Question

Illustration: Kasten Inc. provides paid vacations to its employees. At December 31, 2019, 30 employees have each earned 2 weeks of vacation time. The employees' average salary is $500 per week. Kasten does not accrue based on future salary rates. Employees can accrue a maximum of 4 weeks vacation after which any additional days earned are lost. Unused vacation days can be carried over to the following year. (a) Prepare Kasten's December 31, 2019, adjusting entry.

Salaries and Wages Expense	30,000
Salaries and Wages Payable		30,000
(30 X 2 X $500)

Illustration con’t: Assume that salaries go up in 2020 to $550 per week. During 2020, employees used 50 of the 60 weeks of vacation accrued in 2019. Employees earned an additional 2 weeks vacation as of 12/31/20.

(b) Prepare Kasten's December 31, 2020, adjusting entry.

Salaries Payable 25,000 (50 weeks*500)
        Cash 25,000

Salaries Expense 35,500*
Salaries Payable   33,000

  Cash 2,500

*(50wks * $50 difference in salary) + (60 new wks* $550)= $35,500

The right answer is shown above. Can anyone explain why there's 50 Wks * $50 ? Explain the last adjusting entry

Answer 1

• Here, an adjusting entry in December 2019 is provided at rate of $500.
• So, salary expense is booked at $500 rate ($500*60 weeks) =$30,000.
• Now, in 2020 actual salary goes up to $550 and as the 50 week of vacation is used in 2020, expense will be based on 2020 salary i.e $550 which is $50 higher than 2019 salary $500
• So, at the time of actual using up of vacation weeks we will need to pay an additional ($50*50weeks) = $2500 and book it as an expense in 2020.
• Note that $30,000 as per rate of $500 has already been booked as an expense in 2019.
• So, we will book only the difference as an expense i.e $50
• We will pass a journal recording difference in salary amount.

	salaries expense	$2,500
	cash		$2,500
	($50 hike in salary*50weeks used up)

This can as well be merged with 2020 adjusting entry:

	salaries expense	$35,500
	cash		$2500
	salaries and wages payable (60weeks*$550)		$33,000