1

FINANCIAL ACCOUNTING 300 DEPARTMENT

IAS 19: EMPLOYEE BENEFITS OF
QUESTIONS AND SUGGESTED SOLUTIONS
ACCOUNTING
A Carrim
UP

NB: The mark memoranda should not be taken as cast in stone for all questions
of a similar nature. Marks allocated to a question depend on the difficulty of the
question, the insight required in order to answer the question and thus the time
that is required to complete the question. The mark memoranda are provided to
give you a guide as to the time that will be required to complete the question.

QUESTION 1 (10 marks: 15 minutes)

[Journal entries for leave pay]

JESSICA LIMITED is a large retail entity in South Africa. The company’s reporting date
is 31 December 20X5. The company’s single largest expense is employee benefits. The
financial manager of Jessica Limited is experiencing problems with the application of
International Financial Reporting Standards (IFRS) to the following:

The financial manager has calculated the amount of the leave pay accrual related to
employees that work in one of the company’s divisions. There are two categories of
employees in this division, namely category A and category B employees. The cost to
company of employees in each category is exactly the same.

The following represents the cost to company per employee per year for the year ended
31 December 20X5 for the two different categories:

R
Category A
Basic salary 155 000
Employer’s contribution to medical aid fund (10% of basic salary) 15 500
Employer’s contribution to a defined contribution fund (8% of basic salary) 12 400
182 900

Category B
Basic salary 120 000
Employer’s contribution to medical aid fund (8% of basic salary) 9 600
Employer’s contribution to a defined contribution fund (5% of basic salary) 6 000
135 600

The directors of Jessica Limited have already approved a salary increase of 10% for
category A employees and an increase of 7% for category B employees. These
increases are effective from 1 January 20X6. The company contributions to the medical
 2

aid fund and the defined contribution plan also increased so that the percentage of the
basic salary that the employer contributes remained unchanged.

The following leave policy applies to the different categories:

Category A employees: Each employee is entitled to 25 working days per year for annual
leave. Unused leave days can be used in the following leave cycle or can be paid out in
cash. Unused leave days that are not taken within the 12 month period after the end of
the applicable leave cycle, will be paid out in cash on 31 December of the following year.

Category B employees: Each employee is entitled to 20 working days per year for annual
leave. Unused leave days can be used in the following leave cycle. However, these
employees are not entitled to any cash payment for unused leave days. Unused leave
days that are not taken within 12 months after the end of the leave cycle will be forfeited.

The leave cycle and the financial year end are the same.

Each employee has on average the following unused leave days on 31 December 20X5:

Days

Category A 18
Category B 12

There are 100 Category A employees and 60 Category B employees. Assume that a
financial year has 251 working days.

The entity has estimated that the employees in Category A will take 60% of their
accumulated leave before 31 December 20X6 whilst the employees in Category B will
take 90% of their accumulated leave and the 20X6 leave days before
31 December 20X6.

The financial manager has calculated the leave pay accrual on 31 December 20X5 and
has made the necessary adjustment in the general ledger:

Category A(R155 000/251 days x 18 days x 100 employees) 1 111 554

Category B (R120 000/251 days x 12 days x 60 employees) 344 223
1 455 777
 3

REQUIRED:

Prepare the correcting journal entries that are required to correctly account for the
abovementioned items in the financial statements of Jessica Limited for the year ended
31 December 20X5 in accordance with International Financial Reporting Standards
(IFRS).

Note:  Journal narrations are not required.

 Ignore all tax implications.

SUGGESTED SOLUTION

Correcting journal entry needed:

Jessica Limited - General journal

Dr Cr Marks
R R
^ Employee benefits expense (P/L) (9½) (calc) 273 565
Accrued leave expense(SFP) 273 565 10
(Refer calc below)

Calculation
R Marks
Category A employees (accumulating and vesting)
Obligation for leave days that will be taken
Adjusted cost to company R201 190 
(R182 900 x 110% increase)
Number of working days per year 251 ^
Number of unused leave days on
31/12/X5 per employee 18 ^
Expected number of these days that will ^
be taken as leave per employee 60%
Number of employees 100 ^
Thus leave pay accrual needed: 865 678
(R201 190/251 days x (18 days x 60% x 100 employees)
Obligation for leave days that will be paid
out in cash
Adjusted basic salary R170 500 
(R155 000 x 110% increase)
Number of working days per year 251 ^
Number of unused leave days on 18 ^
31/12/X5 per employee
Expected number of these days that will ^
be taken as leave per employee 40%
Number of employees 100 ^
Thus leave pay accrual needed: 489 084
(R170 500/251 days x (18 days x 40% x 100 employees)
 4

R Marks
Category B employees (accumulating but not
vesting)

Obligation for leave days that will be taken

Adjusted cost to company R145 092 
(R135 600 x 107% increase)
Number of working days per year 251 ^
Number of unused leave days on 31/12/X5 12 ^
per employee
Expected number of these days that will be ^
taken as leave per employee 90%
Number of employees 60 ^
Thus leave pay accrual needed: 374 580
(R145 092/251 days x (12 days x 90% x 60
employees)

Revised accumulated leave pay accrual 1 729 342

Current accumulated leave pay accrual (1 455 ^
777)
Adjustment 273 565 (9½  jnl)

QUESTION 2 (12 marks: 18 minutes)

[bonuses; theory; journals]

MAYBE LIMITED employs a large number of people. During the year ended
31 December 20X7 the company paid the following amounts in cash in respect of staff
benefits:

R
- Salaries (gross) 10 000 000
- Wages (gross) 14 000 000
- Paid annual leave (gross) 2 000 000
- Paid sick leave (gross) 1 000 000
- Employer's contribution to defined contribution plan 2 025 000
29 025 000

Additional information:

1. The company has, since its incorporation, paid bonuses to its employees provided
they are employed throughout a financial year. Experience has shown that these
bonuses are calculated using the following formula:

Total salaries and wages of employees that

remained in service throughout the year x 7½ %
 5

During the current year, staff turnover was such that 90% of the total salaries paid
in respect of 20X7 could be attributed to qualifying employees, while only 80% of
wages paid in respect of 20X7 could be attributed to employees qualifying for the
bonus.

2. The management of Maybe Limited is of the opinion that economic circumstances

in 20X8 will be very unfavourable due to the instability of the currencies of
developing countries and expect that interest rates could increase sharply during
20X8. Consequently they have decided not to pay any bonuses to employees at
the end of 20X7. The human resources manager is of the opinion that this should
not create problems as the bonuses were not specified in the contracts of
employment entered into with the employees.

3. The employees’ trade union heard rumours of the possibility of bonuses not being
paid and are preparing for a prolonged strike as the remuneration paid by Maybe
Limited is approximately 7½ % below the salaries and wages paid to persons
employed in the industry in which the company operates.

4. The current balance on the bonus obligation is Rnil.

REQUIRED:

(a) Critically discuss the intention of management not to recognise a liability for any
bonuses on 31 December 20X7 in accordance with International Financial
Reporting Standards (IFRS).

Note:  A discussion of the definition of short-term employee benefits and

their general measurement criteria is not required. (8 marks)

(b) Regardless of your answer in (a) above, assume that a liability for bonuses must
be recognised. Journalise the amount of the bonus liability to be recognised in
accordance with International Financial Reporting Standards (IFRS).

Note:  Journal narrations are not required.

 Ignore all tax implications. (4 marks)

SUGGESTED SOLUTION
a. Discussion: Cancellation of bonus (8 marks)
An entity must recognise the expected cost of a bonus payment if (IAS19.19):
- the entity has a present legal or constructive obligation to make such payments as
a result of a past event; and
- a reliable estimate of the amount of the obligation can be made. (1)

The entity does not have a legal obligation to pay the bonuses since bonuses are not
specified in contracts with employees. (½)
However, the company has a practice of paying bonuses since its incorporation (past
event) and furthermore the trade union is threatening to strike because salaries and
 6

wages of Maybe Limited will be below the industry average if these bonuses are not paid.
(1)
A change in the informal practices of the entity to pay bonuses will result in unacceptable
damage being done to their relationship with their employees. (½)

In the light of the above, the entity has a constructive obligation to pay the bonuses as
they have no other realistic alternative but to do so (IAS 19.21). (1)

Recognition is subject to the following:

The measurement of the amount to be raised in respect of the constructive obligation

should reflect the possibility that some employees may not receive a bonus as they may
leave the employ of the entity (IAS 19.21). (½)

The entity should be able to make a reliable estimate of its constructive obligation if the
following criteria are met (IAS 19.22):

i. the formal terms of the plan contain a formula for determining the amount of the
bonus, and
ii. the entity is able to determine the amounts to be paid before the financial
statements are authorised for issue, or
iii. past practice gives clear evidence of the amount of the entity’s constructive
obligation. (1½)

Past experience since the incorporation of the company provides a clear indication of the
amount of the company’s constructive obligation, so the amount can be reliably
estimated. (1)

Conclusion

Since the company has a present constructive obligation for the bonus amount and the
bonus can be reliably estimated, a bonus liability must be recognised. (1)

Part b – calculation and journal entry for bonus (4 marks)

Dr Cr Marks
R R
 Employee benefits expense (P/L) (3) (calc) 1 515 000

Bonus obligation (SFP) 1 515 000 4

(Refer calc below)

Calculation

1. Salaries R
Salaries paid during the year 20X7 10 000 000 ^
% of salary amount subject to bonus 90% ^
Salaries subject to bonus 9 000 000
Bonus @ 7,5% (A) 675 000 ^
 7

2. Wages
Wages paid during the year 20X7 14 000 000
% of wages subject to bonus 80%
Wages subject to bonus 11 200 000 
Bonus @ 7,5 % (B) 840 000 ^
Total bonus to be provided (A+B): 1 515 000
(3 marks to journal)

QUESTION 3 (49 marks: 73 minutes)

[Short-term employee benefits; short-term leave and bonuses; notes; tax

implications]

FRENCHISE LIMITED operates a number of French cuisine restaurants in South

Africa. The accountant has calculated the profit before tax for the year ended
30 June 20X6 as R8 451 500, after the following items have been taken into account:

1. Employees

The employees of Frenchise Limited fall into one of the following categories based
on their work experience:

1.1. Category 1 employees

The 100 employees in this category are each entitled to a basic salary of R6 500
per month. The employer contributes R250 per month to basic medical cover for
each of these employees. In addition to this, each of these employees are entitled
to a thirteenth cheque in terms of their contracts of employment. The amount of
this cheque is however within the discretion of management and varies from year
to year. On 25 June 20X6, management decided that the thirteenth cheque for the
year ended 30 June 20X6 would amount to one month’s basic salary per category
1 employee. The thirteenth cheque for the year ended 30 June 20X6 was paid to
the employees in cash on 31 July 20X6.

Category 1 employees are entitled to 15 days of leave per year. A maximum of

two days can be carried forward for three months of the next leave cycle after
which it is forfeited. On 30 June 20X6, category 1 employees had on average five
days of unused leave each. Past experience has shown that category 1
employees take all of the leave days to which they are entitled.

1.2. Category 2 employees

The 40 employees in this category are each entitled to a basic salary of R19 250
per month. The employer contributes R250 per month to basic medical cover for
each of these employees.

Category 2 employees are each entitled to a performance bonus based on the

past practices of the company. For the past 15 years, the total performance
bonuses paid amounted to 23,5% of basic salaries paid to category 2 employees
 8

for two months. The performance bonus for the year ended 30 June 20X6 must
still be calculated by management and is expected to be paid in cash
on 30September 20X6.

Category 2 employees are entitled to 20 days of leave per year. A maximum of

two days can be carried forward to the following leave cycle. If leave that is carried
forward to the following leave cycle is not used within three months after the end
of the leave cycle, it is paid out in cash. On 30 June 20X6, category 2 employees
had on average four days of unused leave. Past experience has shown that
category 2 employees only take 50% of the leave days accumulated at the end of
the reporting date.

1.3. Category 3 employees

The 10 employees in this category are each entitled to a basic salary of R45 600
per month. The employer contributes R3 500 per month to full medical cover for
each of these employees.

Based on past practice of the company, category 3 employees are entitled to a

10% bonus of the company’s profit before the bonuses of category 3 employees
are taken into account. The bonus pool is allocated based on individual
performance. This allocation is expected to be completed on 30 September 20X6
so that the cash payments can be made.

Category 3 employees are each entitled to 30 days of leave per year. A maximum
of 15 days can be carried forward for five months of the following leave cycle after
which it is forfeited. On 30 June 20X6, the average unused days per employee is
12 days. Past experience has shown that category 3 employees only take 75% of
the leave days that have accumulated at the financial year end.

Other information
(i) All employees rendered service to the company for the whole financial year
and are expected to all be entitled to their annual bonus.

(ii) Frenchise Limited’s leave cycle ends annually on 31 December and has 250
working days. Ignore any bonuses for the purposes of calculating the leave
pay accrual amount.

(iii) On 30 June 20X5, the balances on the leave pay accrual and the bonus
accrual were R514 500 and R1 818 600 (R600 000 related to thirteenth
cheque bonuses). Bonuses of R1 815 000 were paid on 30 September 20X5
and R600 000 of this amount related to the thirteenth cheque bonus of
30 June 20X5.

(iv) On 10 July 20X6, before the issue of the financial statements for the year
ended 30 June 20X6, the directors of the company approved a 7,5% increase
on basic salaries and employer’s contributions to the medical aid fund for all
employees.
 9

2. Asset information

Frenchise Limited has the following assets on 30 June 20X6 that are accounted
for in accordance with the cost model:

2.1. Land

All land owned by the company was purchased on 1 July 20X1 for
R12,1 million.

2.2. Office building

The office building was acquired at a cost of R5,25 million on 1 July 20X1
and was immediately available or use as intended by management.
Depreciation is written off in accordance with the straight-line method over
an estimated useful life of 50 years. The residual value is insignificant.

2.3. Restaurant buildings

The restaurant buildings were completed on 1 July 20X2 at a cost of

R15,8 million and were available for use as intended by management on
this date. Depreciation is written off on the straight-line method over an
estimated useful life of 40 years. The residual value is insignificant.

2.4. Equipment

Management replaced all of the equipment on 30 April 20X6 at a cost of

R6,2 million. The carrying amount of the equipment on 30 June 20X6 was
R5,9 million.

The old equipment with a carrying amount of R1,3 million was sold on
30 April 20X6 for R1,2 million. Depreciation on the old equipment was
R125 000 for the year ended 30 June 20X6. The original cost of this
equipment was R5 million on 1 July 20X2.

3. Profit and loss information

The following items are included in the profit before tax amount that was calculated
by the accountant:

R
Dividend income 423 000
Fee for late submission of the income tax return 24 800
 10

4. Income tax information

4.1. The tax rate on companies is currently 28%.

4.2. Ignore capital gains tax and dividend withholding tax.

4.3. The following tax rules are applicable:

Bonuses Contractual bonuses are deductible when they accrue

but all other bonuses are only deductible when paid in
cash.
Office building The office building does not qualify for any tax
deductions.
Restaurant The restaurant buildings qualify for a tax deduction of
buildings 5% per year that is not pro-rated.
Equipment The equipment qualifies for a tax deduction of 20% per
annum that is not pro-rated.

4.4. The correct balance on the deferred tax account on 30 June 20X5 was
R314 468 (debit).

REQUIRED:

Prepare the following notes for Frenchise Limited for the year ended 30 June 20X6 in
accordance with International Financial Reporting Standards (IFRS):

 Income tax expense; and

 Profit before tax.

Note:  Round all calculated amounts to the nearest Rand.

 Comparative amounts are not required.
 A detailed deferred tax calculation is required for all assets and
liabilities arising from the information provided.
 There were no temporary differences other than those that are
evident from the information provided.
 11

SUGGESTED SOLUTION

Frenchise Limited -½ if heading incomplete

Notes for the year ended 30 June 20X6
25. Profit before tax (19 marks)
Profit before tax is after the following items have been taken into account:
R Marks
Expenses
^Loss on disposal of property, plant and equipment 100 000 1
(R1 300 000 – R1 200 000)given
^Depreciation (calc 1) 925 000 2
^Short-term employee benefits (calc 2) 25 346 986 14½

26. Income tax expense (24½ marks)

R Marks
Main components of income tax expense:
Current tax
^ - current year (calc 3) 1 785 920 10½
Deferred tax
^ - origination and reversal of temporary differences 498 404 13
2 284 324

Reconciliation of accounting profit before tax to income tax expense/

Reconciliation from standard to effective tax rate (5½ marks)
R OR % Marks
Accounting profit before tax 8 451 500
^
Standard tax rate 28% 28,0 ^
Tax at standard rate 2 366 420 ^m/t
(R8 451 500 x 28%)
Non-taxable income
^ - Dividend income (118 440)  (1,4) 
(R423 000 x 28%; R423 000/R8 451 500 x
28%)
Non–deductible expenses
- Fines 6 944  0,1 
^ (R24 800 x 28%; R24 800/R8 451 500 x
28%)
- Depreciation without an associated tax  
allowance 29 400 m/t 0,3 m/t
(R105 000(calc 1) x 28%;
R105 000(calc 1) /R8 451 500 x 28%)
Income tax expense 2 284 324
Average effective tax rate 27,0
(R2 284 324 /R8 451 500) ^m/t
 12

The standard rate of tax of 28% is the tax rate announced by the South African tax
authority. ^
Calculations
1. Depreciation
R
Office building (R5 250 000 / 50 years) 105 000 ^
Restaurant buildings (R15 800 000 / 40 years) 395 000 ^
Equipment
- old equipment (given) 125 000 ^
- new equipment (R6 200 000 - R5 900 000) 300 000 ^
925 000
(2  note 25)

2. Short-term employee benefits

R
Category 1 employees 8 100 000
Basic salaries (100 x R6 500 x 12) 7 800 000 
Employer’s contribution to medical fund (100 x R250 x 12) 300 000 ^
Category 2 employees 9 360 000
Basic salaries (40 x R19 250 x 12) 9 240 000 
Employer’s contribution to medical fund (40 x R250 x 12) 120 000 ^
Category 3 employees 5 892 000
Basic salaries (10 x R45 600 x 12) 5 472 000 
Employer’s contribution to medical fund (10 x R3 500 x 12) 420 000 ^
Movement in bonus obligation (recognised in P/L) 1 947 356
(balancing)
- Category 1 employees (100 x R6 500 or R7 800 000 / 12) 650 000 ^
- Category 2 employees [40^ x (23,5%^ x R19 250 x 2^)] 361 900 (1½)
- Category 3 employees (R8 451 500 x 10 / 90) 939 056 
Balance on 30 June 20X6 (required to be) 1 950 956
Balance on 30 June 20X5 (given) (1 818 600) ^
Bonuses paid 30/9/20X5 (given) 1 815 000
Movement in leave obligation (recognised in P/L) 47 630
(balancing)
- Category 1 employees 174 150 (1½)
(5 days^ x R8 100 000 / 250^ x 100% x 1,075^)
- Category 2 employees
* Used (4 days^ x R9 360 000 / 250^ x 50% x 1,075^) 80 496 (1½)
* Paid out (4 days^ x R9 240 000 / 250^ x 50% x 1,075^) 79 464 (1½)
- Category 3 employees 228 020 (1½)
(12 days^ x R5 892 000 / 250^ x 75% x 1,075^)
Balance on 30 June 20X6 (required to be) 562 130
Balance on 30 June 20X5 (given) (514 500) ^

25 346 986
(14  note 25)
 13

3. Current tax expense

R Marks
Accounting profit before tax 8 451 500 ^

Non-taxable income 
- Dividend income (423 000) ^
Non-deductible expenses
- Fines 24 800 ^
- Depreciation on office building (calc 1) 105 000 ^m/t
Temporary differences
- depreciation (R925 000 (calc 1) – R105 000) 820 000 ^m/t
(only ½ if all depreciation under temporary differences) 
- wear and tear (3 030 000) 3
([R15 800 000 x 5%] + [R6 200 000 x 20% (new
equipment)] + [R5 000 000 x 20% (old equipment)])
- loss on sale of equipment (note 25) 100 000 ^m/t
- recoupment on sale of equipment 200 000 (1½)
(R1 200 000^ – [R5 million – {R5 million x 20% x 4 yrs }])
- movement in bonus obligation (accounting) (calc 2) 1 947 356 ^m/t
- tax deduction for bonuses 
20X5 bonuses: (R1 815 000 – R600 000 contractual) (1 215 000) 
20X6 bonuses: calc 2 (contractual bonuses) (650 000) ^m/t
- movement in leave pay obligation (accounting) (calc 2) 47 630 ^m/t
Taxable profit 6 378 286
Current tax at 28% (R6 378 286 x 28%) 1 785 920 ^m/t
(10½  note 26)

4. Deferred tax calculation

CA TB TD DT (SFP) Marks
(dr)/cr
28% ^
R R R R
20X5 (314 468)
20X6
Land ^12 100 000 ^- 12 100 000 ^Exempt (1½)
Office bldg (1)(a)4 725 000 ^- 4 725 000 ^ Exempt (2)
Restaurant (1)(b)14 220 000 (1)(c)12 640 000 1 580 000 442 400 (2)
Equipment ^5 900 000 (1)(d)4 960 000 940 000 263 200 (1½)
Bonus
obligation
- contractual ^m/t(e)(650 000) ^(650 000) - - (1)
- constructive (1 300 956)
m/t(f)
^- (1 300 956) (364 268) (1½)
Leave 
(1½)
obligation
m/t (e)
(562 130) ^- (562 130) (157 396)
183 936
Movement to profit or loss (dr) (R314 468^ + R183 936^m/t) 498 404 (1)
(13  note 26)
 14

(a) R5 250 000 x 45 yrs left / 50 yrs total life = R4 725 000 or
R5 250 000 – (R5 250 000/50 yrs x 5yrs) = R4 725 000
(b) R15 800 000 x 36 yrs left / 40 yrs total life = R14 220 000 or
R15 800 000 – (R15 800 000/40 yrs x 4 yrs) = R14 220 000
(c) R15 800 000 x 80% = R12 640 000 or
R15 800 000 – (R15 800 000 x 5% x 4 yrs) = R12 640 000
(d) R6 200 000 x 80% = R4 960 000 or
R6 200 000 – (R6 200 000 x 20%) = R4 960 000
(e) Calc 2
(f) R361 900 (calc 2) + R939 056 (calc 2) = R1 300 956

QUESTION 4 (15 marks: 23 minutes)

[Profit before tax note: short-term employee benefits; post-employment

benefits]

SILLY SALLY LIMITED manufactures games and puzzles and is listed on the JSE
Limited. The entity has only one type of employees, namely, Category A employees.
The following information in respect of the company’s employees is available for the
year ended 31 July 20X5:

1. Category A employees

1.1. On 1 August 20X4, Silly Sally Limited had 500 Category A employees in service.
On this date, the average monthly cost to the company for each of these
employees comprised the following:
R
Basic salary (refer also to 1.2) 42 500
Employer contributions:
- to the medical aid fund (refer also to 1.3) 1 570
- to the provident fund (refer also to 1.3) 4 250
Total cost to the company 48 320

1.2. Each employee is required to make a monthly contribution of R100 to the labour
union and 5% of the basic salary to the provident fund.

1.3. The risk of shortfalls on the medical aid fund and the provident fund are borne
by the employees and Silly Sally Limited has no obligation to these funds other
than for the payment of its fixed monthly contributions.

1.4. Category A employees receive 20 days of annual leave per year and the leave
cycle ends annually on 31 July. Any unused leave days on 31 July can be
carried forward to the next leave cycle. If the leave days have not be taken by
the end of the following leave cycle, they will be paid out in cash.

On 31 July 20X5, Category A employees had an average of 6 accumulated

leave days. Historical experience indicates that these employees will take on
average 22 days of annual in the following twelve months.
 15

1.5. Category A employees also receive 5 days of sick leave per year and the leave
cycle ends annually on 31 July. Any unused sick leave days on 31 July can be
carried forward to the next leave cycle. If these days are not taken by 31 July
of the next year, they are forfeited.

On 31 July 20X5, Category A employees had an average of 4 days

accumulated sick leave. Historical experience indicates that these employees
will take on average 6 days of sick leave in the following twelve months.

1.6. In addition, Category A employees are also entitled to six months of maternity
leave for each confinement. It is expected that 14 employees will take maternity
leave during the 12 month period after the reporting date.

1.7. The leave accrual had a balance of R6 567 800 on 31 July 20X4.

1.8. On 31 July 20X5, the directors of Silly Sally Limited approved an increase of
8% is the basic salary for Category A employees with effect from
1 August 20X5. The employer’s contributions to the medical and provident
funds will however, remain unchanged.

1.9. Assume that these are 20 working days per month (240 working days per year).

2. Other information

2.1. Silly Sally Limited had no appointments or resignations during the year ended
31 July 20X5.

2.2. Ignore all tax implications.

REQUIRED:

Prepare the “Profit before tax” note of Silly Sally Limited for the year ended
31 July 20X5 in accordance with International Financial Reporting Standards (IFRS).

Note:  Round all calculated amounts to the nearest Rand.

 Comparative amounts are not required.
 16

SUGGESTED SOLUTION

Silly Sally Limited

Notes for the year ended 31 July 20X5 -½ if incomplete

24. Profit before tax

Profit before tax is after the following items have been taken into account:^
Expenses R

Employee benefits:
Short-term employee benefits^ (12)253 571 200 12½
Post-employment benefits
- Contributions to defined contribution plan^ (1½)38 250 000 2

Total employee benefits expense 291 821 200

Calculations

1. Short-term employee benefits

R
Category A employees:
Basic salaries (R42 500 x 500 x 12) 255 000 000 
Employer contributions to medical fund 9 420 000 
(R1 570 x 500 x 12)
Employee contributions to provident fund (12 750 000) m/t
(R255 000 000 x 5%)

Total movement on leave pay accrual (calc 3) 1 901 200 9

253 571 200
(12 marks to note 24)

2. Contributions to defined contribution plan

R
Category A employees:
Employee contributions to provident fund (calc 1) 12 750 000 ^m/t
Employer contributions to provident fund 25 500 000 1
(4 250^ x 500 x 12^)
38 250 000
(1½ marks to note 24)
 17

3. Movement in leave accrual

R
Category A employees
Annual leave
Take*** 2 586 000 3½
[500^ x (22 – 20)^ x ([42 500^ x 1,08^] + 1 570^ +
4 250^) / 20^]
Paid out *** 4 590 000 2½
[500^ x (6 – 2)^ x (42 500^ x 1,08^) / 20^]
Sick leave
Take *** 1 293 000 2½
[500^ x (6 – 5)^ x ([42 500 x 1,08] + 1 570 + 4 250)m/t
/ 20^]
Balance on 31 July 20X5 8 469 000
Balance on 31 July 20X4 (given) (6 567 800) ^
Movement for the year 1 901 200
(9 marks to calc 1)

*** Leave accrual must be calculated on the last-in-last out basis. For
example, with the annual leave, the employees take on average 22 days
per year but are entitled to 20 days per year. Thus, 2 days of the
accumulated leave days on 31 July 20X4 would be taken. The remaining
4 days will be paid out in cash.

-½ if an obligation for maternity leave is calculated.