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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Compensated Absences Bettinghaus Corporation began business on January 2, 2019, with five employees. Its sick leave and vacation policy follows: Each employee is allowed 8 days of paid sick leave each year and one day of paid vacation leave for each month worked. The accrued vacation leave cannot be taken until the employee has been with the company 1 year. The sick leave, if not used, accumulates to an 18-day maximum. The vacation leave accumulates for 5 years, but at any time the employee may request additional compensation in lieu of taking paid vacation leave. The company records its liability for both compensated absences on a quarterly basis. The daily gross wages for each employee are $160.

Required:

  1. 1. Prepare journal entries to record the liability for compensated absences for the first quarter of 2019. Assume no sick leave had been taken by the employees.
  2. 2. Prepare a partial interim balance sheet showing how the liability created in Requirement 1 would be reported on March 31, 2019.
  3. 3. Next Level Discuss the underlying conceptual basis of accounting for compensated absences.

1.

To determine

Prepare the journal entries to record the liability for compensated absence for the first quarter of 2019 in the books of Corporation B.

Explanation

Vacation Pay Liability:

Vacation pay is a benefit paid by the employers for the full-time employees that allows the employees to take the salaried vacation.

Prepare the journal entry to record the sick pay:

DateAccount titles and explanationDebit ($)Credit($)
March 31, 2019Salaries expenses1,600 
     Liabilities for compensated     absences (1) 1,600
 (To record the liability of sick pay for the first quarter)  

Table (1)

Working note (1):

Calculate the amount of liability for compensated absences – sick leave.

Liability for compensatedabsences – sick leave} = [Number of employees ×Daily grosswages per employee ×Number of daysallowed as paid sick leave in a year×(Number of month in first quarterNumber of month in a year)]=5employees ×$160 per employee×8days ×312=$1,600

  • Salaries expense is an expense account and it decreases the value of shareholders’ equity

2.

To determine

Prepare a partial interim balance sheet showing the manner in which the liability would be reported on March 31, 2019.

3.

To determine

Discuss the underlying conceptual basis of accounting for compensated absences.

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