Question

Gavin Co. grants all employees two weeks of paid vacation for each full year of employment. Unused vacation time can be accumulated and carried forward to succeeding years and will be paid at the salaries in effect when vacations are taken or when employment is terminated.There was no employee turnover in 2005.Additional information relating to the year ended December 31, 2005 is as follows:Liability for accumulated vacations at December 31, 2004 $35,000Pre-2005 accrued vacations taken from January 1, 2005 to 30 September 2005 (the authorized period for vacations) 20,000Vacations earned for work in 2005 (adjusted to current rates) 30,000Gavin granted a 10% salary increase to all employees on October 1, 2005, its annual salary increase date. For the year ended December 31, 2005, Gavin should report vacation pay expense ofThe total vacation pay expense for 2005 is $31,500. This is the sum of two amounts:(1) the amount earned in 2005, plus(2) the increase in cost from earlier periods owing to wage increases in 2005.These two amounts are:(1) $30,000 as given in the problem - this amount is already updated for the most current rate(2) $1,500 = ($35,000 - $20,000).10 = the amount of vacation pay yet to be disbursed on benefits earned before 2005; the liability for this amount is increased by the 10% pay increase.The increase in pay rate on the pre-2005 benefits is treated as an estimate change. Therefore, it is handled in current and future years. Retroactive application does not apply in this case.

Answer 1

Answer:

$31,500

Explanation:

For the year ended December 31, 2005, Gavin should report vacation pay expense of $31,500

The total vacation pay expense for 2005 is $31,500 which is the sum of two amounts:

1. the amount earned in 2005, plus

2. the increase in cost from earlier periods owing to wage increases in 2005.

These two amounts are:(1) $30,000 as given in the problem - this amount is already updated for the most current rate

(2) $1,500 = ($35,000 - $20,000).10 = the amount of vacation pay yet to be disbursed on benefits earned before 2005; the liability for this amount is increased by the 10% pay increase.

The increase in pay rate on the pre-2005 benefits is treated as an estimate change. Therefore, it is handled in current and future years.

Retroactive application does not apply in this case.