SHORT TERM EMPLOYEE BENEFITS
ABC Co. pays salaries twice a month and does not pay salaries in advance.
Employees work five days a week and compensation are computed on these
working days. In December 20x1, ABC Co. paid the second monthly salaries on
December 26 which falls on a Friday. The next non-working holiday is on New Years
Day. ABC has 100 employees who earn P1,000 per day. ABCs cost accountant
identified that 70% of salaries accrued incurred pertain to the production of goods.
How much is the accrued salaries as of December 31, 20x1?
SICK LEAVE
An entity has 100 employees who are entitled to five (5) working days of paid sick
leave for each year Unused sick leave may be carried forward for one calendar year.
Sick leave is taken first out of the current years entitlement and then out of any
balance brought forward from the previous year (a LIFO basis).
At December 30, 20x1,the average unused entitlement is two days per employee.
The entity expects based on past experience which is expected to continue, that 92
employees will take no more than five days of paid sick leave in 20x2 and that the
remaining 8 employees will take an average of six and a half days each. The
average salary per day, per employee in 20x1 is P1,000 and it is not expected to
change in 20x2.
How much is the accrued salaries for sick leave and record the corresponding entry
to record the liability and when the sick leaves are taken in 20x2.
VACATION LEAVE-ACCUMULATING, VESTING
ABC Co. grants its employees twelve days paid vacation leave ach year. Per ABCs
policy, employees are required to take vacation leave each year, but not necessarily
for their entire vacation leave entitlement. Vacation leaves not taken during a year
can be carried over indefinitely.
ABC has 500 employees with an average salary of P1,000 per day. The average
annual pay increase is 5%. During 20x1, total vacation leaves taken by employees
were 5,400 days. Based on past experience, 90% of unused vacation leave for a
year are taken in the immediately following year.
Case 1. Assume that unused vacation leaves vest, how much should ABC accrue as
liability for unused vacation leave on December 31, 20x1?
Case 2. Assume that unused vacation leaves do not vest, how much should ABC
accrue as liability for unused vacation leave on December 31, 20x1?
BONUS COMPUTATION
ABC Co. grants its managerial employees bonus in the form of profit sharing.
Information n operations in 20x1 is shown below:
Profit before tax
P1,000,000
Bonus rate or percentage
10%
Income tax rate
30%
Compute for
1.
2.
3.
4.
Bonus
Bonus
Bonus
Bonus
before bonus and before tax
after bonus and before tax
before bonus and after tax
after bonus and after tax
POST EMPLOYMENT BENEFITS
Defined Contribution plan.
ABC Co. has a post-employment benefit plan that is considered as defined
contribution plan. According to the plan, ABC agrees to contribute P200,000
annually to a retirement fund for the benefit of its employees.
On December 31, 20x1 because of poor results of operations and insufficient
working capital, ABC was only able to contribute P80,000 to the fund.
On December 31, 20x2, because of a profitable year, ABC decided to contribute
P450,000 to the retirement fund.
On January 12, 20x3, an employee retired and was eligible to a P30,000 retirement
benefits based on the operating efficiency and investment earnings of the fund.
1. Record the contribution on each of the above transaction.
2. Assume that ABC Co does not transfer retirement funds to a trustee but
rather sets up a retirement fund to be managed internally. Record the
pertinent entries.
3. Assume that ABC Co does not transfer retirement funds to a trustee and does
not set up a retirement fund specifically to be used in paying retirement
benefits. Record the pertinent entries.
Defined Benefit Plan
Present value of defined benefit obligation
Information on ABC Cos defined benefit plan is show below:
Present value of benefit obligation, Jan 1
P120,000
Current Service Cost
30,000
Interest Cost
10%
Benefit paid to retirees
50,000
Decrease in present value of defined benefit obligation during
The year due to changes in actuarial assumptions
10,000
Required: Compute for the balance of present value of defined benefit obligation as
of year end.
Current Service Cost
PV of defined benefit obligation, Jan 1
P120,000
PV of defined benefit obligation, Dec 31
Interest cost
Benefits paid to retirees
122,000
10%
50,000
Increase in present value of defined benefit obligation during the year
Due to changes in actuarial assumptions
10,000
Requirement: Compute for the current service cost.
Projected Unit Credit Method
AB Co. agrees to provide lump-sum retirement benefits to employees equal to 6% of
final salary for each year of service. Information on an employee is show below
Average annual salary level on January 1, 20x1
P3,000,000
Average annual salary increase starting January 1, 20x2 and every year thereafter
3%
Average service lives before entitlement to retirement benefits (January 1, 20x1
To December 31, 20x5)
years
Discount rae per year
10%
Requirement
1. How much is the ultimate cost of the defined benefit plan? (or how much is
the total amount of retirement benefits to be received by the employee?)
2. How much are the current service costs in 20x1, 20x2, 20x3, 20x4 and 20x5,
respectively?
3. How much are the present value of the defined benefit obligation at each
year-end in 20x1, 20x2, 20x3, 20x4, and 20x5 respectivley?
Attributing benefit to periods of service
ABC Co.s defined benefit plan provides a lump sum benefit of P10,000, payable on
retirement, for each year of service.
Case 1. Mr. Juan is an employee of ABC Co. How much benefit is attributed for each
year of service rendered by Mr. Juan?
Case 2. If in Year 1, Mr. Juan has rendered one-year service, how much is the current
service cost for the year assuming the appropriate present value factor is
0.683013?
Case 3. If in Year 3, Mr. Juan has rendered cumulative three years service, how
much is the present value of the defined benefit obligation as of the end of Year 3
assuming the appropriate present value factor is 0.826446?
ASSIGNMENT
Information on ABC Co.s defined benefit plan is show below
Fair value of plan assets, Jan 1
1,000,000
Return of plan assets
120,000
Contributions made to the fund
30,000
Present value of defined benefit obligation, Jan 1
1,200,000
Current Service cost
300,000
Benefits paid during the period
50,000
Discount rate
10%
Requirements
a. Compute for the net defined benefit liability (asset) as of Jan 1
b. Compute for the net defined liability (asset) as of December 31.
