Question

Please answer the following question:

Pharoah Limited provides a long-term disability program for its employees through an insurance company. For an annual premium of $16,200, the insurance company is responsible for providing salary continuation to disabled employees on a long-term basis after a three-month waiting period. During the waiting period, Pharoah continues to pay the employee at full salary. The employees contribute to the cost of this plan through regular payroll deductions that amount to $5,000 for the year. In late October 2017, Tina Hurst, an employee earning $6,000 per month, was injured and was not expected to be able to return to work for at least one year.

Prepare all entries made by Pharoah in 2017 in connection with the benefit plan, as well as any entries required in 2018.

Answer 1

On deduction of premium from employee:

Employee share of insurance premium Debit 5000

Insurance company Credit 5000

The employee share of insurance premium will be deducted from employee payroll at the time of payroll calculation.

Insurance company Debit 16200

Bank Credit 16200

Payment on account of disability Debit 18000

Bank Credit 18000

$6000 will be paid to the employee per month for three months after which the insurance company will continue to make payment to the employee. There will not be any entry in company books as the insurance company will make payment directly to the employee.