Halifax
University recently signed a contract with the bargaining unit that represents
full-time professors. The contract agreement starts on April 1, 2011, the start
of the university’s fiscal year. The following excerpt outlines the portion of
the signed agreement that relates to sabbaticals: “Professors may apply for a
one-year sabbatical leave after seven continuous years of employment, and must
outline how their sabbatical plans will benefit the university.”
After
completing the required amount of time, any professor may apply for the leave.
The contract notes particular types of activities that the sabbatical is
intended to promote, including formal research, continued professional development,
and independent study and research. Individual professors are left to make
their own choices for whichever of these activities to pursue while on
sabbatical leave. As part of their agreement, they must continue to work for
Halifax University one year after their sabbatical, or reimburse the university
for funds they receive while on leave. The agreement states that professors
receive 80% of their salary while on sabbatical leave. Professors may delay, or
be asked to delay, their application for sabbatical, in which case they will
receive 85% of their salary while on leave. The issue of sabbatical had long been a point
of contention with faculty at Halifax University, which is an independent
institution, and they fought vehemently for the right to this paid leave that
had not previously been in their collective
agreement.
The university is phasing in the unfunded sabbatical plan gradually, which
means that the first professors will be eligible to apply for their sabbatical
in seven years.
The
controller has put together the following numbers of professors in each salary
group:
Professors
with salaries averaging $60,000 …………………. 55
Professors
with salaries averaging $70,000 …………………. 40
Professors
with salaries averaging $100,000 ………………… 10
The
union agreement calls for a wage increase of 2% per year in each of the next
seven years. This is consistent with past union agreements for this bargaining
unit. Five of the professors with salaries averaging $100,000 are scheduled to retire
in four years. Halifax University expects to keep a similar composition of
salaried professors in the future. Assume a discount rate of 6%. Halifax
University applies the deferral and amortization approach for employee future
benefits under ASPE.
Instructions
(a)
Prepare any entries that are required at the March 31, 2012 fiscal year end
assuming sabbaticals will be granted only if the sabbatical activities proposed
by the applicants are expected to benefit the university in some way.
(b)
Prepare any entries that are required at the March 31, 2012 fiscal year end
assuming sabbaticals will be granted automatically with no restrictions on the
professors’ activities during the year.
(c)
Five employees are granted approval to take sabbatical in the first year that
they are eligible under the assumption in (b). Prepare the entry that will be required
when the professors are paid, assuming that an amount of $367,000 has correctly
been accrued for these employees.
(d)
The contract allows employees of the bargaining unit to take up to 10 days of
paid sick leave per year. Explain the accounting implications under the
following assumptions:
1.
The sick leave is allowed to be carried over for up to a one-year period
following year end.
2.
Any unused sick time is not eligible to be carried over to the following fiscal
period.
(a) Because the professors have
to do something that benefits the university while they are on sabbatical,
their salary while on sabbatical is simply recognized as expense in the year
they take it. No amount needs to be recognized over the 7 year period leading
up to it.
(b) The following calculations assume that none
of the benefits vest prior to earning the full sabbatical.
|
Current salary
|
Salary when
eligible*
|
Salary during
sabbatical
(80%)
|
Portion earned in
current year (1/7)
|
Present value**
|
Number of
professors
|
Amount earned in
current year
|
|
$60,000
|
$67,570
|
$54,056
|
$7,722
|
$5,136
|
55
|
$282,480
|
|
70,000
|
78,831
|
63,065
|
9,009
|
5,992
|
40
|
239,680
|
|
100,000
|
112,616
|
90,093
|
12,870
|
8,559
|
5***
|
42,795
|
|
|
|
|
|
|
|
$564,955
|
* Salary in 2011 X
(1.02)6
* A rate of 6% is
assumed.
|
**Using a
financial calculator:
|
||
|
PV
|
$
?
|
Yields $5,136
|
|
I
|
6%
|
|
|
N
|
7
|
|
|
PMT
|
$ 0
|
|
|
FV
|
$(7,722)
|
|
|
Type
|
0
|
|
|
Excel formula:
=PV(rate,nper,pmt,fv,type)
|
*** Since five of
the professors in the $100,000 salary grouping will retire, they will not have
worked the necessary seven years for the benefit to vest.
Journal entry required:
Sabbatical
Expense........................... 564,955
Liability
for Compensated Absence........ 564,955
(c)
Liability for Compensated Absence............ 367,000
Cash..................................... 367,000
(d) 1. If the sick leave is allowed to be carried over
into the next fiscal period and employees are eligible to receive a cash
payment upon discharge, termination of employment or retirement, (i.e., the
benefits are vested) then the amounts related to sick leave represent a
liability that should be accrued.
However,
if employees are only permitted to take the paid sick days if they are actually
sick, difficulties in measuring the liability combined with the immateriality
of the amount may mean that the University recognizes the expense as the sick
days are actually taken.
2. If unused sick time is not eligible to be
carried over, there is no future obligation and no entry is required.
