Question

. Marietta Ltd has 50 employees who are entitled to long-service leave (LSL). The LSL can be taken after 10 years of service, at which time the employee is entitled to 13 weeks' leave. Information about the employees is set out below. No. of employees 50 Annual salary per employee 50 000 Years of service 8 Probability that LSL will be taken 80% No of years until vesting 2 Yield on corporate bonds 5% The inflation rate for the foreseeable future is 2%. The future salaries of the employees are expected to keep pace with inflation but not increase as a result of promotion. Assume 52 weeks per year. What should the balance of the long-service leave provision account be in the books of Marietta Ltd (rounded to the nearest dollar)? a. $ 400 000 b. $ 7 549 c. $ 471 837 d. $ 377 469

Answer 1

The answer is C) 471837.

Logic:

• Annual Salary at the end of 10th year(i.e after 2 years)- 50000*102%*102% = $52,020
• Salary for 13 weeks = $52020/52 weeks*13 weeks = $13,005
• Salary of 50 employees for 13 weeks = $13005*50 employees = $650,245
• Probability that LSL will be taken(i.e amount that will be required for LSL) = $650,245*80% = $520,200
• Present value of the amount required for LSL = $520,200*PVF(5%,2) = $520,200*0.9070294 = $471,837
• Amount of LSL Provision to be recorded in the books of Marietta Ltd. = $471,837.