John Company was formed early in Year 1 and hired about one hundred employees shortly after the firm was created.  Management established the policy of granting two days paid vacation per month of employment.  Any unused vacation days carry over to later years to be taken then or ‘cashed out’ if the employee leaves the firm.  These vacation days meet the four requirements for accrual:  services rendered, benefits vested, amounts estimable and payments probable.

At the end of Year 1, the firm’s employees had 170 days of unused vacation time ‘on the books’.  On December 31, Year 1, the firm announced a daily salary increase for all employees from $91 per day to $96 per day effective on January 1, Year 2.

At the end of Year 2, the firm’s employees had 330 days of unused vacation time ‘on the books’.  On December 31, Year 2, the firm announced a daily salary increase for all employees from $96 per day to $102 per day effective on January 1, Year 3.

How much additional expense must the firm recognize in Year 2 because of the existence of the firm’s paid vacation program?

Answer rating: 100% (QA)

In Year 2 the company must provide an additional expense o... View the full answer