Chapter 9, Problem 8P

1.

To determine

Prepare the journal entry to record the events in the books of Company R.

Explanation of Solution

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 liability of sick pay and vacation pay for the first quarter.

Date	Account titles and explanation	Debit ($)	Credit($)
March 31, 2016	Salaries expenses (3)	9,000
	Liabilities for compensated absences		9,000
	(To record the liability of sick pay and vacation pay for the first quarter)

Table (1)

Working note (1):

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

$\begin{array}{c}\begin{array}{l}\text{Liability for compensated}\\ \text{absences – sick leave}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Number of employees }\times \text{Daily gross}\\ \text{wages per employee }\times \text{Number of days}\\ \text{allowed as paid sick leave in a year}\times \\ \left(\frac{\text{Number of month in first quarter}}{\text{Number of month in a year}}\right)\end{array}\right]\\ =15\text{employees }\times \text{\$100 per employee}\times 6\text{days }\times \frac{3}{12}\\ =\$2,250\end{array}$

Working note (2):

Determine the amount of liability for compensated absences – Vacation leave.

$\begin{array}{c}\begin{array}{l}\text{Liability for compensated}\\ \text{absences – vacation leave}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Number of employees }\times \text{Daily gross}\\ \text{wages per employee }\times \text{Number of days}\\ \text{allowed as vacation leave per month}\times \\ \text{Number of month in first quarter}\end{array}\right]\\ =15\text{employees }\times \text{\$100 per employee}\times 1.5\text{days }\times 3\\ =\$6,750\end{array}$

Working note (3):

Determine the liability for compensated absences.

$\begin{array}{c}\text{Liability for compensated absences }=\left[\begin{array}{l}\left(\begin{array}{l}\text{Liability for compensated balances}\\ \text{-Sick leave}\end{array}\right)\\ \text{+}\left(\begin{array}{l}\text{Liability for compensated}\\ \text{balances-Vacation leave}\end{array}\right)\end{array}\right]\\ =\$2,250\left(1\right)+\$6,750\left(2\right)\\ =\$9,000\end{array}$

• Salaries expense is an expense account and it decreases the value of stockholders’ equity. Thus, debit salaries expense with $9,000.
• Liabilities for compensated absences are a liability account and it is increased. Thus credit liabilities for compensated absences with $9,000.

Prepare the journal entry to record the monthly payroll on April 30, 2016.

Date	Account titles and explanation	Debit ($)	Credit($)
April 30, 2016	Salaries expenses	42,000
	Liabilities for compensated absences	3,000
	Cash		45,000
	(To record the payroll expenses paid)

Table (2)

• Salaries expense is an expense account and it decreases the value of stockholders’ equity. Thus, debit salaries expense with $42,000.
• Liabilities for compensated absences are a liability account and it is decreased. Thus debit liabilities for compensated absences with $9,000.
• Cash is an asset account and it is decreased. Thus, credit cash with $45,000.

Prepare the journal entry to record the liability of sick pay and vacation pay for the second quarter.

Date	Account titles and explanation	Debit ($)	Credit($)
March 31, 2016	Salaries expenses (6)	9,000
	Liabilities for compensated absences		9,000
	(To record the liability of sick pay and vacation pay for the second quarter)

Table (3)

Working note (4):

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

$\begin{array}{c}\begin{array}{l}\text{Liability for compensated}\\ \text{absences – sick leave}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Number of employees }\times \text{Daily gross}\\ \text{wages per employee }\times \text{Number of days}\\ \text{allowed as paid sick leave in a year}\times \\ \left(\frac{\text{Number of month in second quarter}}{\text{Number of month in a year}}\right)\end{array}\right]\\ =15\text{employees }\times \text{\$100 per employee}\times 6\text{days }\times \frac{3}{12}\\ =\$2,250\end{array}$

Working note (5):

Determine the amount of liability for compensated absences – Vacation leave.

$\begin{array}{c}\begin{array}{l}\text{Liability for compensated}\\ \text{absences – vacation leave}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Number of employees }\times \text{Daily gross}\\ \text{wages per employee }\times \text{Number of days}\\ \text{allowed as vacation leave per month}\times \\ \text{Number of month in first quarter}\end{array}\right]\\ =15\text{employees }\times \text{\$100 per employee}\times 1.5\text{days }\times 3\\ =\$6,750\end{array}$

Working note (6):

Determine the liability for compensated balances.

$\begin{array}{c}\text{Liability for compensated balances = }\left[\begin{array}{l}\text{Liability for compensated balances}\\ \text{-Sick leave+Liability for compensated}\\ \text{balances-Vacation leave}\end{array}\right]\\ =\$2,250+\$6,750\\ =\$9,000\end{array}$

• Salaries expense is an expense account and it decreases the value of stockholders’ equity. Thus, debit salaries expense with $9,000.
• Liabilities for compensated absences are a liability account and it is increased. Thus credit liabilities for compensated absences with $9,000.

2.

To determine

Prepare a partial interim balance sheet as of June 30, 2016 for disclosing the liabilities that are created.

Explanation of Solution

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare the balance sheet:

Corporation R
Balance sheet (Partial)
As on June 30, 2016
Liabilities	Amount
Current liabilities:
Liability for compensated absences	$15,000

Table (4)

3.

To determine

Discuss the underlying conceptual basis of accounting for compensated absences.

Explanation of Solution

Compensated absences represent an expense that has been incurred by the employer but not yet paid. Because, the company has the responsibility to the employee for the service rendered, this will be accumulated, payment is probable and this can be reasonably estimated and thus the company must accrue an expense related to compensate absences. Hence, it is a liability of the employer to recognize the expenses related to the compensated absences in the period in which the employees work and earn the benefits.