Compensated Absences Handout

Compensated Absences Handout - When Vacations Were Taken in...

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Compensated Absences Suppose a firm grants two weeks of paid vacation each year to nonsalaried employees. Some take their vacations during the year earned and are compensated then. Some wait. Is the compensation an expense during the year earned for only those who actually are paid that year for their absences? When you recall what you have learned about accrual accounting, you probably conclude otherwise. Example Davidson Getty Chemicals has 8,000 employees. Each employee earns two weeks of paid vacation per year. Vacation time not taken in the year earned can be carried over to subsequent years. During 2006, 2,500 employees took both weeks’ vacation, but at the end of the year, 5,500 employees had vacation time carryovers as follows: Vacation Weeks Total Employees Earned but not Taken Carryover Weeks 2,500 0 0 2,000 1 2,000 3,500 2 7,000 8,000 9,000 During 2006, compensation averaged $600 per week per employee.
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Unformatted text preview: When Vacations Were Taken in 2006 Salaries and Wage Expense (2,500 x 2wks x $600) 4,200,000 Cash/Wages Payable 4,200,000 December 31, 2006 (adjusting entry) Salaries and Wage expense (9,000 wks x $600) 5,400,000 Liability – compensated future absences 5,400,000 The liability is recorded at the existing wage rate. So, if wage rates rise, the difference between the accrual and the amount paid increases compensation expense that year. For example, assume that all the carryover vacation time is taken in 2007 and the actual amount paid to employees is $5,700,000. When Year 2006 Vacations are Taken in 2007 Liability – compensated future absences 5,400,000 Compensation expense 300,000 Cash/Wages Payable 5,700,000 Source: Intermediate Accounting , Spiceland, Sepe, Tomassini, 4 th Edition, McGraw Hill, pg 618-619....
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This note was uploaded on 03/16/2010 for the course BUSACC 1205 taught by Professor Boyas during the Spring '10 term at Pittsburgh.

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