EMPLOYEE BENEFITS PROBLEMS

Problem 1 – State whether each of the following statements is correct or incorrect. If the statement is
incorrect, explain why?

1. According to PAS 19, employee benefits are cash consideration given by an entity in exchange for
services rendered by employees.
2. Employee benefits are accrued only after an employee has rendered service.
3. An entity provides its employees one paid sick leave and one paid vacation leave for each month
rendered by an employee. Sick leaves can be carried over the subsequent years and are monetized
when the employee retires or resigns. Vacation leaves cannot be carried over to subsequent periods and
are not monetized when not taken. The entity shall accrue a year-end liability for compensated absences
for unused sick leaves but not for unused vacation leaves.
4. Compensated absences include payments by employers for vacation, holiday, illness, or other personal
activities.
5. Current PFRSs require a liability to be recognized for compensated absences that have been earned
through services rendered, that are vested or carried forward to subsequent years, and that are estimable
and probable.
6. PAS 19 Employee Benefits requires sick pay to be accrued only if it vests with the employee.
7. The accounting for defined contribution plans is complex because it requires actuarial valuations.
8. Under a defined contribution plan, the employer bears the risk that funds are insufficient to pay the
retirement benefits of retiring employees.
9. Under a “funded” plan, the entity holds and manages a fund that will be used solely for the payment of
retirement benefits of employees.
10. An entity’s monthly contributions to the SSS for the benefit of its employees are accounted for as defined
benefit plans.

Problem 2 - SHORT-TERM EMPLOYEE BENEFITS - Bonus Computation

An entity reports profit before bonus and taxes of P500,000 during the year. The entity has an established
policy of paying its top management a 2% bonus on annual profit. The entity is subject to an income tax
rate of 20%.

Requirements: Compute for the amount of bonus under each of the following bonus schemes.
a. Bonus is based on profit before deducting bonus and income tax.
b. Bonus is based on profit after deducting bonus but before deducting income tax.
c. Bonus is based on profit before deducting bonus after deducting income tax.
d. Bonus is based on profit after deducting both bonus and income tax.

Problem 3 – SHORT-TERM EMPLOYEE BENEFITS - Liability on Compensated Absences

An entity provides its employees six paid vacation leaves and two paid sick leaves per year.
● Unused vacation leaves cannot be carried over to subsequent years and are not monetized if not
taken.
● Unused sick leaves can be carried over to subsequent years and are monetized when an
employee retires or leaves the company before retirement.

During the year, the entity has 30 employees, each currently earning a rate of P100 per day.

A total of 48 days of vacation leaves and 14 days of sick leaves were taken during the year.

The entity expects a 2% increase in the pay rate of the employees in the following year.

Compute for the accrued liability for compensated absences at year-end.

Problem 4 – SHORT-TERM EMPLOYEE BENEFITS - Liability on Compensated Absences

ABC corp. compensates its employees for certain absences. Employees can receive one day vacation
plus one day sick leave for each month worked during the year. Unused vacation days may be carried
forward, but unused sick leave expires within one year of employment. Employees are compensated
according to their current pay rate. The following data were taken from the records for the year 2002.

Employee Starting Earned Sick Carry Forward Vacation Days Current Pay
*Question items were lifted from the book of Sir Zeus Vernon B. Millan, Intermediate Accounting 2; and Sir Valix, Intermediate
Accounting 2
 Date Leave Taken 2002 per Day

1/1/02 Taken 2002

S. Liza 1/6/00 5 0 7 P70

M. Jenny 6/2/01 10 6 3 60

P. Rose 11/4/02 5 0 0 48

J. Jisoo 7/28/02 2 0 1 79

Requirement: Compute the amount that should be reported as a liability for compensated
absences on December 31, 2002.

Problem 5 – SHORT-TERM EMPLOYEE BENEFITS - Liability on Unused Vacation Leaves

Lisa Company has the following policy:

a. Each employee is entitled to 12 days paid vacation leave each year.
b. Unused vacation leaves in a year can be carried over to the immediately following year. Vacation
leaves not taken within two years are forfeited.

The following information was determined at the reporting date:

Number of employees 500

Average salary per day P2,000

Average annual pay increase 5%

Vacation leaves taken during the period 5,400 days

Unused vacation leaves from the previous period 0

Based on past experience, 90% of unused vacation leave for a year are
taken in the immediately following year.

Requirement: Provide the year-end adjusting entry to accrue unused vacation leaves.

Problem 6 – POST-EMPLOYMENT BENEFITS - Defined Contribution Plan

An entity’s retirement benefit plan provides for an annual contribution of P2,000,000 to a fund held and
managed by a third party.

The fund is legally separate from the entity and is to be used solely for the retirement pay of employees.

The amount to be received by a retiring employee is dependent on the amount of contributions and the
investment income earned on those contributions.

The third-party trustee assumes the obligation of disbursing the funds to retiring employees.

The entity made the following contributions to the fund:

20x1 P1,200,000

20x2 700,000

20x3 1,050,000

Requirements: Provide the entries to record the contributions.

*Question items were lifted from the book of Sir Zeus Vernon B. Millan, Intermediate Accounting 2; and Sir Valix, Intermediate
Accounting 2