[Anonymous]

Becker MCQ on compensated absences

North Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, North’s unadjusted balance of liability for compensated absences was $21,000. North estimated that there were 150 vacation days and 75 sick days available at December 31. North’s employees earn an average of $100 per day. In its December 31 balance sheet, what amount of liability for compensated absences is North required to report?

a. $22,500
b. $36,000
c. $15,000
d. $21,000

The correct answer is C. 150 vacation days × $100 per day = $15,000

However, why isn’t the correct answer B? The unadjusted balance of $21,000 could be the beginning balance from Jan 1. As a result, the total amount of liability for compensated expense to be recorded is $15,000 + $21,000 = $36,000.

 

 

[Anonymous]

dtodaizzle- The employees should have used those vacation days during the year so the beginning balance is not relevant. The only thing that matters is the number of vacation days accrued at year end x the rate.

[mla1169]

Basically the estimate of 150 days vacation time includes time accrued in previous years. The company is estimating its TOTAL liability at 150 days (as opposed to 150 days only from the current year).

For B to be correct, the company would have had to estimate the balance at 360 days (360 x $100=$36,000) which is not what they estimated.

Hope that helps.

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[Anonymous]

Thank you everyone!

[NYCaccountant]

I thought the sick the days should be accrued as well. When a person takes a sick day, are they not using compensation already earned from prior period? Seems like a matching problem to me.

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[Anonymous]

NYCaccountant – Sick days are not accrued because it is not certain that the employees will use them. We cannot predict future illness therefore we don't know if those days will be used/required to pay.

[Anonymous 2]

I think that what they are asking is what is the company required to report for December 31. Which would be the $15,000. Just an FYI I got $36,000 before reading the correct answer and reviewing the wording. Very tricky as it could mean what is the company required to report on December 31 as current liability which could be the $36,000.

[Author]

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