To illustrate accrued vacation time and accrued vacation pay let's assume that the employee's contract guarantees 120 hours of paid vacation time per year (40 hour work week times 3 weeks). If the employee's hourly pay rate is $26 per hour, the employee is earning vacation pay of $3,120 per year (120 hours x $26), or $60 per week ($3,120 per year divided by 52 weeks). The company is also incurring vacation pay expense and a liability of $60 per week. In terms of vacation time, the employee is earning 2.31 hours of vacation time each week (120 hours per year divided by 52 weeks per year) or 2.45 hours based on 120 hours divided by the 49 weeks not on vacation.
At December 31 the company has a liability for the vacation hours and vacation pay that the employee has earned and is entitled to if the company were to close. If the employee has worked 20 weeks since the employee's anniversary date with the company and the last vacation payment, then the company should report a current liability of $1,200 (20 weeks x $60 per week.)
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