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 current period's LSL expense, we need to first calculate the expected LSL liability for all the employees based on their years of service.

Employee A: Entitled to 15 weeks LSL after 12 years of service. At the end of the current period, he has completed 13 years of service and therefore, is entitled to 15 weeks of LSL. 
15/52 * $90,000 = $25,962

Employee B: Entitled to 15 weeks LSL after 12 years of service. At the end of the current period, he has completed 17 years of service and therefore, is entitled to two blocks of 15 weeks of LSL.
2 * (15/52 * $100,000) = $57,692

Employee C: Entitled to a pro rata cash payment after 10 years of service. At the end of the current period, he has completed 10 years of service and is entitled to a pro rata cash payment equivalent to 1.5 weeks of salary.
1.5/52 * $110,000 = $3,269

Employee D: Entitled to 15 weeks LSL after 12 years of service. At the end of the current period, he has completed 8 years of service and is not yet entitled to LSL.

Employee E: Entitled to a pro rata cash payment after 10 years of service. At the end of the current period, he has completed 12 years of service and is entitled to a pro rata cash payment equivalent to 2 weeks of salary.
2/52 * $80,000 = $3,077

Employee F: Entitled to 15 weeks LSL after 12 years of service. At the end of the current period, he has completed 16 years of service and is entitled to two blocks of 15 weeks of LSL.
2 * (15/52 * $95,000) = $55,769

Employee G: Entitled to a pro rata cash payment after 10 years of service. At the end of the current period, he has completed 8 years of service and is not yet entitled to LSL.

Employee H: Entitled to 15 weeks LSL after 12 years of service. At the end of the current period, he has completed 10 years of service and is not yet entitled to LSL.

Employee I: Entitled to a pro rata cash payment after 10 years of service. At the end of the current period, he has completed 14 years of service and is entitled to a pro rata cash payment equivalent to 1.5 weeks of salary.
1.5/52 * $85,000 = $2,192

Total expected LSL liability = $25,962 + $57,692 + $3,269 + $3,077 + $55,769 + $2,192 = $147,961

To calculate the LSL expense for the current period, we need to bring the expected liability to its present value using the current inflation rate of 1.5%.

Present value of expected LSL liability = $147,961 / (1 + 1.5%)^12 = $120,985

The opening balance of the LSL provision is given as $87,560. Therefore, the LSL expense for the current period is:
LSL expense = Present value of expected LSL liability - Opening balance of LSL provision
LSL expense = $120,985 - $87,560 = $33,425

Rounding this amount to the nearest dollar, we get the answer as choice (B) $33,425.

Midrift Ltd Has Nine Employees Who Are Entitled to Long