Question

1. HK Limited has 100 employees. Each employee earns two weeks of paid vacation per year. Vacation time not taken in the year earned can be carried over to two calendar years. Paid leave is first taken out of the balance brought forward from the previous year and then out of the current year’s entitlement (a FIFO basis). During 2019, 30 employees took both weeks’ vacation, but at the end of the year, 70 employees had vacation time carryover as follows:

Employees	Vacation weeks earned but not taken
30	-
25	1
45	2
100

       

        During 2019, the average salary for employees is $5,000 per week.              [5 marks]

                                               

2. The profit sharing plan requires HK Ltd. to pay 2% of its net profit to its two directors, Mr. Yau Wen and Ms. Shally Tin. The net profit for 2019 is $3,500,000. Mr. Wen will receive the bonus six months after the end of 2019, whereas Ms. Tin would be paid on July 2021 since she joined the company in March of 2019.                         [5 marks]

3. HK Ltd. agrees to pay a fixed contribution of 5% of employees’ salary to a retirement plan, subject to a cap of $1,250 per month for each employee. The contribution is paid monthly on or before the 10th of the following month. Out of the 200 employees, 160 employees earn an average monthly salary of $20,000.   The remaining employees earn more than $35,000 per month.                                           [5 marks]

Required:

Classify the nature of the employee benefit(s) above and explain the accounting treatment (provide journal entries if necessary) in accordance with relevant Hong Kong Accounting Standard(s).

Answer 1

Classification of nature of employee benefit and journal:

The paid vacation time is treated as short-term employee benefits. In this case, the employees of HK Ltd are eligible for 2 weeks paid vacation per year. If not utilized the same year, the employees can carry forward the leave and utilize the same on FIFO basis during the next year. Out of the 100 employees, 70 employees had vacation time carryover.

The vacation has to be accounted in salaries and wages as expense. For the un-utilized part, a provision needs to be created which will be paid in 2020. Please find below journal entry for the same at year end.

	Working	Amount($)	Amount($)
Salaries Payable	$5,000*30*2 + $5000*25 = $300,000+$125,000 = $	425,000
Provision for carry-forward vacation pay	$5000*45*2 weeks + $5,000*25 = $450,000+$125,000 = $575,000/-	575,000
To Cash/Bank	$5000*100*2		1,000,000

The profit sharing bonus to its directors is due in one case within 6 months and in another case, it is due within 7 months. Hence profit sharing plan is accounted under short-term employee benefit as an expense. This sharing is for 2 directors of the company. Journal is as follows at year end.

	Working	Amount($)	Amount($)
Employee Bonuses account	2% of 3,500,000 = $70,000 * 2 = $140,000/-	140,000
Bonus accrual account			140,000

This employee benefit is classified as long term benefit and come under the defined contribution plans. For the monthly contribution, the journal entry is as follows, which has to be passed every month of 2019 :

	Working	Amount($)	Amount($)
Contribution to fixed plan	$20,000*160employees*5%=$160,000 + $1,250 * 40 =$50,000. Total $210,000/- Note: When average salary is $35,000/-, 5% of it is $1,750/- . Hence for remaining 40 employees, the cap amount of $1,250 is taken	210,000
To cash			210,000

Note: The problem initially starts with stating HK Ltd has 100 employees. But for the contribution part, the number of employees is stated as 200. Hence employee numbers are taken as stated for each case.