Expenses

Question 1

Property Taxes and Payables vs Prepaid

Answer 1

NEEDS REVIEW

Challenge to figure out the timing (Key is the Fiscal Year of the Tax Authority?)

Escrow Accounts: Escrow Payments increase the Liability of the Mortgage Company and Payments to Tax Authority reduce (Dr) the Liability

The September 30, 2005 liability balance equals the account’s $3,000 beginning balance, plus the nine deposits of $2,500 received through September 1, 2005, less the three quarters of property tax installments paid in 2005 ($21,000 = .75 x $28,000). These installments were paid on January 1, April 1, and July 1.

Question 2

Compensated Abscences

Answer 2

Under FAS 43, if compensated absences either accumulate OR vest, then the liability should be accrued. Benefits accumulate if they can be carried over to future years.

For example, assume an employee earns four weeks’ vacation per year, but does not take a vacation for two years. If the employee can take an eight-week vacation in the third year, the benefits are said to accumulate (firms usually place restrictions on the total time that can be accumulated).

Benefits vest if they are no longer contingent on continued employment. This means that if an employee retires, he or she will receive their vested vacation pay.

Either way, through accumulation or vesting, it is probable that the vacation compensation will be paid. Therefore, a liability has been incurred as of the balance sheet date.

Question 3

Accrued Vacation Expense and Pay Raise

Answer 3

The total vacation pay expense for 2005 is $31,500. This is the sum of two amounts:

(1) the amount earned in 2005, plus
(2) the increase in cost from earlier periods owing to wage increases in 2005.

These two amounts are:

(1) $30,000 as given in the problem - this amount is already updated for the most current rate
(2) $1,500 = ($35,000 - $20,000).10 = the amount of vacation pay yet to be disbursed on benefits earned before 2005; the liability for this amount is increased by the 10% pay increase.

The increase in pay rate on the pre-2005 benefits is treated as an estimate change. Therefore, it is handled in current and future years. Retroactive application does not apply in this case.

Question 4

Sick Days

Answer 4

The liability must be accrued only for the vacation pay, because it is probable that paid vacations will be taken. Therefore, the liability is $15,000 (150 days x $100 per day).

The firm may, but is not required to, accrue a liability for sick days. If the employees were routinely paid for sick days not taken, then sick days would be required to be accrued. For this firm, there is no payment for sick days not taken, therefore there is no requirement to accrue this cost.

It may be argued that illness is the condition that mandates payment of sick pay. Illness cannot be predicted and therefore is not required to be accrued.