A company has a provision for long service leave of $150 000.This amount was recognised as an expense when the provision was created but is deductible for income tax purposes when the leave is taken.If an employee takes long service leave and is paid an amount of $30 000 (and the company income tax rate is 30%) ,the following entry should be made:

Question

Quizplus · Accepted Answer

Option B is the correct entry. When an employee takes long service leave, we need to reduce the provision by the amount of money paid to the employee. In this case, the employee is paid $30,000. Therefore, we need to reduce the provision for long service leave by $30,000. The journal entry would be:

Long Service Leave Expense Dr $30,000
Provision for Long Service Leave Cr $30,000

As the amount paid to employees is deductible for income tax purposes, we need to recognize a tax benefit. The tax benefit is calculated by multiplying the amount paid by the income tax rate. Therefore, the tax benefit is $30,000 x 30% = $9,000.

Income Tax Benefit Dr $9,000
Provision for Income Tax Cr $9,000

Hence, the correct answer is B.

A Company Has a Provision for Long Service Leave of $150