Appendix
H 
Payroll Accounting
Learning Objectives
After studying this appendix, you should be able to:
[1] Compute and record the payroll for a pay period.
[2] Describe and record employer payroll taxes.
[3] Discuss the objectives of internal control for payroll.
1
Compute and record the payroll for a pay period.
Accounting for Payroll
Payroll and related fringe benefits often make up a large percentage of current liabilities. Employee compensation is often the most significant expense that a company incurs. For example, Costco recently reported total employees of 103,000 and labor and fringe benefits costs that approximated 70% of the company's total cost of operations.
Payroll accounting involves more than paying employees' wages. Companies are required by law to maintain payroll records for each employee, to file and pay payroll taxes, and to comply with numerous state and federal tax laws related to employee compensation. Accounting for payroll has become much more complex due to these regulations.
The term “payroll” pertains to both salaries and wages. Managerial, administrative, and sales personnel are generally paid salaries. Salaries are often expressed in terms of a specified amount per month or per year rather than an hourly rate. Store clerks, factory employees, and manual laborers are normally paid wages. Wages are based on a rate per hour or on a piecework basis (such as per unit of product). Frequently, people use the terms “salaries” and “wages” interchangeably.
The term “payroll” does not apply to payments made for services of professionals such as certified public accountants, attorneys, and architects. Such professionals are independent contractors rather than salaried employees. Payments to them are called fees. This distinction is important because government regulations relating to the payment and reporting of payroll taxes apply only to employees.
Determining the Payroll
Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay.
GROSS EARNINGS
Gross earnings is the total compensation earned by an employee. It consists of wages or salaries, plus any bonuses and commissions.
Companies determine total wages for an employee by multiplying the hours worked by the hourly rate of pay. In addition to the hourly pay rate, most companies are required by law to pay hourly workers a minimum of 1½ times the regular hourly rate for overtime work in excess of eight hours per day or 40 hours per week. In addition, many employers pay overtime rates for work done at night, on weekends, and on holidays.
For example, assume that Michael Watson, an employee of Academy Company, worked 44 hours for the weekly pay period ending January 14. His regular wage is $12 per hour. For any hours in excess of 40, the company pays at 1½ times the regular rate. Academy computes Watson's gross earnings (total wages) as follows.
Illustration H-1
Computation of total wages
Ethics Note
Bonuses often reward outstanding individual performance, but successful corporations also need considerable teamwork. A challenge is to motivate individuals while preventing an unethical employee from taking another's idea for his or her own advantage.
This computation assumes that Watson receives 1½ times his regular hourly rate ($12 × 1.5) for his overtime hours. Union contracts often require that overtime rates be as much as twice the regular rates.
An employee's salary is generally based on a monthly or yearly rate. The company then prorates these rates to its payroll periods (e.g., biweekly or monthly). Most executive and administrative positions are salaried. Federal law does not require overtime pay for employees in such positions.
Many companies have bonus agreements for employees. One survey found that over 94% of the largest U.S. manufacturing companies offer annual bonuses to key executives. Bonus arrangements may be based on such factors as increased sales or net income. Companies may pay bonuses in cash and/or by granting employees the opportunity to acquire shares of company stock at favorable prices (called stock option plans).
PAYROLL DEDUCTIONS
As anyone who has received a paycheck knows, gross earnings are usually very different from the amount actually received. The difference is due to payroll deductions.
Payroll deductions may be mandatory or voluntary. Mandatory deductions are required by law and consist of FICA taxes and income taxes. Voluntary deductions are at the option of the employee. Illustration H-2 summarizes common types of payroll deductions. Such deductions do not result in payroll tax expense to the employer. The employer is merely a collection agent and subsequently transfers the deducted amounts to the government and designated recipients.
FICA TAXES In 1937, Congress enacted the Federal Insurance Contribution Act (FICA). FICA taxes are designed to provide workers with supplemental retirement, employment disability, and medical benefits. In 1965, Congress extended benefits to include Medicare for individuals over 65 years of age. The benefits are financed by a tax levied on employees' earnings.
FICA taxes consist of a Social Security tax and a Medicare tax. They are paid by both employee and employer.1 The FICA tax rate is 7.65% (6.2% Social Security tax plus 1.45%) on the first $110,100 of salary and wages for each employee. In addition, the Medicare tax of 1.45% continues for an employee's salary and wages in excess of $110,100. These tax rate and tax base requirements are shown in Illustration H-3.
Illustration H-2
Payroll deductions
Illustration H-3
FICA tax rate and tax base
To illustrate the computation of FICA taxes, assume that Mario Ruez has total wages for the year of $100,000. In this case, Mario pays FICA taxes of $7,650 ($100,000 × 7.65%). If Mario has total wages of $114,000, Mario pays FICA taxes of $8,479.20, as shown in Illustration H-4.
Illustration H-4
FICA tax computation
Mario's employer is also required to pay $8,479.20.
INCOME TAXES Under the U.S. pay-as-you-go system of federal income taxes, employers are required to withhold income taxes from employees each pay period. Three variables determine the amount to be withheld: (1) the employee's gross earnings, (2) the number of allowances claimed by the employee, and (3) the length of the pay period.
Withholding tables furnished by the Internal Revenue Service indicate the amount of income tax to be withheld. Withholding amounts are based on gross wages and the number of allowances claimed. Separate tables are provided for weekly, biweekly, semimonthly, and monthly pay periods. Illustration H-5 (page H4) shows the withholding tax table for Michael Watson (assuming he earns $552 per week and claims two allowances). For a weekly salary of $552 with two allowances, the income tax to be withheld is $49 (highlighted in red).
Illustration H-5
Withholding tax table
In addition, most states (and some cities) require employers to withhold income taxes from employees' earnings. As a rule, the amounts withheld are a percentage (specified in the state revenue code) of the amount withheld for the federal income tax. Or, they may be a specified percentage of the employee's earnings. For the sake of simplicity, we have assumed that Watson's wages are subject to state income taxes of 2%, or $11.04 (2% × $552) per week.
There is no limit on the amount of gross earnings subject to income tax withholdings. In fact, under our progressive system of taxation, the higher the earnings, the higher the percentage of income withheld for taxes.
OTHER DEDUCTIONS Employees may voluntarily authorize withholdings for charitable, retirement, and other purposes. All voluntary deductions from gross earnings should be authorized in writing by the employee. The authorization(s) may be made individually or as part of a group plan. Deductions for charitable organizations, such as the United Fund, or for financial arrangements, such as U.S. savings bonds and repayment of loans from company credit unions, are made individually. Deductions for union dues, health and life insurance, and pension plans are often made on a group basis. We will assume that Watson has weekly voluntary deductions of $10 for the United Fund and $5 for union dues.
NET PAY
Alternative Terminology
Net pay is also called take-home pay.
Academy Company determines net pay by subtracting payroll deductions from gross earnings. Illustration H-6 shows the computation of Watson's net pay for the pay period.
Illustration H-6
Computation of net pay
Assuming that Michael Watson's wages for each week during the year are $552, total wages for the year are $28,704 (52 × $552). Thus, all of Watson's wages are subject to FICA tax during the year. In comparison, let's assume that Watson's department head earns $2,200 per week, or $114,400 for the year. In this case, the department head's FICA taxes are $8,485 ([$110,100 × 6.20%] + [$114,400 × 1.45%]).
Recording the Payroll
Recording the payroll involves maintaining payroll department records, recognizing payroll expenses and liabilities, and recording payment of the payroll.
MAINTAINING PAYROLL DEPARTMENT RECORDS
To comply with state and federal laws, an employer must keep a cumulative record of each employee's gross earnings, deductions, and net pay during the year. The record that provides this information is the employee earnings record. Illustration H-7 shows Michael Watson's employee earnings record.
Illustration H-7
Employee earnings record
Companies keep a separate earnings record for each employee, and update these records after each pay period. The employer uses the cumulative payroll data on the earnings record to (1) determine when an employee has earned the maximum earnings subject to FICA taxes, (2) file state and federal payroll tax returns (as explained later), and (3) provide each employee with a statement of gross earnings and tax withholdings for the year. (Illustration H-11 on page H11 shows this statement.)
In addition to employee earnings records, many companies find it useful to prepare a payroll register. This record accumulates the gross earnings, deductions, and net pay by employee for each pay period. It provides the documentation for preparing a paycheck for each employee. Illustration H-8 presents Academy Company's payroll register. It shows the data for Michael Watson in the wages section. In this example, Academy Company's total weekly payroll is $17,210, as shown in the gross earnings column.
Illustration H-8
Payroll register
Note that this record is a listing of each employee's payroll data for the pay period. In some companies, a payroll register is a journal or book of original entry; postings are made from the payroll register directly to ledger accounts. In other companies, the payroll register is a memorandum record that provides the data for a general journal entry and subsequent posting to the ledger accounts. At Academy Company, the latter procedure is followed.
RECOGNIZING PAYROLL EXPENSES AND LIABILITIES
From the payroll register in Illustration H-8, Academy Company makes a journal entry to record the payroll. For the week ending January 14, the entry is:
The company credits specific liability accounts for the mandatory and voluntary deductions made during the pay period. In the example, Academy debits Salaries and Wages Expense for the gross earnings of its employees. The amount credited to Salaries and Wages Payable is the sum of the individual checks the employees will receive.
RECORDING PAYMENT OF THE PAYROLL
A company makes payments by check (or electronic funds transfer) either from its regular bank account or a payroll bank account. Each paycheck is usually accompanied by a detachable statement of earnings document. This shows the employee's gross earnings, payroll deductions, and net pay, both for the period and for the year-to-date. Academy Company uses its regular bank account for payroll checks. Illustration H-9 shows the paycheck and statement of earnings for Michael Watson.
Illustration H-9
Paycheck and statement of earnings
Helpful Hint
Do any of the income tax liabilities result in payroll tax expense for the employer?
Answer: No. The employer is acting only as a collection agent for the government.
Following payment of the payroll, the company enters the check numbers in the payroll register. Academy Company records payment of the payroll as follows.
Many medium- and large-size companies use a payroll processing center that performs payroll recordkeeping services. Companies send the center payroll information about employee pay rates and hours worked. The center maintains the payroll records and prepares the payroll checks. In most cases, it costs less to process the payroll through the center (outsource) than if the company did so internally.
> DO IT!
Payroll
In January, gross earnings in Ramirez Company were $40,000. All earnings are subject to 7.65% FICA taxes. Federal income tax withheld was $9,000, and state income tax withheld was $1,000. (a) Calculate net pay for January, and (b) record the payroll.
Action Plan
Determine net pay by subtracting payroll deductions from gross earnings.
Record gross earnings as Salaries and Wages Expense, record payroll deductions as liabilities, and record net pay as Salaries and Wages Payable.
Solution
- (a) Net pay: $40,000 − (7.65% × $40,000) − $9,000 − $1,000 = $26,940
- (b)
Related exercise material: BEH-1, BEH-2, EH-1, and EH-2.
2
Describe and record employer payroll taxes.
Employer Payroll Taxes
Payroll tax expense for businesses results from three taxes that governmental agencies levy on employers. These taxes are (1) FICA, (2) federal unemployment tax, and (3) state unemployment tax. These taxes, plus such items as paid vacations and pensions, are collectively referred to as fringe benefits. As indicated earlier, the cost of fringe benefits in many companies is substantial. The pie chart in the margin shows the pieces of the benefits “pie.”
FICA Taxes
Each employee must pay FICA taxes. In addition, employers must match each employee's FICA contribution. The matching contribution results in payroll tax expense to the employer. The employer's tax is subject to the same rate and maximum earnings as the employee's. The company uses the same account, FICA Taxes Payable, to record both the employee's and the employer's FICA contributions. For the January 14 payroll, Academy Company's FICA tax contribution is $1,316.57 ($17,210.00 × 7.65%).
Federal Unemployment Taxes
The Federal Unemployment Tax Act (FUTA) is another feature of the federal Social Security program. Federal unemployment taxes provide benefits for a limited period of time to employees who lose their jobs through no fault of their own. The FUTA tax rate is 6.2% of taxable wages. The taxable wage base is the first $7,000 of wages paid to each employee in a calendar year. Employers who pay the state unemployment tax on a timely basis will receive an offset credit of up to 5.4%. Therefore, the net federal tax rate is generally 0.8% (6.2% − 5.4%). This rate would equate to a maximum of $56 of federal tax per employee per year (.008 × $7,000). State tax rates are based on state law.
The employer bears the entire federal unemployment tax. There is no deduction or withholding from employees. Companies use the account Federal Unemployment Taxes Payable to recognize this liability. The federal unemployment tax for Academy Company for the January 14 payroll is $137.68 ($17,210.00 × 0.8%).
Helpful Hint
Both the employer and employee pay FICA taxes. Federal unemployment taxes and (in most states) the state unemployment taxes are borne entirely by the employer.
State Unemployment Taxes
All states have unemployment compensation programs under state unemployment tax acts (SUTA). Like federal unemployment taxes, state unemployment taxes provide benefits to employees who lose their jobs. These taxes are levied on employers.2 The basic rate is usually 5.4% on the first $7,000 of wages paid to an employee during the year. The state adjusts the basic rate according to the employer's experience rating. Companies with a history of stable employment may pay less than 5.4%. Companies with a history of unstable employment may pay more than the basic rate. Regardless of the rate paid, the company's credit on the federal unemployment tax is still 5.4%.
Companies use the account State Unemployment Taxes Payable for this liability. The state unemployment tax for Academy Company for the January 14 payroll is $929.34 ($17,210.00 × 5.4%). Illustration H-10 summarizes the types of employer payroll taxes.
Illustration H-10
Employer payroll taxes
Recording Employer Payroll Taxes
Companies usually record employer payroll taxes at the same time they record the payroll. The entire amount of gross pay ($17,210.00) shown in the payroll register in Illustration H-8 is subject to each of the three taxes mentioned above. Accordingly, Academy records the payroll tax expense associated with the January 14 payroll with the entry shown below.
Note that Academy uses separate liability accounts instead of a single credit to Payroll Taxes Payable. Why? Because these liabilities are payable to different taxing authorities at different dates. Companies classify the liability accounts in the balance sheet as current liabilities since they will be paid within the next year. They classify Payroll Tax Expense on the income statement as an operating expense.
Filing and Remitting Payroll Taxes
Preparation of payroll tax returns is the responsibility of the payroll department. The treasurer's department makes the tax payment. Much of the information for the returns is obtained from employee earnings records.
For purposes of reporting and remitting to the IRS, the company combines the FICA taxes and federal income taxes that it withheld. Companies must report the taxes quarterly, no later than one month following the close of each quarter. The remitting requirements depend on the amount of taxes withheld and the length of the pay period. Companies remit funds through deposits in either a Federal Reserve bank or an authorized commercial bank.
Helpful Hint
Employers generally transmit their W-2s to the government electronically. The taxing agencies store the information in their computer systems for subsequent comparison against earnings and taxes withheld reported on employees' income tax returns.
Companies generally file and remit federal unemployment taxes annually on or before January 31 of the subsequent year. Earlier payments are required when the tax exceeds a specified amount. Companies usually must file and pay state unemployment taxes by the end of the month following each quarter. When payroll taxes are paid, companies debit payroll liability accounts, and credit Cash.
Employers also must provide each employee with a Wage and Tax Statement (Form W-2) by January 31 following the end of a calendar year. This statement shows gross earnings, FICA taxes withheld, and income taxes withheld for the year. The required W-2 form for Michael Watson, using assumed annual data, is shown in Illustration H-11. The employer must send a copy of each employee's Wage and Tax Statement (Form W-2) to the Social Security Administration. This agency subsequently furnishes the Internal Revenue Service with the income data required.
> DO IT!
Employer's Payroll Taxes
In January, the payroll supervisor determines that gross earnings for Halo Company are $70,000. All earnings are subject to 7.65% FICA taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes. Halo asks you to record the employer's payroll taxes.
Action Plan
Compute the employer's payroll taxes on the period's gross earnings.
Identify the expense account(s) to be debited.
Identify the liability account(s) to be credited.
Solution
The entry to record the employer's payroll taxes is:
Related exercise material: BEH-3, EH-3, and EH-5.
3
Discuss the objectives of internal control for payroll.
Internal Control for Payroll
Chapter 7 introduced internal control. As applied to payrolls, the objectives of internal control are (1) to safeguard company assets against unauthorized payments of payrolls, and (2) to ensure the accuracy and reliability of the accounting records pertaining to payrolls.
Irregularities often result if internal control is lax. Frauds involving payroll include overstating hours, using unauthorized pay rates, adding fictitious employees to the payroll, continuing terminated employees on the payroll, and distributing duplicate payroll checks. Moreover, inaccurate records will result in incorrect paychecks, financial statements, and payroll tax returns.
Payroll activities involve four functions: hiring employees, timekeeping, preparing the payroll, and paying the payroll. For effective internal control, companies should assign these four functions to different departments or individuals. Illustration H-12 highlights these functions and illustrates their internal control features.
Illustration H-12
Internal control for payroll
> Comprehensive DO IT!
Indiana Jones Company had the following selected transactions related to payroll.
| Feb. 28 | The payroll for the month consists of salaries of $50,000. All wages are subject to 7.65% FICA taxes. A total of $8,900 federal income taxes are withheld. The salaries are paid on March 1. |
| 28 | Employer payroll taxes include 7.65% FICA taxes, a 5.4% state unemployment tax, and a 0.8% federal unemployment tax. |
Instructions
Journalize the February transactions.
Base payroll taxes on gross earnings.
Record gross salaries, record payroll deductions as liabilities, and record net pay.
Compute the employer's payroll taxes on applicable salaries and record expenses and liabilities.
Solution to Comprehensive DO IT!
SUMMARY OF LEARNING OBJECTIVES
1 Compute and record the payroll for a pay period. The computation of the payroll involves gross earnings, payroll deductions, and net pay. In recording the payroll, Salaries and Wages Expense is debited for gross earnings, individual tax and other liability accounts are credited for payroll deductions, and Salaries and Wages Payable is credited for net pay. When the payroll is paid, Salaries and Wages Payable is debited, and Cash is credited.
2 Describe and record employer payroll taxes. Employer payroll taxes consist of FICA, federal unemployment taxes, and state unemployment taxes. The taxes are usually accrued at the time the payroll is recorded by debiting Payroll Tax Expense and crediting separate liability accounts for each type of tax.
3 Discuss the objectives of internal control for payroll. The objectives of internal control for payroll are (1) to safeguard company assets against unauthorized payments of payrolls, and (2) to ensure the accuracy and reliability of the accounting records pertaining to payrolls.
GLOSSARY
Bonus Compensation to management personnel and other employees, based on factors such as increased sales or the amount of net income. (p. H2).
Employee earnings record A cumulative record of each employee's gross earnings, deductions, and net pay during the year. (p. H5).
Federal unemployment taxes Taxes imposed on the employer that provide benefits for a limited time period to employees who lose their jobs through no fault of their own. (p. H9).
Fees Payments made for the services of professionals. (p. H1).
FICA taxes Taxes designed to provide workers with supplemental retirement, employment disability, and medical benefits. (p. H2).
Gross earnings Total compensation earned by an employee. (p. H1).
Net pay Gross earnings less payroll deductions. (p. H4).
Payroll deductions Deductions from gross earnings to determine the amount of a paycheck. (p. H2).
Payroll register A payroll record that accumulates the gross earnings, deductions, and net pay by employee for each pay period. (p. H6).
Salaries Specified amount per month or per year paid to managerial, administrative, and sales personnel. (p. H1).
Statement of earnings A document attached to a paycheck that indicates the employee's gross earnings, payroll deductions, and net pay. (p. H7).
State unemployment taxes Taxes imposed on the employer that provide benefits to employees who lose their jobs. (p. H9).
Wage and Tax Statement (Form W-2) A form showing gross earnings, FICA taxes withheld, and income taxes withheld which is prepared annually by an employer for each employee. (p. H10).
Wages Amounts paid to employees based on a rate per hour or on a piecework basis. (p. H1).
Self-Test, Brief Exercises, Exercises, Problem Set A, and many more components are available for practice in WileyPLUS.
SELF-TEST QUESTIONS
Answers are at the end of the appendix.
| (LO 1) 1. | J. Barr earns $14 per hour for a 40-hour week and $21 per hour for any overtime work. If Barr works 45 hours in a week, gross earnings are:
(a) $560. (b) $630. (c) $650. (d) $665. |
| (LO 1) 2. | Employer payroll taxes do not include:
(a) federal unemployment taxes. (b) state unemployment taxes. (c) federal income taxes. (d) FICA taxes. |
| (LO 3) 3. | The department that should pay the payroll is the:
(a) timekeeping department. (b) human resources department. (c) payroll department. (d) treasurer's department. |
Go to the book's companion website, www.wiley.com/college/weygandt, for additional Self-Test Questions.
QUESTIONS
1. What is the difference between gross pay and net pay? Which amount should a company record as wages or salaries expense?
2. Which payroll tax is levied on both employers and employees?
3. Are the federal and state income taxes withheld from employee paychecks a payroll tax expense for the employer? Explain your answer.
4. What do the following acronyms stand for: FICA, FUTA, and SUTA?
5. What information is shown on a W-4 statement? On a W-2 statement?
6. Distinguish between the two types of payroll deductions and give examples of each.
7. What are the primary uses of the employee earnings record?
8. (a) Identify the three types of employer payroll taxes. (b) How are tax liability accounts and Payroll Tax Expense classified in the financial statements?
9. You are a newly hired accountant with Nolasco Company. On your first day, the controller asks you to identify the main internal control objectives related to payroll accounting. How would you respond?
10. What are the four functions associated with payroll activities?
BRIEF EXERCISES
EXERCISES
| Compute net pay and record pay for one employee.
(LO 1) |
EH-1 Marianna Garza's regular hourly wage rate is $14, and she receives a wage of 1½ times the regular hourly rate for work in excess of 40 hours. During a March weekly pay period, Marianna worked 44 hours. Her gross earnings prior to the current week were $6,000. Marianna is married and claims three withholding allowances. Her only voluntary deduction is for group hospitalization insurance at $28 per week.
Instructions (a) Compute the following amounts for Marianna's wages for the current week. (1) Gross earnings. (2) FICA taxes. (Assume a 7.65% rate on maximum of $110,100.) (3) Federal income taxes withheld. (Use the withholding table in Illustration H-5, page H4.) (4) State income taxes withheld. (Assume a 2.0% rate.) (5) Net pay. (b) Record Marianna's pay. |
| Compute maximum FICA deductions.
(LO 1) |
EH-2 Employee earnings records for Slayton Company reveal the following gross earnings for four employees through the pay period of December 15.
For the pay period ending December 31, each employee's gross earnings is $4,500. Employees are required to pay a FICA tax rate of 7.65% on gross earnings up to $110,100 and 1.45% over $110,100. Instructions Compute the FICA withholdings that should be made for each employee for the December 31 pay period. (Show computations.) |
| Prepare payroll register and record payroll and payroll tax expense.
(LO 1, 2)
|
EH-3 Ramirez Company has the following data for the weekly payroll ending January 31.
Employees are paid 1½ times the regular hourly rate for all hours worked in excess of 40 hours per week. FICA taxes are 7.65% on the first $110,100 of gross earnings and 1.45% in excess of $110,100. Ramirez Company is subject to 5.4% state unemployment taxes on the first $9,800 and 0.8% federal unemployment taxes on the first $7,000 of gross earnings. Instructions (a) Prepare the payroll register for the weekly payroll. (b) Prepare the journal entries to record the payroll and Ramirez's payroll tax expense. |
| Compute missing payroll amounts and record payroll.
(LO 1) |
EH-4 Selected data from a February payroll register for Sandersen Company are presented on the next page. Some amounts are intentionally omitted.
FICA taxes are 7.65%. State income taxes are 4% of gross earnings. Instructions (a) Fill in the missing amounts. (b) Journalize the February payroll and the payment of the payroll. |
| Determine employer's payroll taxes; record payroll tax expense.
(LO 2) |
EH-5 According to a payroll register summary of Casey Company, the amount of employees' gross pay in December was $850,000, of which $64,000 was not subject to Social Security taxes of 6.2% and $760,000 was not subject to state and federal unemployment taxes.
Instructions (a) Determine the employer's payroll tax expense for the month, using the following rates: Social Security tax rate 6.2%, Medicare tax rate 1.45%, state unemployment 5.4%, and federal unemployment 0.8%. (b) Prepare the journal entry to record December payroll tax expense. |
EXERCISES: SET B AND CHALLENGE EXERCISES
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Exercise Set B and a set of Challenge Exercises.
PROBLEMS: SET A
| Prepare payroll register and payroll entries.
(LO 1, 2)
|
PH-1A Hillman Drug Store has four employees who are paid on an hourly basis plus time-and-a-half for all hours worked in excess of 40 a week. Payroll data for the week ended February 15, 2014, are presented below.
Dingler and Patel are married. They claim 2 and 4 withholding allowances, respectively. The following tax rates are applicable: FICA 7.65% on all wages, state income taxes 3%, state unemployment taxes 5.4%, and federal unemployment 0.8%. |
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| Instructions | |||||||||||||||||||||||||||||
| (a) Net pay $1,756.11 | (a) Prepare a payroll register for the weekly payroll. (Use the wage-bracket withholding table in Illustration H-5 on page H4 for federal income tax withholdings.) | ||||||||||||||||||||||||||||
| (b) Payroll Tax Expense $302.22 | (b) Journalize the payroll on February 15, 2014, and the accrual of employer payroll taxes. | ||||||||||||||||||||||||||||
| (c) Journalize the payment of the payroll on February 16, 2014. | |||||||||||||||||||||||||||||
| (d) Journalize the deposit in a Federal Reserve bank on February 28, 2014, of the FICA and federal income taxes payable to the government. | |||||||||||||||||||||||||||||
| Journalize payroll transactions and adjusting entries.
(LO 1, 2) |
PH-2A The following payroll liability accounts are included in the ledger of Hermanson Company on January 1, 2014.
In January, the following transactions occurred.
At January 31, the company also makes the following accrual for employer payroll taxes: FICA taxes 7.65%, state unemployment taxes 5.4%, and federal unemployment taxes 0.8%. |
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| Instructions | |||||||||||||||||||||||||||||
| (a) Journalize the January transactions. | |||||||||||||||||||||||||||||
| (b) Payroll Tax Expense $6,398.70 | (b) Journalize the adjustments pertaining to employee compensation at January 31. | ||||||||||||||||||||||||||||
| Prepare entries for payroll and payroll taxes; prepare W-2 data.
(LO 1, 2) |
PH-3A For the year ended December 31, 2014, D. Dieker Company reports the following summary payroll data.
D. Dieker Company's payroll taxes are Social Security tax 6.2%, Medicare tax 1.45%, state unemployment 2.5% (due to a stable employment record), and 0.8% federal unemployment. Gross earnings subject to Social Security taxes of 6.2% total $450,000 and subject to unemployment taxes total $110,000. |
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| Instructions | |||||||||||||||||||||||||||||
| (a) Sal./Wages Payable $266,240 | (a) Prepare a summary journal entry at December 31 for the full year's payroll. | ||||||||||||||||||||||||||||
| (b) Payroll Tax Expense $39,070 | (b) Journalize the adjusting entry at December 31 to record the employer's payroll taxes. | ||||||||||||||||||||||||||||
| (c) The W-2 Wage and Tax Statement requires the following dollar data.
Complete the required data for the following employees.
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| Identify internal control weaknesses and make recommendations for improvement.
(LO 3) |
PH-4A The payroll procedures used by three different companies are described below.
Instructions (a) (b) For each weakness, describe the control procedure(s) that will provide effective internal control. Use the following format for your answer:
|
Indicate the weakness(es) in internal control in each company.PROBLEMS: SET B
| Prepare payroll register and payroll entries.
(LO 1, 2) |
PH-1B Frank's Hardware has four employees who are paid on an hourly basis plus time-and-a-half for all hours worked in excess of 40 a week. Payroll data for the week ended March 15, 2014, are presented below.
Ludwick and Buckner are married. They claim 0 and 3 withholding allowances, respectively. The following tax rates are applicable: FICA 7.65% on all wages, state income taxes 4.5%, state unemployment taxes 5.4%, and federal unemployment 0.8%. |
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| Instructions | |||||||||||||||||||||||||||||
| (a) Net pay $1,874.39 | (a) Prepare a payroll register for the weekly payroll. (Use the wage-bracket withholding table in Illustration H-5 on page H4 for federal income tax withholdings.) | ||||||||||||||||||||||||||||
| (b) Payroll Tax Expense $336.96 | (b) Journalize the payroll on March 15, 2014, and the accrual of employer payroll taxes. | ||||||||||||||||||||||||||||
| (c) Journalize the payment of the payroll on March 16, 2014. | |||||||||||||||||||||||||||||
| (d) Journalize the deposit in a Federal Reserve bank on March 31, 2014, of the FICA and federal income taxes payable to the government. | |||||||||||||||||||||||||||||
| Journalize payroll transactions and adjusting entries.
(LO 1, 2) |
PH-2B The following payroll liability accounts are included in the ledger of Marino Company on January 1, 2014.
In January, the following transactions occurred.
At January 31, the company also makes the following accrued adjustment for employer payroll taxes: FICA taxes 7.65%, federal unemployment taxes 0.8%, and state unemployment taxes 5.4%. |
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| Instructions | |||||||||||||||||||||||||||||
| (a) Journalize the January transactions. | |||||||||||||||||||||||||||||
| (b) Payroll Tax Expense $7,008.10 | (b) Journalize the adjustments pertaining to employee compensation at January 31. | ||||||||||||||||||||||||||||
| Prepare entries for payroll and payroll taxes; prepare W-2 data.
(LO 1, 2) |
PH-3B For the year ended December 31, 2014, Stovall Electrical Repair Company reports the following summary payroll data.
Stovall Company's payroll taxes are Social Security tax 6.2%, Medicare tax 1.45%, state unemployment 2.5% (due to a stable employment record), and 0.8% federal unemployment. Gross earnings subject to Social Security taxes total $484,000, and unemployment taxes total $125,000. |
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| Instructions | |||||||||||||||||||||||||||||
| (a) Sal./Wages Payable $266,717 | (a) Prepare a summary journal entry at December 31 for the full year's payroll. | ||||||||||||||||||||||||||||
| (b) Payroll Tax Expense $42,108 | (b) Journalize the adjusting entry at December 31 to record the employer's payroll taxes. | ||||||||||||||||||||||||||||
| (c) The W-2 Wage and Tax Statement requires the following dollar data.
Complete the required data for the following employees.
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| Identify internal control weaknesses and make recommendations for improvement.
(LO 3) |
PH-4B Selected payroll procedures of Morrison Company are described below.
Instructions (a) (b) For each weakness, describe the control procedures that will provide effective internal control. Use the following format for your answer:
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PROBLEMS: SET C
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Problem Set C.
Broadening Your PERSPECTIVE
Financial Reporting and Analysis
Real-World Focus
BYPH-1 The Internal Revenue Service provides considerable information over the Internet. The following demonstrates how useful one of its sites is in answering payroll tax questions faced by employers.
Address: www.irs.ustreas.gov/formspubs/index.html, or go to www.wiley.com/college/weygandt
Steps
- 1. Go to the site shown above.
- 2. Choose View Online, Tax Publications.
- 3. Choose Publication 15, Circular E, Employer's Tax Guide.
Instructions
Answer each of the following questions.
(a) How does the government define “employees”?
(b) What are the special rules for Social Security and Medicare regarding children who are employed by their parents?
(c) How can an employee obtain a Social Security card if he or she doesn't have one?
(d) Must employees report to their employer tips received from customers? If so, what is the process?
Critical Thinking
Decision-Making Across the Organization
BYPH-2 Brownlee Processing Company provides word-processing services for business clients and students in a university community. The work for business clients is fairly steady throughout the year. The work for students peaks significantly in December and May as a result of term papers, research project reports, and dissertations.
Two years ago, the company attempted to meet the peak demand by hiring part-time help. However, this led to numerous errors and considerable customer dissatisfaction. A year ago, the company hired four experienced employees on a permanent basis instead of using part-time help. This proved to be much better in terms of productivity and customer satisfaction. But, it has caused an increase in annual payroll costs and a significant decline in annual net income.
Recently, Carol Holt, a sales representative of Bensen Services Inc., has made a proposal to the company. Under her plan, Bensen Services will provide up to four experienced workers at a daily rate of $96 per person for an 8-hour workday. Bensen workers are not available on an hourly basis. Brownlee Processing would have to pay only the daily rate for the workers used.
The owner of Brownlee Processing, Ann Gray, asks you, as the company's accountant, to prepare a report on the expenses that are pertinent to the decision. If the Bensen plan is adopted, Ann will terminate the employment of two permanent employees and will keep two permanent employees. At the moment, each employee earns an annual income of $28,000. Brownlee Processing pays 7.65% FICA taxes, 0.8% federal unemployment taxes, and 5.4% state unemployment taxes. The unemployment taxes apply to only the first $7,000 of gross earnings. In addition, Brownlee Processing pays $100 per month for each employee for medical and dental insurance.
Ann indicates that if the Bensen Services plan is accepted, her needs for workers will be as follows.
Instructions
With the class divided into groups, answer the following.
(a) Prepare a report showing the comparative payroll expense of continuing to employ permanent workers compared to adopting the Bensen Services Inc. plan.
(b) What other factors should Ann consider before finalizing her decision?
Communication Activity
BYPH-3 Mike Merando, president of the New View Company, has recently hired a number of additional employees. He recognizes that additional payroll taxes will be due as a result of this hiring, and that the company will serve as the collection agent for other taxes.
Instructions
In a memorandum to Mike Merando, explain each of the taxes, and identify the taxes that result in payroll tax expense to New View Company.
Ethics Case
BYPH-4 Danny Pedigo owns and manages Danny's Restaurant, a 24-hour restaurant near the city's medical complex. Danny employs 9 full-time employees and 16 part-time employees. He pays all of the full-time employees by check, the amounts of which are determined by Danny's public accountant, Shelly Eby. Danny pays all of his part-time employees in cash. He computes their wages and withdraws the cash directly from his cash register.
Shelly has repeatedly urged Danny to pay all employees by check. But, as Danny has told his competitor and friend, Bill Edmonds, who owns the Blue Plate Special, “First of all, my part-time employees prefer the cash over a check, and secondly, I don't withhold or pay any taxes or workmen's compensation insurance on those wages because they go totally unrecorded and unnoticed.”
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the legal and ethical considerations regarding Danny's handling of his payroll?
(c) Shelly Eby is aware of Danny's payment of the part-time payroll in cash. What are her ethical responsibilities in this case?
(d) What internal control principle is violated in this payroll process?
Answers to Self-Test Questions
1. d ($14 × 40) + ($21 × 5) = $665 2. c 3. d
1Congress sets the tax rate and the tax base for FICA taxes. For example, in 2011 the tax rate on Social Security taxes for employees only was lowered to 4.2% to provide more spendable income to stimulate the economy.
2In a few states, the employee is also required to make a contribution. In this textbook, including the homework, we will assume that the tax is only on the employer.