A business provides its employees with varying amounts of vacation per year, depending on the length of employment

A business provides its employees with varying amounts of vacation per year, depending on the length of employment. The estimated amount of the current year’s vacation pay is $42,000.

a. Journalize the adjusting entry required on January 31, the end of the first month of the current year, to record the accrued vacation pay.

b. How is the vacation pay reported on the company’s balance sheet? When is this amount removed from the company’s balance sheet?


Answer:






a.
 Vacation Pay Expense 3,500
Vacation Pay Payable 3,500
Vacation pay accrued for January, $42,000 × 1/12.


b. Vacation pay is reported as a current liability on the balance sheet. If employees are allowed to accumulate their vacation pay, then the estimated vacation pay that will not be taken in the current year will be reported as a long-term liability. When employees take vacations, the liability for vacation pay is decreased.