Cates Computing Systems develops and markets commercial software for personal co

Question

Cates Computing Systems develops and markets commercial software for personal computers and workstations. Three situations involving compensation for possible future absences of Cates's employees are described below. a.Cates compensates employees at their regular pay rate for time absent for military leave, maternity leave, and jury time. Employees are allowed predetermined absence periods for each type of absence. b.Members of the new product development team are eligible for three months' paid sabbatical leave every four years. Five members of the team have just completed their fourth year of participation. c.Company policy permits employees four paid sick days each year. Unused sick days can accumulate and can be carried forward to future years. Required: 1.What are the conditions that require accrual of an expense and related liability for employees' compensation for future absences? 2.For each of the three situations, indicate the circumstances under which accrual of an expense and related liability is warranted.

Explanation / Answer

It is a problem on accrual of leave. Your objective is to determine whether in the books of account it will be shown as accrued liabilty or ot. Three separate situations are mentioned below:

1.When leave has accrued and money is surely payable in future then it is necessary to create liability in the book

2. If accumulation of leave is subject to the happening of an event then no liaility is created in the book unless it has happened.

3. Again leave is sometimes allowed to accumulate but not availed unless something has happened. For such leave also no liability should be created in the books of accout.

-----------------------------------------------------------------------------------------------------------------------------------------

Answer of part 2:

In the problem, three types of leave has been prescribed.. They are evaluated in the light of points discussed in the previous paras.

1. When an employess has to remain absent due to reasons like:

a. Military activities

b. maternity and

c. Injury time,

then full compensation is payable. Here leave will be granted only whe something has happened. Military leave is payable only when a labor is called to do the same. Similarly a female worker will get maternity leave only when she is pregnant. Finally injury leave is taken only when there is accident in course of employment and labor has suffered injury.

These leaves are known contingency leave. It will accumulate only when contingency has happened. If nothing as such has happened then no leave is due. So unless contingency has happened, expenses will not accrue and as such no libility will be created. In accounts such contingent leave provision can be properly disclosed in the form of a note.

2. Now consider second type of leave. Members of new product development team are eligible for three months sabatical leave after every four year. Here leave is surely payable after every four years. As the leave is surely payable, liability for them should accrue and liability needs be created.

3. Now consider third type of leave. It is sick leave. Four days sick leave is allowed for each year of service. This leave is taken only when the worker has become sick. If he is not sick then it will be carried forward. In susequent year if the worker has become sick, he will be able to avail all accumulated sick leave. Therefore it will be recorded as unused leave accumulates. However it should not be shown as accrued expenses and no libility is reqiuired to be created since it will be paid only when he is sick.

Conclusion : Only accrual of expnese and creation of liability is required against sabatical leave.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.