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Chapter 13: Q4E (page 694)

Assume the facts in E13-3 except that Matt Broderick Company has chosen not to accrue paid sick leave until used, and has chosen to accrue vacation time at expected future rates of pay without discounting. The company used the following projected rates to accrue vacation time.

Year in Which Vacation Time Was Earned

Projected Future Pay Rates Used to Accrue Vacation Pay

2016

\(10.75

2017

\)11.60

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. In 2016$2,880 is paid for sick leaves used and$3,960 2017.
  2. Balance on 31 Dec 2016 is$7,740 and on 31 Dec 2017 is$9,126.

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 to record the transaction of compensated absences during 2016 and 2017

Date

Accounts and Explanation

Debit $

Credit $

2016

Salaries expenses

$7,740

Salaries payable(9鈥�employees脳10days脳8hours脳$10.75)

$7,740

(To record the accrual of vacation salary)

Salaries expenses

$2,880

Cash(9鈥�employees脳4days脳8hours脳$10)

$2,880

(To record the sick leaves used)

2017

Salaries expenses

$8,352

Salaries payable(9鈥�employees脳10days脳8hours脳$11.60)

$8,352

(To record the accrual of vacation salary)

Salaries expenses(9鈥�employees脳5days脳8hours脳$11)

$3,960

Cash

$3,960

(To record the sick leaves used)

Salaries and wages expenses($7,128-$6,966)

$162

Salaries and wages payable(9鈥�employees脳9days脳8hours脳$10.75)

$6,966

Cash(9鈥�employees脳9days脳8hours脳$11)

$7,128

(To record the vacation time paid)

03

Liability for compensated absences on the balance sheet of 2016 and 2017

Particular

2016

2017

Balance on 1 Jan

0

$7,740

Accrued

$7,740

8,352

Less: Paid

0

(6,966)

Balance on 31 Dec

$7,740

$9,126

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Most popular questions from this chapter

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for

investments.

(Equity Investment) Oregon Co. had purchased 200 shares of Washington Co. for \(40 each this year (Oregon

Co. does not have significant influence). Oregon Co. sold 100 shares of Washington Co. stock for \)45 each. At year-end, the price

per share of the Washington Co. the stock had dropped to $35.

Instructions

Prepare the journal entries for these transactions and any year-end adjustments.

Eddie Zambrano Corporation began operations on January 1, 2017. During its first 3 years of operations, Zambrano reported net income and declared dividends as follows.

Net Income Dividends Declared

2014 \( 40,000 \) 鈥�0鈥�

2015 125,000 50,000

2016 160,000 50,000

The following information relates to 2017.

Income before income tax \(240,000

Prior period adjustment: understatement of 2015 depreciation expense (before taxes) \)25,000

Cumulative decrease in income from change in inventory methods (before taxes) \(35,000

Dividends declared (of this amount, \)25,000 will be paid on Jan. 15, 2018) \(100,000

Effective tax rate 40%

Instructions

  1. Prepare a 2017 retained earnings statement for Eddie Zambrano Corporation.
  2. Assume Eddie Zambrano Corporation restricted retained earnings in the amount of \)70,000 on December 31, 2017. After this action, what would Zambrano report as total retained earnings in its December 31, 2017, balance sheet?

(Gain on Sale of Investments and Comprehensive Income) On January 1, 2017, Acker Inc. had the followingbalance sheet.

The accumulated other comprehensive income related to unrealized holding gains on available-for-sale debt securities. The fairvalue of Acker Inc.鈥檚 available-for-sale debt securities at December 31, 2017, was \(190,000; its cost was \)140,000. No securities

were purchased during the year. Acker Inc.鈥檚 income statement for 2017 was as follows. (Ignore income taxes.)

ACKER INC.

BALANCE SHEET

AS OF JANUARY 1, 2017

Assets Equity

Cash \( 50,000 Common stock \)260,000

Debt investments (available-for-sale) 240,000 Accumulated other comprehensive income 30,000

Total \(290,000 Total \)290,000

ACKER INC.

INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2017

Dividend revenue \( 5,000

Gain on sale of investments 30,000

Net income \)35,000

Instructions

(Assume all transactions during the year were for cash.)

(a) Prepare the journal entry to record the sale of the available-for-sale debt securities in 2017.

(b) Prepare the journal entry to record the Unrealized Holding Gain or Loss for 2017.

(c) Prepare a statement of comprehensive income for 2017.

(d) Prepare a balance sheet as of December 31, 2017.

Under what conditions is an employer required to accrue a lability for sick pay? Under what conditions is an employer permitted but not required to accrue a liability for sick pay?
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