Halifax University recently signed a contract with the bargaining unit that represents full-time professors

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.