11
Current CHAPTER Liabilities and Payroll Accounting
ASSIGNMENT CLASSIFICATION TABLE
Brief Exercises 1 A Problems 1A B Problems 1B
Study Objectives 1. Explain a current liability, and identify the major types of current liabilities. 2. Describe the accounting for notes payable. 3. Explain the accounting for other current liabilities. 4. Explain the financial statement presentation and analysis of current liabilities. 5. Describe the accounting and disclosure requirements for contingent liabilities. 6. Compute and record the payroll for a pay period. 7. Describe and record employer payroll taxes. 8 Discuss the objectives of internal control for payroll. Identify additional fringe benefits associated with employee compensation.
Questions 1
Exercises 7
2
2
1, 2, 7
1A, 2A
1B, 2B
3, 4
3, 4
3, 4, 7
1A
1B
5
5
7, 8, 9
1A
1B
6, 7
6
5, 6, 7
1A
1B
8, 9, 10, 12 13, 14, 15 9, 10, 11, 15 16, 17
7, 8
10, 11, 12 13 12, 14
3A, 4A, 5A
3B, 4B, 5B
9
3A, 4A, 5A
3B, 4B, 5B
10
*9.
18, 19, 20, 21, 22
11
15, 16
4A
4B
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix*to the chapter.
11-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem Number 1A Difficulty Level Moderate Time Allotted (min.) 3040
Description Prepare current liability entries, adjusting entries, and current liabilities section. Journalize and post note transactions and show balance sheet presentation. Prepare payroll register and payroll entries. Journalize payroll transactions and adjusting entries. Prepare entries for payroll and payroll taxes; prepare W-2 data. Prepare current liability entries, adjusting entries, and current liabilities section. Journalize and post note transactions and show balance sheet presentation. Prepare payroll register and payroll entries. Journalize payroll transactions and adjusting entries. Prepare entries for payroll and payroll taxes; prepare W-2 data.
2A
Moderate
3040
3A 4A 5A
Simple Moderate Moderate
3040 3040 3040
1B
Moderate
3040
2B
Moderate
3040
3B 4B 5B
Simple Moderate Moderate
3040 3040 3040
11-2
Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
Knowledge Q11-1 BE11-1 Q11-2 BE11-2 E11-1 E11-2 P11-1A E11-3 BE11-3 E11-7 E11-4 P11-1A P11-1A P11-1B BE11-6 E11-5 P11-1A P11-1B P11-3B P11-4B P11-5B BE11-9 E11-12 E11-14 P11-3A P11-4A P11-5A P11-3B P11-4B P11-5B P11-1B P11-2A P11-1B P11-2B E11-7 E11-7 P11-1A P11-1B Comprehension Application Analysis Synthesis Evaluation
Study Objective
1. Explain a current liability, and identify the major types of current liabilities.
2. Describe the accounting for notes payable.
BLOOMS TAXONOMY TABLE
3. Explain the accounting for other current liabilities. Q11-5 BE11-5 E11-7 E11-8 E11-9 E11-5 E11-6 E11-7
BE11-4 Q11-3 Q11-4
4. Explain the financial statement presentation and analysis of current liabilities. Q11-6 Q11-7 E11-6 Q11-9 Q11-12 Q11-14 Q11-11 Q11-9 Q11-10 Q11-15 Q11-16 BE11-10 Q11-19 Q11-20 Q11-21 Q11-22 BE11-11 E11-16 Financial Reporting Communication Exploring the Web Q11-8 Q11-10 Q11-13
11-3
Q11-17 Q11-18
5. Describe the accounting and disclosure requirements for contingent liabilities.
6. Compute and record the payroll for a pay period.
Q11-15 BE11-7 E11-11 P11-3A BE11-8 E11-12 P11-4A E11-10 E11-13 P11-5A
7. Describe and record employer payroll taxes.
8. Discuss the objectives of internal control for payroll.
*9. Identify additional fringe benefits associated with employee compensation.
E11-15 P11-4A P11-4B Comparative Analysis Decision Making Across the Organization Ethics Case All About You
Broadening Your Perspective
ANSWERS TO QUESTIONS
1. Jill is not correct. A current liability is a debt that can reasonably be expected to be paid: (a) from existing current assets or through the creation of other current liabilities and (2) within one year or the operating cycle, whichever is longer. In the balance sheet, Notes Payable of $40,000 and Interest Payable of $900 ($40,000 X .09 X 3/12) should be reported as current liabilities. In the income statement, Interest Expense of $900 should be reported under other expenses and losses. (a) Disagree. The company only serves as a collection agent for the taxing authority. It does not report sales taxes as an expense; it merely forwards the amount paid by the customer to the government. (b) The entry to record the proceeds is: Cash ................................................................................................................ 7,400 Sales ...................................................................................................... 7,000 Sales Taxes Payable .......................................................................... 400 (a) The entry when the tickets are sold is: Cash ......................................................................................................... Unearned Football Ticket Revenue .......................................... (b) The entry after each game is: Unearned Football Ticket Revenue.................................................... Football Ticket Revenue..............................................................
2.
3.
4.
800,000 800,000
160,000 160,000
5.
Liquidity refers to the ability of a company to pay its maturing obligations and meet unexpected needs for cash. Two measures of liquidity are working capital (current assets current liabilities) and the current ratio (current assets current liabilities). A contingent liability is an existing situation involving uncertainty as to a possible obligation which will be resolved when one or more future events occur or fail to occur. Contingent liabilities are only recorded in the accounts if they are probable and the amount is reasonably estimable. Warranty costs are a contingent liability usually recorded in the accounts since they are both probable in incurrence and subject to estimation. If an event is only reasonably possible, then only note disclosure is required. If the possibility of a contingent liability occurring is only remote, then neither recording in the accounts nor note disclosure is required. Gross pay is the amount an employee actually earns. Net pay, the amount an employee is paid, is gross pay reduced by both mandatory and voluntary deductions, such as FICA taxes, union dues, federal income taxes, etc. Gross pay should be recorded as wages or salaries expense. Both employees and employers are required to pay FICA taxes. No. When an employer withholds federal or state income taxes from employee paychecks, the employer is merely acting as a collection agent for the taxing body. Since the employer holds employees funds, these withholdings are a liability for the employer until they are remitted to the government.
6.
7.
8.
9. 10.
11-4
Questions Chapter 11 (Continued)
11. FICA stands for Federal Insurance Contribution Act; FUTA stands for Federal Unemployment Tax Act; and SUTA stands for State Unemployment Tax Act. 1 2. A W-2 statement contains the employees name, address, social security number, wages, tips, other compensation, social security taxes withheld, wages subject to social security taxes, and federal, state and local income taxes withheld. 1 3. Payroll deductions can be classified as either mandatory (required by the government) or voluntary (not required by the government). Mandatory deductions include FICA taxes and income taxes. Examples of voluntary deductions are health and life insurance premiums, pension contributions, union dues, and charitable contributions.
1 4. The employee earnings record is used in: (1) determining when an employee has earned the maximum earnings subject to FICA taxes, (2) filing state and federal tax returns, and (3) providing each employee with a statement of gross earnings and tax withholdings for the year. 15. (a) The three types of taxes are: (1) FICA, (2) federal unemployment, and (3) state unemployment. (b) The tax liability accounts are classified as current liabilities in the balance sheet. Payroll tax expense is classified under operating expenses in the income statement. The main internal control objectives associated with payrolls are: (1) to safeguard company assets from unauthorized payments of payrolls and (2) to assure the accuracy and reliability of the accounting records pertaining to payrolls. The four functions associated with payroll are: (1) hiring employees, (2) timekeeping, (3) preparing the payroll, and (4) paying the payroll.
16.
17.
*18. Two additional types of fringe benefits are: (1) Paid absencesvacation pay, sick pay, and paid holidays. (2) Post-retirement benefitspensions and health care and life insurance. *19. Paid absences refer to compensation paid by employers to employees for vacations, sickness, and holidays. When the payment of such compensation is probable and the amount can be reasonably estimated, a liability should be accrued for paid future absences which employees have earned. When this amount cannot be reasonably estimated, the potential liability should be disclosed. *20. Post-retirement benefits consist of payments by employers to retired employees for: (1) pensions and (2) health care and life insurance. *21. A 401(K) works as follows: an employee can contribute up to a certain percentage of pay into a 401(K) plan and employers will match a percentage of the employees contribution. *22. A defined contribution plan defines the contribution that an employer can make but not the benefit that the employee will receive. In a defined benefit plan, the employer agrees to pay a defined amount to retirees based on employees meeting certain eligibility standards.
11-5
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 11-1 (a) A note payable due in two years is a long-term liability, not a current liability. (b) $30,000 of the mortgage payable is a current maturity of long-term debt. This amount should be reported as a current liability. (c) Interest payable is a current liability because it will be paid out of current assets in the near future. (d) Accounts payable is a current liability because it will be paid out of current assets in the near future.
BRIEF EXERCISE 11-2 July 1 Cash ............................................................................. Notes Payable .................................................. Interest Expense ...................................................... Interest Payable............................................... ($80,000 X 10% X 1/2) 80,000 80,000 4,000 4,000
Dec. 31
BRIEF EXERCISE 11-3 Sales tax payable (1) Sales = $14,800 = ($15,540 1.05) (2) Sales taxes payable = $740 = ($14,800 X 5%) Mar. 16 Cash.............................................................................. Sales .................................................................... Sales Taxes Payable ...................................... 15,540 14,800 740
11-6
BRIEF EXERCISE 11-4 Cash .............................................................................................. Unearned Basketball Ticket Revenue....................... (To record sale of 4,000 season tickets) Unearned Basketball Ticket Revenue................................ Basketball Ticket Revenue ........................................... (To record basketball ticket revenues earned) 720,000 720,000
60,000 60,000
BRIEF EXERCISE 11-5 (a) Working capital = $4,090,475 $1,180,707 = $2,909,768 (thousand) (b) Current ratio = $4,090,475 $1,180,707 = 3.46:1
BRIEF EXERCISE 11-6 Dec. 31 Warranty Expense ................................................ Estimated Warranty Liability ................... [(1,000 X 5%) X $80] 4,000 4,000
BRIEF EXERCISE 11-7 Gross earnings: Regular pay (40 X $16) ................................................... Overtime pay (7 X $24) ................................................... Gross earnings.......................................................................... Less: FICA taxes payable ($808 X 8%) ............................. Federal income taxes payable ................................ Net pay .........................................................................................
$640.00 168.00
$808.00 $808.00
$ 64.64 95.00
159.64 $648.36
11-7
BRIEF EXERCISE 11-8 Jan. 15 Wages Expense ........................................................ FICA Taxes Payable ($808 X 8%) ............... Federal Income Taxes Payable................... Wages Payable................................................. Wages Payable.......................................................... Cash..................................................................... 808.00 64.64 95.00 648.36 648.36 648.36
Jan. 15
BRIEF EXERCISE 11-9 Jan. 31 Payroll Tax Expense............................................. FICA Taxes Payable ($70,000 X 8%).......... Federal Unemployment Taxes Payable ($70,000 X .8%)......................... State Unemployment Taxes Payable ........ ($70,000 X 5.4%) 9,940 5,600 560 3,780
BRIEF EXERCISE 11-10 (a) Timekeeping (b) Hiring employees (c) Preparing the payroll (d) Paying the payroll
*BRIEF EXERCISE 11-11 Jan. 31 Vacation Benefits Expense (80 X $120) ......... Vacation Benefits Payable ........................ 9,600 9,600
11-8
SOLUTIONS TO EXERCISES
EXERCISE 11-1 July 1, 2008 Cash ................................................................................... Notes Payable ......................................................... November 1, 2008 Cash ................................................................................... Notes Payable ......................................................... December 31, 2008 Interest Expense ............................................................ ($50,000 X 12% X 6/12) Interest Payable...................................................... Interest Expense ............................................................ ($60,000 X 10% X 2/12) Interest Payable...................................................... Feburary 1, 2009 Notes Payable ................................................................. Interest Payable.............................................................. Interest Expense ............................................................ Cash ........................................................................... April 1, 2009 Notes Payable ................................................................. Interest Payable.............................................................. Interest Expense ............................................................ Cash ...........................................................................
50,000 50,000
60,000 60,000
3,000 3,000 1,000 1,000
60,000 1,000 500 61,500
50,000 3,000 1,500 54,500
11-9
EXERCISE 11-2 (a) June 1 Cash.................................................................... Notes Payable.......................................... (b) June 30 Interest Expense............................................. Interest Payable ...................................... [($90,000 X 12%) X 1/12] (c) Dec. 1 Notes Payable.................................................. Interest Payable .............................................. ($90,000 X 12% X 6/12) Cash............................................................ (d) $5,400 90,000 90,000 900 900
90,000 5,400 95,400
EXERCISE 11-3 Apr. 10 WARKENTINNE COMPANY Cash........................................................................... Sales ................................................................. Sales Taxes Payable ................................... RIVERA COMPANY Cash........................................................................... Sales ($23,540 1.07) ................................. Sales Taxes Payable ................................... ($23,540 $22,000) 31,500 30,000 1,500
15
23,540 22,000 1,540
11-10
EXERCISE 11-4 (a) Nov. 30 Cash...................................................................... 240,000 Unearned Subscriptions ....................... (12,000 X $20) Unearned Subscriptions................................ Subscription Revenue ........................... ($240,000 X 1/12) Unearned Subscriptions................................. Subscription Revenue............................ ($240,000 X 3/12) 20,000 20,000
240,000
(b) Dec. 31
(c) Mar. 31
60,000 60,000
EXERCISE 11-5 (a) Estimated warranties outstanding: Month November December Total Estimate 900 960 1,860 Units Defective 600 400 1,000 Outstanding 300 560 860
Estimated warranty liability860 X $20 = $17,200. (b) Warranty Expense (1,860 X $20) ...................................... Estimated Warranty Liability.................................... Estimated Warranty Liability............................................. Repair Parts, Wages Payable, Cash, etc.............. (c) Estimated Warranty Liability (500 X $20)...................... Repair Parts, Wages Payable, Cash, etc.............. 37,200 37,200 20,000 20,000 10,000 10,000
11-11
EXERCISE 11-6 (a) If a contingency is remote (unlikely to occur), it need not be recorded or disclosed. (b) Since the contingency is probable and reasonably estimable, the liability should be recorded in the accounts. In addition, the details should be disclosed in the notes to the financial statements. The journal entry is: Lawsuit Loss ........................................................ Lawsuit Liability ....................................... (c) 1,000,000 1,000,000
If a contingency is reasonably possible, it need not be recorded, but must be disclosed in the notes to the financial statements.
EXERCISE 11-7 (a) JEWETT ONLINE COMPANY Partial Balance Sheet Current liabilities Accounts payable .................................................................... Long-term debt due within one year.................................. Unearned ticket revenue........................................................ Estimated warranty liability .................................................. Sales taxes payable................................................................. Interest payable ........................................................................ Total current liabilities................................................... $ 63,000 30,000 24,000 18,000 10,000 8,000 $153,000
(b) Jewett Online Companys working capital is $147,000 and its current ratio is 1.96:1. Although a current ratio of 2:1 has been considered the standard for a good credit rating, many companies operate successfully with a current ratio below 2:1. EXERCISE 11-8 (a) Working capital = $6,466 $6,715 = ($249) million (b) Current ratio = $6,466 $6,715 = .96:1
11-12
EXERCISE 11-9 (a) Current ratio 2004 $8,720 $6,071 = 1.44:1 2005 $7,115 $5,238 = 1.36:1 Working capital 2004 $8,720 $6,071 = $2,649 million 2005 $7,115 $5,238 = $1,877 million (b) Current ratio $6,915 $5,038 = 1.37:1 Working capital $6,915 $5,038 = $1,877 million It would make its current ratio increase slightly, but its working capital would remain the same.
EXERCISE 11-10 (a) 1. Regular 40 X $15.00 = $600.00 Overtime 2 X $22.50 = 45.00 Gross earnings $645.00 FICA taxes$51.60 = ($645 X 8%). Federal income taxes $55. State income taxes $12.90 = ($645 X 2%). Net pay $500.50 = ($645.00 $51.60 $55.00 $12.90 $25.00). 645.00 51.60 55.00 12.90 25.00 500.50
2. 3. 4. 5.
(b) Office Wages Expense ....................................................... FICA Taxes Payable ................................................... Federal Income Taxes Payable .............................. State Income Taxes Payable ................................... Health Insurance Payable ........................................ Wages Payable ............................................................
11-13
EXERCISE 11-11 C. Ogle $4,000 X 8% = $320. Ogles total gross earnings for the year are $87,500 = ($83,500 + $4,000), which is below the $90,000 maximum for FICA taxes. $3,900 X 8% = $312. Delgados total gross earnings for the year are $90,100. Thus, $3,900 of the gross earnings ($4,000 $100) for this pay period are subject to FICA taxes. $2,400 X 8% = $192. Jeters total gross earnings for the year are $91,600. Thus, only $2,400 of the gross earnings ($4,000 $1,600) for this pay period are subject to FICA taxes. $0. Spiveys gross earnings prior to this pay equal the maximum amount subject to FICA taxes. Thus, none of the gross earnings in the December 31 pay period is subject to FICA taxes.
D. Delgado
L. Jeter
T. Spivey
EXERCISE 11-12 (a) See next page. (b) Jan. 31 Wages Expense ........................................... FICA Taxes Payable........................... Federal Income Taxes Payable......... Health Insurance Payable................ Wages Payable.................................... 1,837.00 146.96 129.00 60.00 1,501.04
11-14
EXERCISE 11-12 (Continued)
(a)
AIVAMAR COMPANY Payroll Register For the Week Ending January 31 Earnings Regular $ 480.00 520.00 600.00 $1,600.00 $108.00 39.00 90.00 $237.00 $ 588.00 559.00 690.00 $1,837.00 $ 47.04 44.72 55.20 $146.96 Overtime Gross Pay FICA Taxes
11-15
Employee 46 42 44
Total Hours
Deductions Federal Health Income Taxes Insurance $ 34.00 37.00 58.00 $129.00 $10.00 25.00 25.00 $60.00
Total $ 91.04 106.72 138.20 $335.96
Net Pay $ 496.96 452.28 551.80 $1,501.04
M. Hashmi E. Benson K. Kern Totals
EXERCISE 11-12 (Continued) (b) Jan. 31 Payroll Tax Expense........................................ FICA Taxes Payable................................ Federal Unemployment Taxes Payable ($1,837 X .8%) ...................... State Unemployment Taxes Payable ($1,837 X 5.4%).................... 260.86 146.96 14.70 99.20
EXERCISE 11-13 (a) (1) (2) (3) (4) (5) $ 1,100 [$10,000 see (2) below $8,900]. $10,000 (FICA taxes $800 8%). $ 300 ($10,000 X 3%). $ 2,340 ($10,000 $7,660). $ 6,000 ($10,000 $4,000). Warehouse Wages Expense......................... Store Wages Expense .................................... FICA Taxes Payable ............................... Federal Income Taxes Payable .................................................. State Income Taxes Payable ............... Union Dues Payable............................... Wages Payable......................................... Wages Payable ................................................. Cash............................................................. 6,000 4,000 800 1,140 300 100 7,660 7,660 7,660
(b) Feb. 28
28
EXERCISE 11-14 (a) FICA tax ($760,000 X 8%)................................................... SUTA tax ($100,000 X 5.4%).............................................. FUTA tax ($100,000 X 0.8%) .............................................. Total payroll tax ........................................................... (b) Payroll Tax Expense............................................................ FICA Taxes Payable.................................................... State Unemployment Taxes Payable .................... Federal Unemployment Taxes Payable ...............
11-16
$60,800 5,400 800 $67,000 67,000 60,800 5,400 800
*EXERCISE 11-15 Mar. 31 Vacation Benefits Expense ................................. (10 X 2 X $120) Vacation Benefits Payable.......................... Pension Expense ($40,000 X 10%).................... Pension Liability............................................. 2,400 2,400 4,000 4,000
31
*EXERCISE 11-16 1. Vacation Benefits Expense............................................ Vacation Benefits Payable................................... (20 X 5 X $120) Pension Expense............................................................... Cash ............................................................................ Pension Liability ..................................................... Vacation Benefits Payable ............................................. Cash ............................................................................ (18 X 1 X $120) 12,000 12,000
2.
100,000 70,000 30,000 2,160 2,160
3.
11-17
SOLUTIONS TO PROBLEMS
PROBLEM 11-1A
(a) Jan. 5
Cash...................................................................... Sales ($22,680 108%) .......................... Sales Taxes Payable .............................. ($22,680 $21,000) Unearned Service Revenue........................... Service Revenue...................................... Sales Taxes Payable ....................................... Cash............................................................. Accounts Receivable ...................................... Sales ............................................................ Sales Taxes Payable .............................. (800 X $50 X 8%) Cash...................................................................... Notes Payable........................................... Cash...................................................................... Sales ($12,420 108%).......................... Sales Taxes Payable .............................. ($12,420 $11,500)
22,680 21,000 1,680
12
10,000 10,000 7,700 7,700 43,200 40,000 3,200
14
20
21
18,000 18,000 12,420 11,500 920
25
(b) (1) Jan. 31
Interest Expense...................................... Interest Payable .............................. ($18,000 X 8% X 1/12 = ($120; $120 X 1/3) Warranty Expense................................... ($40,000 X 7%) Estimated Warranty Liability..........................................
40 40
(2) Jan. 31
2,800
2,800
11-18
PROBLEM 11-1A (Continued) (c) Current liabilities Notes payable ............................................................................... Accounts payable ........................................................................ Unearned service revenue ($16,000 $10,000) ................. Sales taxes payable ($1,680 + $3,200 + $920) .................... Estimated warranty liability...................................................... Interest payable............................................................................ Total current liabilities ......................................................
$18,000 52,000 6,000 5,800 2,800 40 $84,640
11-19
PROBLEM 11-2A
(a) Jan.
2
Merchandise Inventory or Purchases..................................................... Accounts Payable.................................. Accounts .......................................... Payable Notes Payable......................................... Interest Expense ............................................. ($30,000 X 9% X 2/12) Interest Payable ..................................... Notes Payable.................................................. Interest Payable .............................................. Cash ........................................................... Equipment......................................................... Cash ........................................................... Notes Payable......................................... Interest Expense ............................................. ($40,000 X 10% X 3/12) Interest Payable ..................................... Notes Payable.................................................. Interest Payable .............................................. Cash ........................................................... Cash .................................................................... Notes Payable......................................... Interest Expense ............................................. ($15,000 X 8% X 1/12) Interest Payable .....................................
30,000 30,000 30,000 30,000 450 450 30,000 450 30,450 51,000 11,000 40,000 1,000 1,000 40,000 1,000 41,000 15,000 15,000 100 100
Feb.
1
Mar. 31
Apr.
1
July
1
Sept. 30
Oct.
1
Dec.
1
Dec. 31
11-20
PROBLEM 11-2A (Continued) (b) 4/1 10/1 Notes Payable 30,000 2/1 40,000 7/1 12/1 12/31 Bal. Interest Payable 450 3/31 1,000 9/30 12/31 12/31 Bal. Interest Expense 450 1,000 100 1,550 30,000 40,000 15,000 15,000
4/1 10/1
450 1,000 100 100
3/31 9/30 12/31 12/31 Bal.
(c) Current liabilities Notes payable ......................................................... Interest payable ......................................................
$15,000 100
$15,100
(d) Total interest is $1,550.
11-21
(a)
DEL HARDWARE Payroll Register For the Week Ending March 15, 2008 Earnings Deductions
PROBLEM 11-3A
11-22 Regular 600.00 600.00 520.00 520.00 2,240.00 0 45.00 78.00 117.00 240.00 600.00 645.00 598.00 637.00 2,480.00 48.00 51.60 47.84 50.96 198.40 72.00 47.00 60.00 61.00 240.00 18.00 19.35 17.94 19.11 74.40 5.00 5.00 8.00 5.00 23.00 Overtime FICA Fed. State U.F. Gross Pay 40 42 44 46
Employee
Hours
Total 143.00 122.95 133.78 136.07 535.80
Net Pay 457.00 522.05 464.22 500.93 1,944.20
Store Wages Expense 600.00 645.00 598.00 1,843.00
Office Wages Expense
Joe Devena Mary Keener Andy Dye Kim Shen Totals
637.00 637.00
PROBLEM 11-3A (Continued) (b) Mar. 15 Store Wages Expense ............................. Office Wages Expense ............................ FICA Taxes Payable ........................ Federal Income Taxes Payable ........................................... State Income Taxes Payable ........ United Fund Contributions Payable ........................................... Wages Payable ................................. Payroll Tax Expense ................................ FICA Taxes Payable ........................ ($2,480 X 8%) Federal Unemployment Taxes Payable ($2,480 X .8%)............... State Unemployment Taxes Payable ($2,480 X 5.4%) ............ Wages Payable .......................................... Cash ..................................................... FICA Taxes Payable ................................. ($198.40 + $198.40) Federal Income Taxes Payable ............ Cash ..................................................... 1,843.00 637.00 198.40 240.00 74.40 23.00 1,944.20 352.16 198.40
15
19.84 133.92 1,944.20 1,944.20 396.80 240.00 636.80
(c) Mar. 16
(d) Mar. 31
11-23
PROBLEM 11-4A
(a) Jan. 10
Union Dues Payable ........................... Cash................................................ FICA Taxes Payable............................ Federal Income Taxes Payable....... Cash................................................ U.S. Savings Bonds Payable ........... Cash................................................ State Income Taxes Payable ........... Cash................................................ Federal Unemployment Taxes Payable............................................... State Unemployment Taxes Payable............................................... Cash................................................ Office Salaries Expense.................... Store Wages Expense........................ FICA Taxes Payable................... Federal Income Taxes Payable...................................... State Income Taxes Payable...................................... United Fund Contributions Payable...................................... Union Dues Payable .................. Wages Payable............................ Wages Payable..................................... Cash................................................
870.00 870.00 760.00 1,204.60 1,964.60 360.00 360.00 108.95 108.95
12
15
17
20
288.95 1,954.40 2,243.35 26,600.00 28,400.00 4,400.00 2,158.00 454.00 1,888.00 400.00 45,700.00 45,700.00 45,700.00
31
31
11-24
PROBLEM 11-4A (Continued) (b) 1. Jan. 31 Payroll Tax Expense ........................... 7,810.00 FICA Taxes Payable ..................... ($55,000 X 8%) Federal Unemployment Taxes Payable ($55,000 X .8%) ......... State Unemployment Taxes Payable ($55,000 X 5.4%) ...... Vacation Benefits Expense............... 3,300.00 ($55,000 X 6%) Vacation Benefits Payable ........
4,400.00
440.00 2,970.00
*2.
31
3,300.00
11-25
PROBLEM 11-5A
(a) Administrative Salaries Expense............................... Electricians Wages Expense...................................... FICA Taxes Payable............................................... Federal Income Taxes Payable.......................... State Income Taxes Payable .............................. United Fund Contributions Payable................. Hospital Insurance Premiums Payable........... Wages Payable........................................................ (b) Payroll Tax Expense....................................................... FICA Taxes Payable ($485,000 X 8%) .............. Federal Unemployment Taxes Payable .......... ($135,000 X .8%) State Unemployment Taxes Payable ............... ($135,000 X 2.5%) (c)
Employee Jane EcKman Sharon Bishop (1) $59,000 X 3%. (2) $26,000 X 3%. Wages, Tips, Other Compensation $59,000 26,000 Federal Income Tax Withheld $28,500 10,200 State Income Tax Withheld $1,770 (1) 780 (2)
200,000 370,000 38,800 174,400 17,100 27,500 17,200 295,000 43,255 38,800 1,080 3,375
FICA Wages $59,000 26,000
FICA Tax Withheld $4,720 2,080
11-26
PROBLEM 11-1B
(a) Jan. 1
Cash ........................................................................ 30,000 Notes Payable ............................................. Cash ........................................................................ 10,400 Sales ($10,400 104%)............................. Sales Taxes Payable ................................. ($10,400 $10,000) Unearned Service Revenue ............................. Service Revenue ........................................ Sales Taxes Payable.......................................... Cash ............................................................... 9,000
30,000
5
10,000 400
12
9,000 5,800 5,800
14
20
Accounts Receivable......................................... 48,672 Sales............................................................... Sales Taxes Payable ................................. (900 X $52 X 4%) Cash ........................................................................ 18,720 Sales ($18,720 104%)............................. Sales Taxes Payable ................................. ($18,720 $18,000)
46,800 1,872
25
18,000 720
(b) (1) Jan. 31
Interest Expense ........................................ Interest Payable................................. ($30,000 X 8% X 1/12) Warranty Expense ..................................... ($46,800 X 5%) Estimated Warranty Liability ............................................
200 200
(2) Jan. 31
2,340
2,340
11-27
PROBLEM 11-1B (Continued) (c) Current liabilities Notes payable....................................................................... Accounts payable ............................................................... Unearned service revenue ($15,000 $9,000) ........... Sales taxes payable ($400 + $1,872 + $720) ............... Estimated warranty liability ............................................. Interest payable ................................................................... Total current liabilities..............................................
$30,000 42,500 6,000 2,992 2,340 200 $84,032
11-28
PROBLEM 11-2B
(a) Jan.
2
Merchandise Inventory or Purchases .................................................... Accounts Payable ................................. Accounts Payable .......................................... Notes Payable ........................................ Interest Expense............................................. ($18,000 X 10% X 2/12) Interest Payable ..................................... Notes Payable ................................................. Interest Payable.............................................. Cash........................................................... Equipment ........................................................ Cash........................................................... Notes Payable ........................................ Interest Expense............................................. ($24,000 X 10% X 3/12) Interest Payable ..................................... Notes Payable ................................................. Interest Payable.............................................. Cash........................................................... Cash.................................................................... Notes Payable ........................................ Interest Expense............................................. ($10,000 X 12% X 1/12) Interest Payable .....................................
18,000 18,000 18,000 18,000 300 300 18,000 300 18,300 35,000 11,000 24,000 600 600 24,000 600 24,600 10,000 10,000 100 100
Feb.
1
Mar. 31
Apr.
1
July
1
Sept. 30
Oct.
1
Dec.
1
Dec. 31
11-29
PROBLEM 11-2B (Continued) (b) 4/1 10/1 Notes Payable 18,000 2/1 24,000 7/1 12/1 12/31 Bal. Interest Payable 300 3/31 600 9/30 12/31 12/31 Bal. Interest Expense 300 600 100 1,000 18,000 24,000 10,000 10,000
4/1 10/1
300 600 100 100
3/31 9/30 12/31 12/31 Bal.
(c) Current liabilities Notes payable.......................................................... Interest payable ......................................................
$10,000 100
$10,100
(d) Total interest is $1,000.
11-30
(a)
HILLER DRUG STORE Payroll Register For the Week Ended February 15, 2008 Earnings Deductions
PROBLEM 11-3B
11-31 Regular 585.00 520.00 480.00 480.00 2,065.00 0 39.00 72.00 108.00 219.00 585.00 559.00 552.00 588.00 2,284.00 46.80 44.72 44.16 47.04 182.72 54.00 33.00 61.00 46.00 194.00 Overtime FICA Fed. Gross Pay 39 42 44 46
Employee
Hours
State 17.55 16.77 16.56 17.64 68.52
U.F. 0 5.00 7.50 5.00 17.50
Total 118.35 99.49 129.22 115.68 462.74
Net Pay 466.65 459.51 422.78 472.32 1,821.26
Store Wages Expense 585.00 559.00 552.00 1,696.00
Office Wages Expense
L. Steck S. Jabar M. Cape L. Wild Totals
588.00 588.00
PROBLEM 11-3B (Continued) (b) Feb. 15 Store Wages Expense.............................. Office Wages Expense ............................ FICA Taxes Payable......................... Federal Income Taxes Payable............................................ State Income Taxes Payable ........ United Fund Payable ....................... Wages Payable.................................. Payroll Tax Expense................................. FICA Taxes Payable......................... ($2,284 X 8%) Federal Unemployment Taxes Payable ($2,284 X .8%) ............... State Unemployment Taxes Payable ($2,284 X 5.4%)............. Wages Payable.......................................... Cash..................................................... FICA Taxes Payable................................. ($182.72 + $182.72) Federal Income Taxes Payable............ Cash..................................................... 1,696.00 588.00 182.72 194.00 68.52 17.50 1,821.26 324.33 182.72
15
18.27 123.34 1,821.26 1,821.26 365.44 194.00 559.44
(c) Feb. 16
(d) Feb. 28
11-32
PROBLEM 11-4B
(a) Jan. 10
Union Dues Payable........................... Cash ............................................... FICA Taxes Payable ........................... Federal Income Taxes Payable ........ Cash ............................................... U.S. Savings Bonds Payable........... Cash ............................................... State Income Taxes Payable ........... Cash ............................................... Federal Unemployment Taxes Payable .............................................. State Unemployment Taxes Payable .............................................. Cash ............................................... Office Salaries Expense.................... Store Wages Expense ....................... FICA Taxes Payable .................. Federal Income Taxes Payable ..................................... State Income Taxes Payable ..................................... Union Dues Payable.................. United Fund Contributions Payable ..................................... Wages Payable ........................... Wages Payable .................................... Cash ...............................................
250.00 250.00 662.20 1,254.60 1,916.80 350.00 350.00 102.15 102.15
12
15
17
20
312.00 1,954.40 2,266.40 22,600.00 27,400.00 4,000.00 1,970.00 430.00 400.00 1,800.00 41,400.00 41,400.00 41,400.00
31
31
11-33
PROBLEM 11-4B (Continued) (b) 1. Jan. 31 Payroll Tax Expense............................. FICA Taxes Payable ........................ ($50,000 X 8%) Federal Unemployment Taxes Payable ($50,000 X .8%) ............ State Unemployment Taxes Payable ($50,000 X 5.4%) .......... Vacation Benefits Expense................ ($50,000 X 5%) Vacation Benefits Payable ............ 7,100.00 4,000.00
400.00 2,700.00 2,500.00 2,500.00
*2.
31
11-34
PROBLEM 11-5B
(a) Administrative Salaries Expense ................................. Electricians Wages Expense ........................................ FICA Taxes Payable ................................................. Federal Income Taxes Payable ............................ State Income Taxes Payable ................................. United Fund Contributions Payable ................... Hospital Insurance Premiums Payable ............. Wages Payable .......................................................... (b) Payroll Tax Expense ......................................................... FICA Taxes Payable ($450,000 X 8%)................. Federal Unemployment Taxes Payable ............. ($120,000 X .8%) State Unemployment Taxes Payable.................. ($120,000 X 2.5%) (c)
Employee R. Lopez K. Vopat Wages, Tips, Other Compensation $60,000 27,000 Federal Income Tax Withheld $27,500 11,000 State Income Tax Withheld $1,800 (1) 810 (2)
200,000 320,000 36,000 159,000 15,600 25,000 15,800 268,600 39,960 36,000 960 3,000
FICA Wages $60,000 27,000
FICA Tax Withheld $4,800 2,160
(1) $60,000 X 3%. (2) $27,000 X 3%.
11-35
BYP 11-1
FINANCIAL REPORTING PROBLEM
(a) Total current liabilities at December 31, 2005, $9,406 million. PepsiCos total current liabilities increased by $2,654 ($9,406 $6,752) million over the prior year. (b) In Note 2 under the subheading Commitments and Contingencies, PepsiCo states: We recognize liabilities for contingencies and commitments when a loss is probable and estimable. (c) The components of current liabilities are: Short-term obligations ......................................................... Accounts payable and other current liabilities ............ Income taxes payable ........................................................... Total current liabilities................................................... $2,889,000,000 5,971,000,000 546,000,000 $9,406,000,000
11-36
BYP 11-2
COMPARATIVE ANALYSIS PROBLEM
(a) PepsiCos largest current liability was accounts payable and other liabilities at $5,971 million. Its total current liabilities were $9,406 million. Coca-Colas largest current liability was loans and notes payable at $4,518 million. Its total current liabilities were $9,836 million. (b) (in millions) (1) Working capital (2) Current ratio PepsiCo $10,454 $9,406 = $1,048 Coca-Cola $10,250 $9,836 = $414
$10,454 = 1.11:1 $ 9,406
$10,250 = 1.04:1 $ 9,836
(c) Based on this information, it appears that both companies are only narrowly liquid. The working capital levels are both low, as are the current ratios.
11-37
BYP 11-3
EXPLORING THE WEB
(a) A worker who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. Get Pub. 15-A, Employers Supplemental Tax Guide, for more information on how to determine whether an individual providing services is an independent contractor or an employee. Generally, people in business for themselves are not employees. For example, doctors, lawyers, veterinarians, construction contractors, and others in an independent trade in which they offer their services to the public are usually not employees. However, if the business is incorporated, corporate officers who work in the business are employees. (b) Payments for the services of a child under the age of 18 who works for his or her parent in a trade or business (sole proprietorship or a partnership in which each partner is a parent of the child) are not subject to social security and Medicare taxes. If these services are for work other than in a trade or business, such as domestic work in the parents private home, they are not subject to social security and Medicare taxes until the child reaches 21. (c) Any employee without a social security card can get one by completing Form SS-5, Application for a Social Security Card. (d) Tips your employee receives are generally subject to withholding. Your employee must report cash tips to you by the 10th of the month after the month the tips are received. The report should include tips you paid over to the employee for charge customers and tips the employee received directly from customers. No report is required for months when tips are less than $20. Your employee reports the tips on Form 4070, Employees Report of Tips to Employer, or on a similar statement.
11-38
BYP 11-3 (Continued) (e) In general, you must deposit income tax withheld and both the employer and employee social security and Medicare taxes (minus any advance EIC payments). You must deposit by using the Electronic Federal Tax Payment System (EFTPS) or by mailing or delivering a check, money order, or cash to an authorized financial institution or Federal Reserve bank using Form 8109 Federal Tax Deposit Coupon. However, some taxpayers are required to deposit by electronic funds transfer.
11-39
BYP 11-4
DECISION MAKING ACROSS THE ORGANIZATION
(a) Months JanuaryMarch AprilMay JuneOctober NovemberDecember Total Cost
METCALFE SERVICES INC. Number of Employees 2 3 2 3 Days Worked 60 (20 X 3) 50 (25 X 2) 90 (18 X 5) 46 (23 X 2) Daily Rate $75 75 75 75 Cost $ 9,000 11,250 13,500 10,350 $44,100
PERMANENT EMPLOYEES Salaries ($21,000 X 2)....................................................... Additional payroll costs FICA taxes (8% X $42,000)..................................... Federal unemployment taxes............................... (.8% X $14,000) State unemployment taxes ................................... (5.4% X $14,000) Medical and dental insurance .............................. (2 X $40 X 12) $42,000 $3,360 112 756 960 5,188 $47,188
Kensingtown Processing Company would save $3,088 ($47,188 $44,100), as shown, by discharging the two employees and accepting the Metcalfe Services Inc. plan. (b) Donna should consider the following additional factors: (1) The effect on the morale of the continuing employees if two employees are terminated. (2) The anticipated efficiency of Metcalfe Services Inc. workers compared to the efficiency of the two employees who would be terminated. (3) The effect on management control and supervision of using Metcalfe Services Inc. personnel. (4) The time that may be required to indoctrinate the different Metcalfe Services Inc. personnel into the Kensingtown Processing Companys procedures.
11-40
BYP 11-5
COMMUNICATION ACTIVITY
Dear Mr. Quaney: In response to your request, I wish to explain the types of taxes that are involved in determining the payroll and in recording and paying employer payroll taxes. The taxes that are involved in determining the payroll are as follows: 1. FICA taxes. These taxes were enacted by Congress to provide workers with supplemental retirement, employment disability, and medical benefits. These benefits are financed by a tax levied on employees earnings. The tax rate and tax base are set by Congress and both change intermittently. Our text uses a rate of 8% on the first $90,000 of gross earnings. FICA taxes are withheld by the employer and then remitted to the government. These taxes are not an expense to the employer. Federal income taxes. Employers are required to withhold federal income taxes from employees each pay period. The amount depends on the employees gross earnings, the number of allowances claimed by the employee, and the length of the pay period. The amounts withheld are remitted by the employer to the government. These taxes are not an expense to the employer. State and city income taxes. Where applicable, these income taxes are similar to federal income taxes.
2.
3.
There are three types of payroll taxes that are levied on employers that are recognized as payroll tax expense by the employer. 1. FICA taxes. The employer must match each employees FICA contribution. The employers tax is subject to the same rate and maximum earnings applicable to the employee.
11-41
BYP 11-5 (Continued) 2. Federal unemployment taxes. These taxes provide benefits to employees who lose their jobs through no fault of their own. The tax is 6.2% on the first $7,000 of gross earnings paid to each employee during a calendar year. The employer is allowed a maximum credit of 5.4% on the federal rate for contributions to state unemployment taxes. State unemployment taxes. These taxes also provide benefits to employees who lose their jobs. The basic rate is usually 5.4% on the first $7,000 of wages paid to an employee during the year.
3.
Very truly yours,
11-42
BYP 11-6
ETHICS CASE
(a) The stakeholders in this situation are: Daniel Longan, owner and manager. Sixteen part-time employees of Daniels. Gina Watt, public accountant. (b) Not withholding federal and state taxes from employees payroll is both illegal and unethical. Also, not paying FICA taxes, and state and federal unemployment taxes, is illegal and unethical. (c) Gina Watt, as Daniels public accountant, should not be an accomplice to improper payroll deductions and accounting. Gina should constantly remind Daniel of the consequences of his illegal payroll payments and the unrecorded payments. She should advise Daniel that not only is the government deprived of its proper tax revenues, but employees are deprived of social security and possibly Medicare credits as well as workmens compensation insurance. (d) An important internal control principle is to make no payments from cash receipts. All cash receipts should be deposited daily intact in the bank and all disbursements should be made by properly authorized and signed checks.
11-43
BYP 11-7
ALL ABOUT YOU ACTIVITY
The answer to these questions depends on the state in which the student resides. It also will be depend on the year chosen, although we expect that the results will be much the same whether they pick any rates between 2005 and 2008. We provide a solution for this problem using the state of Wisconsin as an example. It should be pointed out that certain taxes can be deducted for computing federal income tax but are ignored in our computation. (a) Wisconsin state income taxes for a single person with a taxable income of $60,000 is $3,710.80. The tax rate between $17,680 and $132,580 is $950.30 plus 6.5 percent over $17,680. Therefore the computation is as follows: ($60,000 $17,680) X 6.5% = $2,750 Base rate 950 Total state income tax $3,710 (b) The property tax on a $200,000 home at 2.1% is $4,200. (c) The state gasoline tax in Wisconsin is 32.9 cents per gallon and the federal gasoline tax is 18.4 cents per gallon. Your total taxes on gasoline are computed as follows: 400 gallons X ($0.329 + $0.184) = $205 (d) In Wisconsin the state sales tax rate is 5% and excludes food and prescription drug purchases. Therefore the sales tax is $200 ($4,000 X 5%). (e) The social security rate is 7.65% on income of $60,000 or $4,590. (f) Federal income taxes for a single person with a taxable income of $60,000 is $11,538. The tax rate between $30,650 and $74,200 is $4,220 plus 25% over $30,650. Therefore the computation is as follows: ($60,000 $30,650) X 25% = $ 7,338 Base rate 4,220 Total tax $11,538
11-44
BYP 11-7 (Continued) The total taxes paid therefore are computed as follows, based on a $60,000 income amount: State income tax .............................................................. Property tax on home..................................................... Gasoline tax....................................................................... Sales tax ............................................................................. Social security tax........................................................... Federal income tax.......................................................... Total tax .............................................................................. $ 3,710 4,200 205 200 4,590 11,538 $24,443
The percentage of total taxes to income is therefore 41% ($24,443/$60,000), given the information above.
11-45