Question

Vargas Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2009, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2009 may first be taken on January 1, 2010. Information relative to these employees is as follows:

Hourly, Vacation Days Earned, Vacation Days Used
Year Wages
2009 $25.80 10 0
2010 27.00 10 8
2011 28.50 10 10

Vargas has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned.

What is the amount of expense relative to compensated absences that should be reported on Vargas's income statement for 2009?
a. $0.
b. $68,880.
c. $75,600.
d. $72,240.

What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2011?
a. $94,920.
b. $90,720.
c. $79,800.
d. $95,760.

Answer 1

The expense for compensated absences for Vargas Company in 2009 is $72,240. The accrued liability for compensated absences at the end of 2011 is $94,920.

Step-by-step explanation:

The student has posed two questions related to Vargas Company's employee compensated absences. First, they wish to know the amount of expense relative to compensated absences that should be reported on Vargas's income statement for 2009. Vargas Company has instituted a program of 10 days paid vacation for its employees, which accrue in one year and can be used the following year. Since the employees earn $25.80 per hour, if they were to take the full 10 days (or 80 hours) of vacation, it would cost the company 35 employees * 80 hours * $25.80/hr = $72,240. As Vargas Company is accruing the liability in the year the vacation is earned, this amount should be reported as an expense for 2009.

The second question asks about the accrued liability for compensated absences that should be reported at December 31, 2011. By 2011, the hourly wage has increased to $28.50, and the company must account for the vacation days earned but not yet taken. By the end of 2011, the employees have not used 2 days (16 hours) of vacation earned in 2010 and 10 days (80 hours) of vacation earned in 2011, which equals 35 employees * (16 hours + 80 hours) * $28.50/hr = $94,920. This is the total accrued liability for compensated absences at the end of 2011.