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Chapter 13: Q3E (page 693)

(Compensated Absences)

Matt Broderick Company began operations on January 2, 2016. It employs 9 individuals who work 8-hour days and are paid hourly. Each employee earns 10 paid vacation days and 6 paid sick days annually. Vacation days may be taken after January 15 of the year following the year in which they are earned. Sick days may be taken as soon as they are earned; unused sick days accumulate. Additional information is as follows.

Actual hourly wage rate
Vacation days used by each employee
Sick days used by each employee

2016

2017

2016

2017

2016

2017

\(10

\)11

0

9

4

5

Matt Broderick Company has chosen to accrue the cost of compensated absences at rates of pay in effect during the period when earned and to accrue sick pay when earned.

Instructions

(a) Prepare journal entries to record transactions related to compensated absences during 2016 and 2017.

(b) Compute the amounts of any liability for compensated absences that should be reported on the balance sheet at December 31, 2016 and 2017.

Short Answer

Expert verified
  1. Employees used sick leaves of $2,880 in the year 2016 and $3,960 in the year 2017.
  2. Balance on 31 Dec 2016 and 2017:
Particular


20162017
Vacations wages payableSick pay wages payableVacations wages payableSick pay wages payable

31 Dec balance

$7,200

$1,440

$8,640

$2,376

Step by step solution

01

Definition of Salaries Payable

Salaries payable is the account used to report the liabilities in respect of the salaries and expenses that are due but not paid. It is generally reported as the current liability of the business entity.

02

Journal entries for transactions related to compensated absences

Date

Accounts and Explanation

Debit $

Credit $

2016

Salaries expenses

$7,200

Salaries payable(9鈥�employees脳10days脳8hours脳$10)

$7,200

(To record the accrual of vacation leaves)

Salaries expenses

$4,320

Salaries payable(9鈥�employees脳6days脳8hours脳$10)

$4,320

(To record the accrual of sick leave)

Salaries payable

$2,880

Cash(9鈥�employees脳4days脳8hours脳$10)

$2,880

(To record the sick leaves used)

2017

Salaries expenses

$7,920

Salaries payable(9鈥�employees脳10days脳8hours脳$11)

$7,920

(To record the accrual of vacation leaves)

Salaries expenses

$4,752

Salaries payable(9鈥�employees脳6days脳8hours脳$11)

$4,752

(To record the accrual of sick leave)

Salaries expenses

$648

Salaries payable(9鈥�employees脳9days脳8hours脳$10)

$6,480

Cash(9鈥�employees脳9days脳8hours脳$11)

$7,128

(To record the vacation leaves used)

Salaries expenses

$144

Salaries payable(9鈥�employees脳3days脳8hours脳$11+9鈥�employees脳2days脳8hours脳$10)

$3,816

Cash

$3,960

(To record the sick leaves used)

03

Calculation of liability for the compensated absence

Particular
20162017
Vacations wages payable
Sick pay wages payable
Vacations wages payable
Sick pay wages payable

1 Jan balance

$0

$0

$7,200

$1,440

Accrued

$7,200

$4,320

$7,920

$4,752

Less: paid

0

($2,880)

($6,480)

($3,816)

31 Dec balance

$7,200

$1,440

$8,640

$2,376

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Most popular questions from this chapter

Question: (Cash Flow Hedge) LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will

need to purchase 500 ounces of gold in October 2017, for jewelry that will be shipped for the holiday shopping season. However,

if the price of gold increases, LEW鈥檚 cost to produce its jewelry will increase, which would reduce its profit margins.

To hedge the risk of increased gold prices, on April 1, 2017, LEW enters into a gold futures contract and designates this

futures contract as a cash flow hedge of the anticipated gold purchase. The notional amount of the contract is 500 ounces, and

the terms of the contract give LEW the right and the obligation to purchase gold at a price of \(300 per ounce. The price will be

good until the contract expires on October 31, 2017.

Assume the following data with respect to the price of the futures contract and the gold inventory purchase:

Date Spot Price for October Delivery

April 1, 2017 \)300 per ounce

June 30, 2017 310 per ounce

September 30, 2017 315 per ounce

Instructions

Prepare the journal entries for the following transactions.

(a) April 1, 2017鈥擨nception of the futures contract, no premium paid.

(b) June 30, 2017鈥擫EW Co. prepares financial statements.

(c) September 30, 2017鈥擫EW Co. prepares financial statements.

(d) October 10, 2017鈥擫EW Co. purchases 500 ounces of gold at \(315 per ounce and settles the futures contract.

(e) December 20, 2017鈥擫EW sells jewelry containing gold purchased in October 2017 for \)350,000. The cost of the finished

goods inventory is $200,000.

(f) Indicate the amount(s) reported on the balance sheet and income statement related to the futures contract on June 30, 2017.

(g) Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions

on December 31, 2017.-

(Fair Value Measurement) Presented below is information related to the purchases of common stock by Lilly

Company during 2017.

Cost Fair Value

(at purchase date) (at December 31)

Investment in Arroyo Company stock \(100,000 \) 80,000

Investment in Lee Corporation stock 250,000 300,000

Investment in Woods Inc. stock 180,000 190,000

Total \(530,000 \)570,000

Instructions

(Assume a zero balance for any Fair Value Adjustment account.)

(a) What entry would Lilly make at December 31, 2017, to record the investment in Arroyo Company stock if it chooses to

report this security using the fair value option?

(b) What entry(ies) would Lilly make at December 31, 2017, to record the investments in the Lee and Woods corporations,

assuming that Lilly did not select the fair value option for these investments?

How is present value related to the concept of a liability?

BE 13-13(L03) Streep Factory provides a 2-year warranty with one of its products which was first sold in 2017. Streep sold \(1,000,000 of products subject to the warranty. Streep expects \)125,000 of warranty costs over the next 2 years. In that year, Streep spent $70,000 servicing warranty claims. Prepare Streep鈥檚 journal entry to record the sales (ignore cost of goods sold) and the December 31 adjusting entry, assuming the expenditures are inventory costs.

How are current liabilities related by definition to current assets? How are current liabilities related to a company鈥檚 operating cycle?
See all solutions

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