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.                       

                               

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.                     

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.   

Required:

Classify the nature of the employee benefit(s) above and explain the accounting treatment (provide journal entries if necessary)

Answer 1

1. Paid vacations are expenses for the company. Company needs to pay them for the leaves tacken. If the the paid leaves carry forwarded to next year, expense should be recognised in the respective year and creating an equal amount of liability.

Journal entry for the above example is given below

as on 12/31/2019

Particulars	Debit	Credit
Salary	$ 5,75,000.00
Accrued vacation leave		$ 5,75,000.00
(25+(45*2))*5000

2. Payments of profit share to directors is an incentivized compensation programme. This will be an addition to their normal salary.

The incentive expense is ussualy paid in the next financial year after computing the profit of the company. Hence companies need to accrue the incentive expenses at respective year end.

Journal entry for the above example is given below

as on 12/31/2019

Particulars	Debit	Credit
Incentive	$       70,000.00
Incentive payable to directors		$      70,000.00
(3500000*2%)

3. Employer contribution to pention scheme is collection of fund contributed by employer. Employee will get pention on his retirement. Employer contribution to pension is an additional expense apart from the monthly salary.

Pention expenses in the given example is 5% of employee salary or $1250 which ever is less per employee

Journal entry for the above example is given below

as on 12/31/2019

Particulars	Debit	Credit
Incentive	$    2,30,000.00
Incentive payable to directors		$ 2,30,000.00
(20000*5%*160)+(35000*5%*40)