Question

Sycamore Ltd. began operations on January 2, 2020. The company employs 10 people who work 8-hour days. Each employee earns 10 paid sick days annually. The sick days accumulate, are vested, and can be carried forward. The average hourly wage rate was $ 20.00 in 2020 and $ 21 in 2021. The average number of sick days used by each employee in 2020 was 8. Sycamore accrues the cost of compensated absences at rates of pay in effect when the absences are expected to be taken.

Required:

1. Record the adjusting entry for 2020 to accrue the compensated absence.
2. Assume that the sick days do not vest, and are accumulated. Discuss the accounting issue which this presents.

Answer 1

1. Hourly rate in 2021- $21

Daily rate with 8 hours work day= 8*21= $176

No. of employees- 10

Vested and accumulated leave balance carried forward- (10-8)*10= 20 days

Cost to be accounted= 20*176= $3,520

Journal entry shall be-

Compensated abscences Expenses A/c---Dr $3,520

To Provision for compensated abscences A/c $3,520

(Being provision recorded for carried forward compensated abscences)

2. Non-vesting leave balances are those which cannot be encashed but can be used in future if carried forward is allowed. This results in change in accounting as in future when an employee uses non-vested, accumulated and brought forward leave, salary expenses recorded on that day should adjusted against the provision for abscences rather than recording current salary cost.