QUESTION 2

Question

Locomotive Ltd provides transport of goods via railway all across South Africa and its
bordering neighbouring countries.
Locomotive Ltd employs 20 train drivers, 100 train personnel who operate on the trains and
are responsible for doing maintenance on the trucks, help with the loading and unloading of
the freight and to keep everything running smoothly, 5 managers and 3 directors.
To recruit and retain train drivers and train personnel is not easy, especially because they
are away from home often and for long periods of time. Locomotive Ltd has decided to
incentivise these personnel in the form of good basic salaries of an average of R250 000 per
annum for train drivers and an average of R200 000 per annum for train personnel as well as
50 days leave in a year.
The managers and directors are only awarded 25 days and 30 days leave respectively in a
year. Their basic salaries are on average R350 000 per annum for a manager and R450 000
per annum for a director.
On top of their basic salaries, train drivers and train personnel are also awarded an out of
town allowance of R250 per day that they are away from home. Directors are awarded a
travel allowance making up 5% of their basic salary a year.
As per their human resource policy and employment contracts, leave days are not vesting
and can only be carried over for one year before they expire. Managers and directors are
expected to work 5 days a week while train drivers and personnel are expected to work 6
days a week. There are 52 weeks in the current year.
At 31 December 2019, the following information is available:
Average unused leave days
(per employee)

% unused days expected to
be taken in following year

Train drivers 20 70%
Train personnel 15 60%
Managers 5 60%
Directors 8 75%
The train drivers and train personnel were on average out of town for 250 days in the year.
REQUIRED
Calculate the leave pay provision that would need to be raised for each type of employee in
the financial statements of 31 December 2019.

Answer 1

To calculate the leave pay provision for each employee category, we need to consider the number of unused leave days, the applicable percentages of days expected to be taken, and their respective average salaries.

Step 1: Calculate Leave Pay Provision for Each Employee Category

1. Train Drivers

• Average salary: R250,000 per annum
• Average unused leave days: 20 days
• % of unused days expected to be taken: 70%

Calculating Daily Salary: \[ \text{Daily Salary} = \frac{\text{Annual Salary}}{\text{Working Days in a Year}} = \frac{250,000}{(52 \text{ weeks} \times 6 \text{ days})} = \frac{250,000}{312} \approx 800.64 \]

Calculating Leave Pay Provision: \[ \text{Provision per driver} = \text{Average Unused Leave Days} \times \text{Daily Salary} \times \text{% Expected to be Taken} = 20 \times 800.64 \times 0.70 \approx 11,209 \] \[ \text{Total Provision for 20 Drivers} = 20 \times 11,209 \approx R224,180 \]

2. Train Personnel

• Average salary: R200,000 per annum
• Average unused leave days: 15 days
• % of unused days expected to be taken: 60%

Calculating Daily Salary: \[ \text{Daily Salary} = \frac{200,000}{(52 \text{ weeks} \times 6 \text{ days})} = \frac{200,000}{312} \approx 640.26 \]

Calculating Leave Pay Provision: \[ \text{Provision per personnel} = \text{Average Unused Leave Days} \times \text{Daily Salary} \times \text{% Expected to be Taken} = 15 \times 640.26 \times 0.60 \approx 5,403.31 \] \[ \text{Total Provision for 100 Personnel} = 100 \times 5,403.31 \approx R540,331 \]

3. Managers

• Average salary: R350,000 per annum
• Average unused leave days: 5 days
• % of unused days expected to be taken: 60%

Calculating Daily Salary: \[ \text{Daily Salary} = \frac{350,000}{(52 \text{ weeks} \times 5 \text{ days})} = \frac{350,000}{260} \approx 1,346.15 \]

Calculating Leave Pay Provision: \[ \text{Provision per manager} = \text{Average Unused Leave Days} \times \text{Daily Salary} \times \text{% Expected to be Taken} = 5 \times 1,346.15 \times 0.60 \approx 4,038.45 \] \[ \text{Total Provision for 5 Managers} = 5 \times 4,038.45 \approx R20,192.25 \]

4. Directors

• Average salary: R450,000 per annum
• Average unused leave days: 8 days
• % of unused days expected to be taken: 75%

Calculating Daily Salary: \[ \text{Daily Salary} = \frac{450,000}{(52 \text{ weeks} \times 5 \text{ days})} = \frac{450,000}{260} \approx 1,730.77 \]

Calculating Leave Pay Provision: \[ \text{Provision per director} = \text{Average Unused Leave Days} \times \text{Daily Salary} \times \text{% Expected to be Taken} = 8 \times 1,730.77 \times 0.75 \approx 10,384.62 \] \[ \text{Total Provision for 3 Directors} = 3 \times 10,384.62 \approx R31,153.86 \]

Final Leave Pay Provisions

Now we can summarize the total leave pay provisions for all types of employees that need to be raised as provisions in the financial statements of 31 December 2019.

• Train Drivers: R224,180
• Train Personnel: R540,331
• Managers: R20,192.25
• Directors: R31,153.86

Total Leave Pay Provision

\[ \text{Total Leave Pay Provision} = R224,180 + R540,331 + R20,192.25 + R31,153.86 \approx R815,857.11 \]

Conclusion

The leave pay provision necessary for the financial statements as of December 31, 2019, is approximately R815,857.11.