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Chapter 13: Question 11Q (page 691)

What are compensated absences?

Short Answer

Expert verified

Compensated absencesare paid leaves, sick leaves, vacations, etc.

Step by step solution

01

Meaning of Compensated Absences Meaning

Compensation absences are the leaves for which they are paid. If the employee does not use full leave in the current period, those leaves can be used in a future period. However, those holidays may or may not be allowed only on the basis of future leave benefits, regardless of whether it is carried forward.

02

Objectives of Compensated absences

Compensated absences are those paid leaves by employees such as vacation, sick leave, etc. They get paid time off or at the time of retirement or termination as compensation.

  • It is to have a uniform and consistent methodology for calculation
  • It is generally measured using the payor salary rates with effect to balance sheet date.
  • It also requires additional amounts relating to salary-related payments like social security, medicare taxes of employee shares.
  • Using sick leaves can be carried forward to the following year also in case they are not utilized.
  • In the case of vacations, it would be yearly basics and can be carried forward. It is calculated as per company rules and regulations and the policies of HR.

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Most popular questions from this chapter

Instar Company has several investments in the securities of other companies. The following information regarding these investmentsis available at December 31, 2017.

1. Instar holds bonds issued by Dorsel Corp. The bonds have an amortized cost of \(320,000 and their fair value at December31, 2017, is \)400,000. Instar intends to hold the bonds until they mature on December 31, 2025.

2. Instar has invested idle cash in the equity securities of several publicly traded companies. Instar intends to sell these securitiesduring the first quarter of 2018, when it will need the cash to acquire seasonal inventory. These equity securities havea cost basis of \(800,000 and a fair value of \)920,000 at December 31, 2017.

3. Instar has a significant ownership stake in one of the companies that supplies Instar with various components Instar usesin its products. Instar owns 6% of the common stock of the supplier, does not have any representation on the supplier鈥檚board of directors, does not exchange any personnel with the supplier, and does not consult with the supplier on any of

the supplier鈥檚 operating, financial, or strategic decisions. The cost basis of the investment in the supplier is \(1,200,000 andthe fair value of the investment at December 31, 2017, is \)1,550,000. Instar does not intend to sell the investment in theforeseeable future. The supplier reported net income of \(80,000 for 2017 and paid no dividends.

4. Instar owns some common stock of Forter Corp. The cost basis of the investment in Forter is \)200,000 and the fair value atDecember 31, 2017, is \(50,000. Instar believes the decline in the value of its investment in Forter is permanent and thereforeimpaired, but Instar does not intend to sell its investment in Forter in the foreseeable future.

5. Instar purchased 25% of the stock of Slobbaer Co. for \)900,000. Instar has significant influence over the operating activitiesof Slobbaer Co. During 2017, Slobbaer Co. reported net income of \(300,000 and paid a dividend of \)100,000.

Accounting

(a) Determine how each of the investments described above should be classified and accounted far.

(b) Prepare any December 31, 2017, journal entries needed for Instar relating to Instar鈥檚 various investments in other companies.

Assume 2017 is Instar鈥檚 first year of operations.

Analysis

What is the effect on Instar鈥檚 2017 net income (as reported on Instar鈥檚 income statement) of Instar鈥檚 investments in other companies?

Question: (Lessee-Lessor Entries, Operating Lease) Cleveland Inc. leased a new crane to Abriendo Construction under a 5-year noncancelable contract starting January 1, 2017. Terms of the lease require payments of \(33,000 each January 1, starting January 1, 2017. Cleveland will pay insurance, taxes, and maintenance charges on the crane, which has an estimated life of 12 years, a fair value of \)240,000, and a cost to Cleveland of \(240,000. The estimated fair value of the crane is expected to be \)45,000 at the end of the lease term. No bargain-purchase or -renewal options are included in the contract. Both Cleveland and Abriendo adjust and close books annually at December 31. Collectibility of the lease payments is reasonably certain, and no uncertainties exist relative to unreimbursable lessor costs. Abriendo鈥檚 incremental borrowing rate is 10%, and Cleveland鈥檚 implicit interest rate of 9% is known to Abriendo.

Instructions

  1. Identify the type of lease involved and give reasons for your classification. Discuss the accounting treatment that should be applied by both the lessee and the lessor.

(Contingencies) Presented below are three independent situations. Answer the question at the end of each situation:

1. During 2017, Salt-n-Pepa Inc. became involved in a tax dispute with the IRS. Salt-n-Pepa鈥檚 attorneys have indicated that they believe it is probable that Salt-n-Pepa will lose this dispute. They also believe that Salt-n-Pepa will have to pay the IRS between \(900,000 and \)1,400,000. After the 2017 financial statements were issued, the case was settled with the IRS for \(1,200,000. What amount, if any, should be reported as a liability for this contingency as of December 31, 2017?

2. On October 1, 2017, Alan Jackson Chemical was identified as a potentially responsible party by the Environmental Protection Agency. Jackson鈥檚 management along with its counsel have concluded that it is probable that Jackson will be responsible for damages, and a reasonable estimate of these damages is \)5,000,000. Jackson鈥檚 insurance policy of \(9,000,000 has a deductible clause of \)500,000. How should Alan Jackson Chemical report this information in its financial statements at December 31, 2017?

3. Melissa Etheridge Inc. had a manufacturing plant in Sudan, which was destroyed in the civil war. It is not certain who will compensate Etheridge for this destruction, but Etheridge has been assured by governmental officials that it will receive a definite amount for this plant. The amount of the compensation will be less than the fair value of the plant, but more than its book value. How should the contingency be reported in the financial statements of Etheridge Inc.?

Calaf鈥檚 Drillers erects and places into service an off-shore oil platform on January 1, 2018, at a cost of \(10,000,000. Calaf is legally required to dismantle and remove the platform at the end of its useful life in 10 years. Calaf estimatesit will cost \)1,000,000 to dismantle and remove the platform at the end of its useful life in 10 years. (The fair value at January 1,2018, of the dismantle and removal costs is $450,000.) Prepare the entry to record the asset retirement obligation.

Question: EXCEL (Derivative Financial Instrument) The treasurer of Miller Co. has read on the Internet that the stock

price of Wade Inc. is about to take off. In order to profit from this potential development, Miller Co. purchased a call option on

Wade common shares on July 7, 2017, for \(240. The call option is for 200 shares (notional value), and the strike price is \)70. (The

market price of a share of Wade stock on that date is \(70.) The option expires on January 31, 2018. The following data are available

with respect to the call option.

Date Market Price of Wade Shares Time Value of Call Option

September 30, 2017 \)77 per share $180

December 31, 2017 75 per share 65

January 4, 2018 76 per share 30

Instructions

Prepare the journal entries for Miller Co. for the following dates.

(a) July 7, 2017鈥擨nvestment in call option on Wade shares.

(b) September 30, 2017鈥擬iller prepares financial statements.

(c) December 31, 2017鈥擬iller prepares financial statements.

(d) January 4, 2018鈥擬iller settles the call option on the Wade shares.
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