Reference no: EM132606643

Orange Ltd. has 3 employees. According to their employment award, long service leave (LSL) can be taken after 13 years, at which time the employee is entitled to 10 weeks leave. If the employee leaves before the completion of 13 years' service, then there will be no entitlement to leave or to a cash payment in lieu of leave.

The names of the employees, their current salaries, and their years of service as at 30 June 2016 are as follows:

Name                    Current salary                   Years of service

Fred                          45,000                           6

David                         50,000                           9

John                             60,000                         13

The provision for long service leaves as at 1 July 2015 is $10,000.

Government bonds exist with periods to maturity, which exactly match the various periods that must still be served by the employees before LSL entitlements vest with them. These bond rates are as follow:

Years to maturity     Bond Rate %

7                                5.2

4                                 5.0

0                                 4.0

The projected inflation rate for the foreseeable future is 2%.

The projected probabilities that the employees will stay until such time that the LSL vests are as follows:

Name               Probability (%) of staying until vesting of LSL

Fred                          40

David                         50

John                             100

Required:

Question 1: schedule and calculate the LSL obligation for Orange Ltd. as at 30 June 2016. Show all workings.