Compensated absences (vacation/PTO): what to accrue and what to skip

Answer C. Accrue the vested vacation (600 × $30 = $18,000) and the accumulating personal leave that will be used in the next period (160 × $25 = $4,000). Do not accrue sick leave because it expires at year-end and creates no future obligation. Employer payroll taxes (8%) apply to amounts that will be paid, so measure the obligation as (18,000 + 4,000) × 1.08 = $23,760.

Why not A: This equals the vested vacation plus payroll taxes only (18,000 × 1.08). It is tempting because vacation clearly vests, but it omits the accumulating personal leave that, although not payable on termination, is expected to be used and therefore must be accrued.

Why not B: This equals the wages for vacation and personal leave (18,000 + 4,000) but omits employer payroll taxes. Since payroll taxes are directly related to the amounts that will be paid, they should be included in the accrual.

Why not D: This overstates the obligation by including amounts that would arise only if expiring sick leave or another ineligible category were accrued. Sick leave here expires at year-end and is not paid on termination, so it does not create an accrued liability for services already rendered.

Answer B. Under ASC 710, a liability for compensated absences is accrued when rights are attributable to past services and either vest or accumulate, payment or use is probable, and the amount can be reasonably estimated. Here, the PTO has been earned and accumulates because it can be carried forward; historical experience makes use probable and the cost is estimable, so an accrual is appropriate even though no termination cash payout exists.

Why not A: Tempting because candidates often equate a termination payout with an obligation. It fails because accrual does not require a termination cash settlement: accumulating rights earned from past service can require recognition if use or payment is probable and the amount is estimable.

Why not C: Tempting because timing of use influences current versus noncurrent presentation. It fails because classification follows recognition; the controlling recognition factors are whether rights vest or accumulate, whether payment or use is probable, and whether the amount can be reasonably estimated.

Why not D: Tempting since employer approval might appear to limit the obligation. It fails because scheduling or approval procedures do not negate that employees have earned PTO through service; enforceability for accrual depends on vesting/accumulation and probability, not routine approval requirements.

Answer C. A liability for compensated absences is accrued when the obligation is attributable to services already rendered, the rights vest or accumulate, payment is probable, and the amount can be reasonably estimated. Here, employees have earned the time and the unused days can be carried forward (they accumulate), and Maple expects use, so recognition of the liability and related expense at 12/31/X5 is required.

Why not A: This reflects a cash-timing error. The obligation arises from service already rendered in X5; if use is probable and the amount can be estimated, the expense and liability belong in X5, not deferred until the time off is taken.

Why not B: This is tempting because of the forfeiture language, but GAAP allows accrual when rights accumulate even if they are not paid in cash on termination; the ability to carry the time forward means the rights have accumulated and an obligation exists.

Why not D: Uncertainty about exact scheduling does not prevent recognition. If the employer can reasonably estimate the obligation and the rights have accumulated, recognition is required rather than mere disclosure.

Answer C. A liability for compensated absences is accrued when it is attributable to services already rendered, the rights vest or accumulate, payment is probable, and the amount can be reasonably estimated. The facts state that the vacation days were earned in Year 1, carry forward, are payable, and can be estimated. Therefore, Lane should recognize the accrued liability at December 31, Year 1.

Why not A: This reflects a cash-basis approach; under accrual accounting liabilities are recorded when incurred, not when paid. Waiting until cash payment would understate Year 1 liabilities and expense because the employees earned the benefit in Year 1 and the amount is estimable.

Why not B: This focuses on when the leave is used, but the obligation arises from services already performed and the accumulation of rights. Once the accrual criteria are met, the liability is recognized before the vacation is taken.

Why not D: Formal approval of timing does not create the obligation. The liability is triggered by employee service and the accumulation or vesting of paid vacation rights, not by later scheduling approvals.

Answer B. Under U.S. GAAP, liabilities expected to be settled beyond the entity's next 12 months are classified as noncurrent. The accrued vacation benefits will not be paid until Year 4 (beyond 12 months), so they are noncurrent. The other obligations are expected to be settled within the next 12 months and are current liabilities.

Why not A: This is a current liability because the payable is due Jan 30, Year 2, within the next 12 months, so it is classified as current, not noncurrent.

Why not C: Accrued wages are current because they will be paid on Jan 5, Year 2, which is within 12 months of the balance sheet date.

Why not D: Although related to long-term debt, the accrued interest due within the next 12 months is a current liability; only principal amounts due beyond one year are classified as noncurrent.