Morgan Company determined that (1) it has a material obligation relating to empl

Question

Morgan Company determined that (1) it has a material obligation relating to employees' ... relating to employees' rights to receive compensation for future absences attributable toemployees' services already rendered, (2) the obligation relates to rights that vest, and (3) payment of the compensation in probable. The amount of Morgan's obligation as of December 31, year 1 is reasonably estimated for the following employee benefits:

Vacation pay $100,000

Holiday pay $25,000

What total amount should Morgan report as its liability for compensated absences in its December 31, year 1 balance sheet?

Explanation / Answer

A liability for compensated absences should be accrued if the obligation is attributable to employees’ services already rendered, the obligation relates to rights which vest or accumulate, payment is probable, and the amount is reasonably estimable. All four conditions are met.
             So, both the vacation pay and holiday pay are considered compensated absences. Therefore, $125,000 ($100,000 + $25,000) should be accrued for compensated absences.

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