Final answer:
To handle accrued vacation benefits, Chavez company must make a year-end adjusting entry to expense the estimated $6,500 and create a liability. Later, when an employee takes vacation and is paid $490, the company must adjust the liability and record the cash paid out.
Step-by-step explanation:
The student's question requires preparing accounting entries for accrued vacation benefits, which falls under the subject of Business, particularly financial accounting. The grade level appears to be College given the nature of the question dealing with accounting entries which is a topic typically covered at the college level.
Year-End Adjusting Entry
To record the expense for the accrued vacation benefits at the year end (December 31), the following journal entry needs to be made:
- Debit Vacation Expense: $6,500
- Credit Accrued Vacation Liability: $6,500
This entry reflects the estimation that Chavez company needs to recognize the expense for vacation benefits earned by the employees during the year even though it has not been paid out in cash yet.
Vacation Taken and Paid
When an employee takes a one-week vacation, the company would need to relieve the liability and recognize the cash outflow.
- Debit Accrued Vacation Liability: $490
- Credit Cash: $490
This entry reflects the actual payment made to the employee for taking the one-week vacation.
It is important to note that vacation benefits are a form of employee compensation that companies must manage properly. Accrual accounting requires expenses to be recognized when earned, not necessarily when paid, which is why Chavez company needs to make an adjusting entry at the end of the year. The actual cash payment is recorded when the employee takes the vacation. Accrued liabilities and expenses represent the company's obligation to its employees for benefits earned that are yet to be paid.