Question

Entity A has 20 employees who are each entitled to one day paid vacation leave for each month of service rendered. Unused vacation leaves are carried forward and can be used in future periods if the current period's entitlement is not used in full. Moreover, employees are entitled to a cash payment for unused entitlement when they leave the entity. All the employees have rendered service throughout the current year and have taken a total of 150 days of vacation leaves. The average daily rate of the employees in the current period is P1,000. However, a 5% increase in the rate is expected to take into effect in the following year. Based on Entity A's past experience, the average annual employee turnover rate is 20%. How much will entity A accrue at the end of the current year for unused entitlements?

a. 0
b. 75,600
c. 90,000
d. 94,500

Answer 1

Entity A should accrue P94,500 for each of the 20 employees at the end of the current year for unused vacation entitlements, taking into account the carried forward leaves, rate increase, and the potential cash payment upon employee departure.

Step-by-step explanation:

Entity A should accrue P94,500 at the end of the current year for unused vacation entitlements.

Entity A has 20 employees with 1 day paid vacation leave each per month. Annually, this totals to 240 days (20 employees × 12 months). With 150 days used, the remaining unused entitlement is 90 days. The current daily rate is P1,000. Accounting for a 5% increase next year, the rate will be P1,050 (P1,000 + 5% of P1,000). Since the turnover rate is 20%, expected to buy out is 20% of the unused leaves (20% × 90 days = 18 days). The accrued expense is 18 days × P1,050, which equals to P18,900 annually per employee. Multiplying this by all 20 employees gives P18,900 × 20 = P378,000.

However, since the vacation leaves are carried forward, Entity A should recognize the entire 90 days unused leaves for all employees, not just those expected to leave. Therefore, the total accrued is 90 days × P1,000 × 20 employees = P1,800,000. Taking into account the 5% rate increase, the total is P1,800,000 × 105% = P1,890,000. Divided by 20, the accrual per employee is P94,500.