Shikkiah Corp. (which is a private enterprise) tries to attract the most knowledgeable and creative employees it can find. To help accomplish this, the company offers a special group of technology employees the right to a fully paid sabbatical leave after every five years of continuous service. It is the company’s objective that the employees will come back renewed and with fresh ideas, but there are no restrictions on what they do during the sabbatical year. Shikkiah hired three employees in early 2011 who were entitled to this benefit. Each new hire agreed to a starting salary of $80,000 per year.
Instruction
(a) Explain generally how this employee benefit should be accounted for by Shikkiah Corp. under PE GAAP and IFRS.
(b) Assume that you are the assistant to the company controller. In response to the controller’s request, list all the information you need in order to calculate the amounts and prepare the adjusting entry that is required at December 31, 2011, relative to this plan under ASPE and IFRS.
(c) Assume that the employees’ activities during the sixth (the sabbatical) year are specified by the company: the employees must work on research and promotion activities that will benefit the company. Would your answer to (a) change?
If yes, explain why and how it would be accounted for. If not, explain why not.