Midrift Ltd has nine employees who are entitled to long service leave (LSL). The LSL can be taken after 12 years of service, at which time the employee is entitled to 15 weeks' leave. After 10 years the employee is entitled to a pro rata cash payment on leaving the company. Information about the employees is set out below:

Other information collected.

The inflation rate for the foreseeable future is 1.5 per cent. The future salaries of the employees are expected to keep pace with inflation but not increase as a result of promotion. If the opening balance of the LSL provision is $87,560, what is the entry to record LSL expense for the current period (round amounts to the nearest dollar)?
E) None of the given answers.

Question

Midrift Ltd has nine employees who are entitled to long service leave (LSL). The LSL can be taken after 12 years of service, at which time the employee is entitled to 15 weeks' leave. After 10 years the employee is entitled to a pro rata cash payment on leaving the company. Information about the employees is set out below:

Other information collected.

The inflation rate for the foreseeable future is 1.5 per cent. The future salaries of the employees are expected to keep pace with inflation but not increase as a result of promotion. If the opening balance of the LSL provision is $87,560, what is the entry to record LSL expense for the current period (round amounts to the nearest dollar)?
E) None of the given answers.

Quizplus · Accepted Answer

To calculate the LSL expense for the current period, we need to take the following steps:
1. Calculate the number of employees entitled to LSL: 9 employees
2. Calculate the pro rata cash payment for employees with 10 years of service: 
- Employee A: $62,500 × 10 ÷ 12 = $52,083.33
- Employee C: $77,500 × 10 ÷ 12 = $64,583.33
- Employee E: $92,500 × 10 ÷ 12 = $77,083.33
- Total pro rata cash payment = $193,750
3. Calculate the present value of the LSL liability for employees with 12 years of service:
- Employee B: $77,500 × 15 weeks = $18,437.50
- Employee D: $92,500 × 15 weeks = $21,875
- Total present value of LSL liability = $40,312.50
4. Calculate the inflation adjustment for the LSL liability:
- Inflation rate = 1.5%
- Inflation adjustment = $40,312.50 × 1.5% = $604.69
5. Calculate the total LSL expense for the current period:
- LSL expense = pro rata cash payment + present value of LSL liability + inflation adjustment = $193,750 + $40,312.50 + $604.69 = $234,667.19
6. Record the journal entry to recognize the LSL expense for the current period:
- Debit LSL expense for $234,667
- Credit LSL provision for $234,667

Therefore, the answer is B.

Midrift Ltd Has Nine Employees Who Are Entitled to Long