You have been hired as an accounting consultant to help set up the year-end entr
ID: 2422736 • Letter: Y
Question
You have been hired as an accounting consultant to help set up the year-end entries necessary to account for employee liabilities. Your client, Tate’s Bake Shop, began operations on January 2, 2015. It employs 4 individuals who work 8-hour days and are paid hourly and 2 individuals who are paid salary.
2. Tate’s Bake Shop would like you to evaluate the financial statement impact of the following two options for accounting for vacation and sick days.
a. Accrue the cost of compensated absences at rates of pay in effect during the period when earned and accrue sick pay when earned.
b. Accrue vacation time at expected future rates of pay without discounting and record paid sick leave only when it is used.
Each employee earns 10 paid vacation days and 6 paid sick days annually. Vacation days may be taken after January 15 of the year following the year in which they are earned. Sick days may be taken as soon as they are earned; unused sick days accumulate. Additional information is as follows.
Year
Actual Salary Rate
Actual Wage Rate
Vacation Days Used by each Employee
Sick Days Used by each Employee
Projected Future Pay Rates Used to Accrue Vacation Pay
2015
$3,000/wk
15.00/hr
0
5
17.00/hr & 3,500/wk
Include the suggested journal entries to record compensated absences during 2015 and the amounts of any liability for compensated absences that should be reported on the balance sheet at December 31, 2015 under each method. Conclude by recommending one of the two methods and explaining your recommendation.
Year
Actual Salary Rate
Actual Wage Rate
Vacation Days Used by each Employee
Sick Days Used by each Employee
Projected Future Pay Rates Used to Accrue Vacation Pay
2015
$3,000/wk
15.00/hr
0
5
17.00/hr & 3,500/wk
Explanation / Answer
Individual Hours Rate per Hour weeks Total Earnings per anam Salary per month 4 individuals 8 15 52 124800 10400 2 individuals 3000 52 312000 156000 166400 Individual vacation sick Earing of vacation Earning of sick Total 4 individuals 10 1 17 170 17 2 individuals 10 1 700 7000 700 717 Salary payable account Dr 167117 To Salary Cr 167117 ( Being salary transferred to salary payable accoun ) Employee A/ c Dr 167117 To cash / Bank A/c Cr 167117 ( Being salary transferred to employees account )
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