RWL Limited provides a long-term disability program for its employees through an insurance company

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