		No. of employees		% expected to become entitled		Average annual salary $		No. of years until vesting		Yield on govt. corporate bonds %
1		100		20		78,000		9		8
2		80		26		80,000		8		8
3		50		35		82,000		7		4
4		40		50		84,500		6		7
5		25		70		87,600		5		4

Additional information
(a)		The estimated annual increase in retail wages is 6% p.a. for the next 10 years, reflecting Bluebell Ltd's policy of increasing salaries of its debt collection staff for each year of additional experience.
(b)		At 30 June 2018, the provision for long service leave for non-managerial debt collection staff was $140,000.

Prepare the journal entry to account for Bluebell Ltd's provision for long service leave at 30 June 2019 in relation to the non-managerial employees of the company's debt collection business. (Enter debit entries first, followed by credit entries. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round discount factors to 6 decimal places e.g. 0.527512 and final answers to 0 decimal places, e.g. 5,275.)

Date	Account and explanation	Debit	Credit
30/6/19	Wages and salaries expense    Provision for sick leave    Cash    Provision for long service leave    Long service leave expense
	Long service leave expense    Provision for long service leave    Provision for sick leave    Wages and salaries expense    Cash
	(Increase in provision for long service leave)

Answer 1

Date	Account	Debit	Credit
30-06-2019	Long service leave expense	458096
	Provision for long service leave		458096
	(Increase in provision for long service leave)

Working notes:

Estimate of the number of employees expected to become eligible for long service leave:

Years of service	% expected to become entitled	Total no of employees	No of eligible employees
1	20%	100	20
2	26%	80	20.8
3	35%	50	17.5
4	50%	40	20
5	70%	25	17.5

Calculation of projected salaries = No of eligible employees * Current salary * [(1 + Inflation rate) ^ No of years until vesting]

Years of service	No of eligible employees	Current salary	Inflation rate	No. of years until vesting	Discount rate	Projected salary
1	20	78000	6%	9	1.6894790	2635587
2	20.8	80000	6%	8	1.5938481	2652163
3	17.5	82000	6%	7	1.5036303	2157709
4	20	84500	6%	6	1.4185191	2397297
5	17.5	87600	6%	5	1.3382256	2051500

Calculation of accumulated benefit = (Years of employment / Years required for LSL) * (LSL weeks / 52) * Projected salary

Years of service	Projected salary	Unit Credit	LSL weeks / 52	Accumulated benefit
1	2635587	0.1	0.25	65890
2	2652163	0.2	0.25	132608
3	2157709	0.3	0.25	161828
4	2397297	0.4	0.25	239730
5	2051500	0.5	0.25	256437

Present value of accumulated benefit

Years of service	Accumulated benefit	Discount factor	PV
1	65890	0.500249	32961
2	132608	0.540269	71644
3	161828	0.759918	122976
4	239730	0.666342	159742
5	256437	0.821927	210773
			598096

Amount of provision to be increased by = 598096 - 140000 = 458096