RWL
Limited provides a long-term disability program for its employees through an
insurance company. For an annual premium of $18,000, 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,
RWL continues to pay the
employee
at full salary. The employees contribute to the cost of this plan through
regular payroll deductions that amount to $6,000 for the year. In late October
2011, Tony Hurst, a department manager earning $5,400 per month, was injured and
was not expected to be able to return to work for at least one year.
Instructions
Prepare
all entries made by RWL in 2011 in connection with the benefit plan, as well as
any entries required in 2012.
This is partly a
defined benefit plan because the plan specifies the benefits to be received by
employees – full salary for the first three months. To the extent that the
insurance company assumes the risk for the long-term portion of the salary
continuation plan for a fixed premium of $18,000, this portion of the benefit
plan is a defined contribution plan.
2011:
Payment of premium
to insurance company:
Long-term Disability Benefit Expense......... 12,000
Long-term Disability Benefits Payable........ 6,000
Cash..................................... 18,000
Late October, 2011:
Long-term Disability Benefit Expense......... 16,200
Disability
Benefits Payable ($5,400 X 3). 16,200
(based on the “event accrual” approach discussed in
Chapter 13)
November 2011:
Disability
Benefits Payable.................. 5,400
Cash..................................... 5,400
December, 2011:
Disability
Benefits Payable.................. 5,400
Cash..................................... 5,400
2012:
January 2012 – payment of third month’s
waiting period:
Disability
Benefits Payable.................. 5,400
Cash..................................... 5,400
Payment of premium
to insurance company:
Long-term Disability Benefit Expense......... 12,000
Long-term Disability Benefits Payable........ 6,000
Cash ..................................... 18,000
