Question

1. Johnson Corp. prepares monthly financial statements and ends its fiscal year on June 30. In July, your first month as accountant for the company, you find that the company has not previously accrued estimated liabilities. You discover that the company allows employees who have worked for the company for one year to take two weeks' paid vacation each year. The cost of these vacations had been charged to expense in the month of payment. Approximately 85 percent of the employees qualify for this benefit.  You suggest to management that proper accounting treatment for these expenses is to spread their cost over the entire year. Management agrees and asks you to make the proper adjustments.

Required

a.)  Assume that for July the total payroll is $424,000, which includes $14,800 paid to employees who were on vacation.  

(i). Compute the vacation pay expense for July.  

(ii)  Prepare a general journal entry to record the accrual of vacation pay expense for July.

Answer 1

(i) After one full year of working ,employees are entitled for 2 weeks paid vacation
For one full month working employees are entitled to vacation period=15/12*1 i.e 1.25 days and 85% qualify for vacation
Therefore Vacation expenses to be accrued is $14,492.50
Calculation=(424000-14800)/30*1.25*85%
(ii) Required Journal Entry
Description	Debit	Credit
Leave Encashment	$14,492.50
Provision for Leave Encashment		$14,492.50
(being vacation pay expenses accrued)