Question

Question 2 (Marks: 15) Chopin (Pty) Ltd ordinarily pays their employees a bonus in the form of a thirteenth cheque together with their December pay. This has created a constructive obligation on their part to recognise the liability. Chopin (Pty) Ltd only pays the bonus if the employee is still working for the company on 31 December of each year. Any employees joining the company during the year are paid a pro-rata (proportional) amount of their bonus. On 1 January 2020 there were 32 employees in total earning an average monthly salary of R21 300 each. During the year, two new employees were taken on, one on 1 May 2020 at a salary of R15 700 per month, and the other on 1 November 2020 earning R10 500 per month. Two of the original employees resigned on 31 May 2020, their last day of employment being on 30 June 2020. (4) Required: Q.2.1.1 Calculate the value of the provision that Chopin (Pty) Ltd should recognise on 1 January 2020. Prepare the journal entry. No narration is necessary. Show all your workings. Round to the nearest Rand value. (7) Q.2.1.2 What will the carrying value of the liability be on 30 June 2020? Show your calculations and prepare the journal entry to recognise the adjustment from the 1 January balance. No narration is necessary. Show all your workings Round all amounts to the nearest Rand. mply with the requirements of International Financial Reporting Standards (IFRS), in particular AS19 - Employee benefits. Your answer must Q.2.2 (4) Gotell (Pty) Ltd embarked on a retrenchment programme. The company made an offer to 10 employees over the age of 55 years for voluntary termination. Advise Gotell (Pty) Ltd of the implications that this offer has regarding the recognition of a liability in their books of account Explain to Gotell (Pty) Ltd how the recognition of the liability would differ if Gotell (Pty) Ltd were terminating the employment.

Answer 1

The above question is based on calculation of Provision for Bonus.

Part 1.1 Value of Bonus Provision on 1st January 2020

No. of employees working on 1st of January 2020: 32

Average Monthly Salary for original Employees (32) = $ 21,300

A  $\Rightarrow$ Bonus: 32* 21,300 = $ 6,81,600

Journal Entry:

01.01.2020	Debit	Credit
Bonus Expense ( by department)	6,81,600
Accrued Bonus Liability		6,81,600

Part 1.2 Carrying value of the liability on 30.06.2020

Original no. of emplyees left = 32-2 = 30

Average Monthly Salary for original Employees remaining (30) = $ 21,300

A  $1600419918149_blob.png$ Bonus: 30* 21,300 = $ 6,39,000

Average Monthly Salary for New Employee (1st) = $15,700 p.m

No. of months worked: 05.01.2020 to 12.31.2020 = 8 months

B $1600419918226_blob.png$ Bonus (prorata) = (1* 15,700) * 8/12 = $ 10,467 ( approx)

New bonus liability as on 30.06.2020 = 6,39,000+10,467 = $ 6,49,467

$\Rightarrow$ Liabiity to be reduced in the books by = $ ( 6,81,600 - 6,46,467) = $ 32,133

Journal Entry:

30.06.2020	Debit	Credit
Accrued Bonus Liability	32,133
Bonus Expense ( by department)		32,133

Part 2 Retrenchment programm and recognition of the termination liabilities

IAS 19 Employee Benefits (1998) dealing with the accounting for termination benefits, together with IAS 37 Provisions, Contingent Liabilities and Contingent Assets Proposes:

• termination benefits to encourage employees to leave service voluntarily (voluntary termination benefits) should be recognised when employees accept the entity's offer of those benefits.
• termination benefits provided as a result of an entity terminating employment (involuntary termination benefits) should be recognised when the entity has communicated its plan of termination to the affected employees and the plan meets specified criteria, unless the involuntary termination benefits are provided in exchange for employees' future services (i.e. in substance they are a 'stay bonus'). In such cases, the liability for those benefits should be recognised over the period of the future service.

Thus, Gotell (Pty) Ltd. should recognise benefits according to IAS 19 which states that : termination benefits to be recognised at the earlier of:

• When the offer cannot be withdrawn

• When the related restructuring costs are recognised under IAS 37 Provisions, Contingent Liabilities and Contingent Assets.