Question

Question 5: Sydney Bay Ltd has five employees. According to their particular employment award, long-service leave can be taken after 12 years, at which time the employee is entitled to 10 weeks' leave. If an employee were to leave before the completion of 12 years' service, no entitlement would be paid. 6. Name of employee Current salary ($) Years of service Years until LSL vests Black 40 000 2 10 White 40 000 4 8 Brown 50 000 6 Green 60 000 8 4 Purple 70 000 10 2. I High-quality corporate bond rates exist with periods to maturity that exactly match the various periods that must still be served by the employees before LSL entitlements vest with them. Corporate bond period to maturity 10 8 Bond rate (%) 8.0 7.0 6.5 6.0 5.8 6 4 2 The projected inflation rate for the foreseeable future is 2 per cent. The projected probabilities that the employees will stay long enough for the LSL to vest--that is, for a total of 12 years-are as follows:

Answer 1

ANSWER

Name of employee	projected salary	Accumlated LSL benefits	Years until LSL obligation	LSL Liability
Black	48,760	1563	724	109
White	46,866	3004	1748	350
Brown	56,308	5314	3710	1855
Green	64,946	8,326	6595	4617
Purple	72,828	11671	10,426	9383
				16,314

Notes:

1.

The projected salary is determined by the calculations:

Current salary x (1 + inflation rate)n

The growth rate for wages and will continue to be 2% for black:

= 40,000 x (1.02)10

= 48,760

2.

Accumulated LSL benefit is determined by the following

Accumulated LSL entitlement = (Year of employment)/ (Number of years required) x Weeks of LSL entitlement %/52 x Projected salary

For Black: 2/12 x 10/52 x 48,760 = $1563

3.

The present value of Long service leave calculation is:

Accumulated long service leave benefit/ (1 + Approriate govt bond rate)n

= 1563/ (1.08)10

= 724

4.

Probability that long service leave will be taken:

The probabilty that long service leave will be taken would be determined by refernce to prior experience with in the industry

= 724 x 0.15 = 109

After considering all five employees, that long service leave position at the end of the period should total $16,314

Part 2

If the carrying amount of provision account is $12,500 then it must be raised to $16,314 resulting in a LSL expense for the year of $3,814

Long service Leave expense Dr. 3,814

To Provision for long service leave $3,814

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