Accounting for employee benefits: Additional exercise 3

UBSS Ltd has six employees. According to their employment award, long-service leave (LSL) can be taken after 15 years, at which time the employee is entitled to 13 weeks leave (4.333 days per year entitlement). Further, we will assume that, after 10 years, pro rate payment is allowed so that if employees leave after serving 10 years, they will be entitled to a cash payment in relation to their pro rate entitlement to long-service leave, that is, the period between 10 and 15 years is the conditional period.

The number of employees of UBSS Ltd, their current salaries and their years of service are provided in the table below:

Final Exam Guideline 0123: Financial Accounting & Reporting April 2023 Page 12 of 6

Number of Current employees

1 $50000 1 $40000 1 $60000 1 $40000 1 $50000 1 $80000

Salaries

Years of service

3 4 6 7 10 12

Years until LSL vests

7

6

4 3 0 0

Probability that LSL will vest 20%

25%

35% 60% 100% 100%

Additional Information: Market yields on high-quality bonds.

High-quality bonds periods to maturity 7

6

4 3

Bond rate %

8.0 7.5 6.5 6.0

The projected inflation rate for the foreseeable future is 3 per cent and wage increases will keep pace with inflation.

The opening balance in the long service provision account is $22,300.

Question a: Calculate the long-service leave liabilities for UBSS Ltd. Use the schedule provided below.

Schedule for long- service leave liabilities:

$50000 3 $40000 4 $60000 6 $40000 7 $50000 10 $80000 12

Formula Hints:

(1) Projected salary: Current salaries * Factor 3%, 7 years i.e., 1.2299

(2) Accumulated LSL benefits: (year of service/15 weeks) * (13 weeks / No of weeks in a year) * Projected salary

(3) Present value of LSL obligation: Accumulated LSL benefits * Factor 8%, 7 years i.e., 0.5835

(4) LSL liability: Present value of LSL obligation x Probability (rate) that LSL will be paid

Question b: Record journal entry

Current Salaries

Years of service

Projected Salary (1)

Accumulated LSL benefit (2)

Present value of LSL obligation (3)

Probability (rate)

that LSL will be paid

LSL liability (4)