CHAPTER 10 CURRENT LIABILITIES AND PAYROLL

(1)

1. No. A discounted note payable has no stated interest rate, but provides interest by discounting the note proceeds. The discount, which is the difference between the proceeds and the face of the note, is the interest and is accounted for as such.

2. a. Employee’s federal income taxes, social security, and Medicare

b. Employees Federal Income Tax Payable, Social Security Tax Payable, and Medicare Tax Payable

3. The deductions from employees’ earnings are for amounts owed (liabilities) to others for such items as federal taxes, state and local income taxes, and contributions to pension plans.

4. 1. a 2. c 3. c 4. b 5. b

5. An advantage of using a separate payroll bank account is that reconciling the bank statements is simplified. In addition, a payroll bank account establishes control over payroll checks and, thus, prevents their theft or misuse.

6. a. Constants are data that remain unchanged from payroll to payroll. These include employee names, social security numbers, marital status, number of income tax withholding

allowances, rates of pay, tax rates, and withholding tables.

b. Variables are data that change from payroll to payroll. These include number of hours or days worked for each employee, accrued days of sick leave, vacation credits, total earnings to date, and total taxes withheld.

7. The vacation pay expense should be recorded during the period in which the vacation privilege is earned.

8. In a defined contribution plan, the company invests contributions on behalf of the employee during the employee’s working years. Normally, the employee and employer contribute to the plan. The employee’s pension depends on the total contributions and the investment returns earned on those contributions.

9. To match revenues and expenses properly, the liability to cover product warranties should be recorded in the period during which the sale of the product is recorded.

10. When the defective product is repaired, the repair costs would be recorded by debiting Product Warranty Payable and crediting Cash, Supplies, or another appropriate account.

DISCUSSION QUESTIONS

(2)

PE 10–1A a. $70,000

b. $69,650 [$70,000 – ($70,000 × 30/360 × 6%)]

PE 10–1B a. $150,000

b. $148,125 [$150,000 – ($150,000 × 45/360 × 10%)]

PE 10–2A

Total wage payment……… $2,600.00

One allowance (provided by IRS)……… $70.00

Multiplied by allowances claimed on Form W-4……… 2 140.00 Amount subject to withholding……… $2,460.00 Initial withholding from wage bracket in Exhibit 3……… $ 327.40 Plus additional withholding: 28% of excess over $1,648*……… 227.36 Federal income tax withholding……… $ 554.76

*($2,460 – $1,648) × 28%

PE 10–2B

Total wage payment……… $1,400.00

One allowance (provided by IRS)……… $70.00

Multiplied by allowances claimed on Form W-4……… 1 70.00 Amount subject to withholding……… $1,330.00 Initial withholding from wage bracket in Exhibit 3……… $ 91.40 Plus additional withholding: 25% of excess over $704*……… 156.50 Federal income tax withholding……… $ 247.90

*($1,330 – $704) × 25%

×

(3)

Total wage payment……… $2,600.00 Less: Federal income tax withholding……… $554.76

Social security tax ($2,600 × 6%)……… 156.00

Medicare tax ($2,600 × 1.5%)……… 39.00 749.76

Net pay……… $1,850.24

PE 10–3B

Total wage payment……… $1,400.00 Less: Federal income tax withholding……… $247.90

Social security tax ($1,400 × 6%)……… 84.00

Medicare tax ($1,400 × 1.5%)……… 21.00 352.90

Net pay……… $1,047.10

PE 10–4A

Salaries Expense 220,000

Social Security Tax Payable 13,200

Medicare Tax Payable 3,300

Employees Federal Income Tax Payable 43,560

Salaries Payable 159,940

PE 10–4B

Salaries Expense 90,000

Retirement Savings Deductions Payable 5,400

(4)

Payroll Tax Expense 18,670

State Unemployment Tax Payable* 1,890

Federal Unemployment Tax Payable** 280

* $35,000 × 5.4%

**$35,000 × 0.8%

PE 10–5B

Payroll Tax Expense 7,370

State Unemployment Tax Payable* 540

Federal Unemployment Tax Payable** 80

* $10,000 × 5.4%

**$10,000 × 0.8%

PE 10–6A

a. Vacation Pay Expense 19,500

Vacation Pay Payable 19,500

Vacation pay accrued for the period.

b. Pension Expense 15,600

Cash 15,600

To record pension contribution, 6% × $260,000.

PE 10–6B

b. Pension Expense 201,250

Cash 175,000

Unfunded Pension Liability 26,250

(5)

a. Feb. 28 Product Warranty Expense 12,000

Product Warranty Payable 12,000

To record warranty expense for February, 6% × $200,000.

b. July 24 Product Warranty Payable 92

Supplies 60

Wages Payable 32

PE 10–7B

a. July 31 Product Warranty Expense 14,625

To record warranty expense for July, 4.5% × $325,000.

b. Nov. 11 Product Warranty Payable 220

Cash 220

PE 10–8A

a. December 31, 2014

Quick Ratio = Quick Assets ÷ Current Liabilities Quick Ratio = ($650 + $1,500 + $700) ÷ $2,375 Quick Ratio = 1.2

December 31, 2013

Quick Ratio = Quick Assets ÷ Current Liabilities Quick Ratio = ($680 + $1,550 + $770) ÷ $2,000 Quick Ratio = 1.5

b. The quick ratio of Nabors Company has declined from 1.5 in 2013 to 1.2 in 2014. This decrease is the result of a large increase in accounts payable compared to decreases in the three types of quick assets (cash, temporary investments, and accounts

receivable).

(6)

a. December 31, 2014

Quick Ratio = Quick Assets ÷ Current Liabilities Quick Ratio = ($1,000 + $1,200 + $800) ÷ $1,875 Quick Ratio = 1.6

December 31, 2013

Quick Ratio = Quick Assets ÷ Current Liabilities Quick Ratio = ($1,140 + $1,400 + $910) ÷ $2,300 Quick Ratio = 1.5

b. The quick ratio of Adieu Company has improved from 1.5 in 2013 to 1.6 in 2014. This increase is the result of a small decrease in the three types of quick assets (cash, temporary investments, and accounts receivable) compared to the larger decrease in the current liability, accounts payable.

(7)

Ex. 10–1

Current liabilities:

Federal income taxes payable*……… $ 336,000 Advances on magazine subscriptions**……… 1,593,750 Total current liabilities……… $1,929,750

* $840,000 × 40%

**25,000 × $85 × 9/12 = $1,593,750

The nine months of unfilled subscriptions are a current liability because Bon Nebo received payment prior to providing the magazines.

Ex. 10–2

a. 1. Merchandise Inventory 792,000

Interest Expense* 8,000

Notes Payable 800,000

2. Notes Payable 800,000

Cash 800,000

b. 1. Notes Receivable 800,000

Sales 792,000

Interest Revenue* 8,000

2. Cash 800,000

Notes Receivable 800,000

* $800,000 × 6% × 60/360

(8)

a. $240,000 × 8% × 60/360 = $3,200 for each alternative.

b. (1) $240,000 simple-interest note: $240,000 proceeds

(2) $240,000 discounted note: $240,000 – $3,200 interest = $236,800 proceeds c. Alternative (1) is more favorable to the borrower. This can be verified by

comparing the effective interest rates for each loan as follows:

Situation (1): 8% effective interest rate ($3,200 × 360/60) ÷ $240,000 = 8%

Situation (2): 8.11% effective interest rate ($3,200 × 360/60) ÷ $236,800 = 8.11%

The effective interest rate is higher for the discounted note because the creditor lent only $236,800 in return for $3,200 interest over 60 days. In the undiscounted note, the creditor must lend $240,000 for 60 days to earn the same $3,200 interest.

Ex. 10–4

a. Accounts Payable 150,000

b. Notes Payable 150,000

Interest Expense* 875

Cash 150,875

* $150,000 × 7% × 30/360

Ex. 10–5

a. Accounts Payable 89,100

Interest Expense* 900

b. Notes Payable 90,000

Cash 90,000

* $90,000 × 8% × 45/360

(9)

a. June 30 Building 450,000

Land 350,000

Note Payable 400,000

Cash 400,000

b. Dec. 31 Note Payable 20,000

Interest Expense ($400,000 × 6% × 1/2) 12,000

Cash 32,000

c. June 30 Note Payable 20,000

Interest Expense ($380,000 × 6% × 1/2) 11,400

Cash 31,400

Ex. 10–7

a. $1,276 is the amount disclosed as the current portion of long-term debt.

b. The current liabilities increased by $1,225 ($1,276 – $51).

c. $14,041 ($15,317 – $1,276)

Ex. 10–8

a. Regular pay (40 hrs. × $50)……… $2,000

Overtime pay (10 hrs. × $100)……… 1,000

Gross pay……… $3,000

b. Gross pay……… $3,000

Less: Social security tax (6% × $3,000)……… $180 Medicare tax (1.5% × $3,000)……… 45

Federal withholding……… 686 911

Net pay……… $2,089

(10)

Regular earnings……… $3,800.00 $1,600.00 $1,760.00

Overtime earnings……… 1,200.00 880.00

Gross pay……… $3,800.00 $2,800.00 $2,640.00 Less: Social security tax……… $ 228.00 $ 168.00 $ 158.40

Medicare tax……… 57.00 42.00 39.60

Federal income tax withheld……… 904.06 610.76 585.56

$1,189.06 $ 820.76 $ 783.56 Net pay……… $2,610.94 $1,979.24 $1,856.44

16.0% × $3,800.00 = $228.00

26.0% × $2,800.00 = $168.00

36.0% × $2,640.00 = $158.40

41.5% × $3,800.00 = $57.00

51.5% × $2,800.00 = $42.00

61.5% × $2,640.00 = $39.60

Withholding supporting calculations:

Gross weekly pay……… $3,800.00 $2,800.00 $2,640.00

Number of withholding allowances……… 2 2 1

Multiplied by: Value of one allowance…… × $70.00 × $70.00 × $70.00 Amount to be deducted……… $ 140.00 $ 140.00 $ 70.00 Amount subject to withholding……… $3,660.00 $2,660.00 $2,570.00 Initial withholding from wage bracket

in Exhibit 3……… $ 816.28 $ 327.40 $ 327.40 Plus: Bracket percentage over

bracket excess……… 87.78 283.36 258.16

Amount withheld……… $ 904.06 $ 610.76 $ 585.56

733% × ($3,660 – $3,394)

828% × ($2,660 – $1,648)

928% × ($2,570 – $1,648)

Computer

Consultant Programmer Administrator Consultant Programmer

Computer

Administrator

1 4

2 5

3 6

7 8 9

(11)

a. Summary: (1) $460,000; (3) $540,000; (8) $6,750; (12) $135,000

Net amount paid……… $338,850

Total deductions……… 201,150

(3) Total earnings……… $540,000

Overtime……… 80,000

(1) Regular……… $460,000

Total deductions……… $201,150

Social security tax……… $ 32,400

Medicare tax……… 8,100

Income tax withheld……… 135,000

Medical insurance……… 18,900 194,400

(8) Union dues……… $ 6,750

Total earnings……… $540,000

Factory wages……… $285,000

Office salaries……… 120,000 405,000

(12) Sales salaries……… $135,000

b. Factory Wages Expense 285,000

Sales Salaries Expense 135,000

Office Salaries Expense 120,000

Employees Income Tax Payable 135,000

Medical Insurance Payable 18,900

Union Dues Payable 6,750

c. Salaries Payable 338,850

Cash 338,850

(12)

a. Social security tax (6% × $880,000)……… $52,800 Medicare tax (1.5% × $880,000)……… 13,200 State unemployment tax (5.4% × $40,000)……… 2,160 Federal unemployment (0.8% × $40,000)……… 320

$68,480

b. Payroll Tax Expense 68,480

State Unemployment Tax Payable 2,160

Federal Unemployment Tax Payable 320

Ex. 10–12

a. Salaries Expense 1,250,000

Federal Unemployment Tax Payable** 1,800

*5.4% × $225,000

**0.8% × $225,000

(13)

a. Wages Expense 240,000

Social Security Tax Payable* 14,400

Medicare Tax Payable** 3,600

Wages Payable 174,000

* 6.0% × $240,000

**1.5% × $240,000

Federal Unemployment Tax Payable** 280

* 5.4% × $35,000

**0.8% × $35,000

Ex. 10–14

Big Howie’s Hot Dog Stand does have an internal control procedure that should detect the payroll error. Before funds are transferred from the regular bank account to the payroll account, the owner authorizes the total amount of the week’s payroll. The owner should catch the error, since the extra 60 hours will cause the weekly payroll to be substantially higher than usual. The owner should sign the paychecks, thereby restricting access to cash by employees who are responsible for record keeping.

Ex. 10–15

a. Appropriate. All changes to the payroll system, including wage rate increases, should be authorized by someone outside the Payroll Department.

b. Inappropriate. Each employee should record his or her own time out for lunch.

Under the current procedures, one employee could clock in several employees who are still out to lunch. The company would be paying employees for more time than they actually worked.

c. Inappropriate. Payroll should be informed when any employee is terminated.

A supervisor or other individual could continue to clock in and out for the terminated employee and collect the extra paycheck.

d. Inappropriate. Access to the check-signing machine should be restricted.

e. Appropriate. The use of a special payroll account assists in preventing fraud and makes it easier to reconcile the company’s bank accounts.

(14)

Vacation pay accrued for January, $42,000 × 1/12.

b. Vacation pay payable is reported as a current liability on the balance sheet. If employees are allowed to accumulate their vacation pay, then the estimated vacation pay payable that will not be taken in the current year will be reported as a long-term liability. When employees take vacations, the liability for vacation pay is decreased.

Ex. 10–17

a. Dec. 31 Pension Expense 365,000

To record quarterly pension cost.

Jan. 15 Unfunded Pension Liability 365,000

Cash 365,000

b. In a defined contribution plan, the company invests contributions on behalf of the employee during the employee’s working years. Normally, the employee and employer contribute to the plan. The employee’s pension depends on the total contributions and the investment return on those contributions. In a defined benefit plan, the company pays the employee a fixed annual amount based on a formula. The employer is obligated to pay for (fund) the employee’s future pension benefits.

Ex. 10–18

The $4,267 million unfunded pension liability is the approximate amount of the pension obligation that exceeds the value of the net assets of the pension plan.

Apparently, Procter & Gamble has underfunded its plan relative to the obligation that has accrued over time. This can occur when the company contributes less to the plan than the annual pension cost.

The obligation grows yearly by the amount of the periodic pension cost. Thus, the

$538 million periodic pension cost is a measure of the amount of pension earned by employees during the year. The annual pension cost is determined by making assumptions about employee life expectancies, employee turnover, expected compensation levels, and interest.

(15)

a. Product Warranty Expense 22,400

To record warranty expense for June, 4% × $560,000.

Product Warranty Payable 235

Supplies 140

Wages Payable 95

Ex. 10–20

a. The warranty liability represents estimated outstanding automobile warranty claims. Of these claims, $2,965 million is estimated to be due during Year 2, while the remainder ($4,065 million) is expected to be paid after Year 2. The distinction between short- and long-term liabilities is important to creditors in order to accurately evaluate the near-term cash demands on the business, relative to the quick current assets and other longer-term demands.

b. Product Warranty Expense Product Warranty Payable

$7,030 + X – $3,000 = $6,789

X = $6,789 – $7,030 + $3,000 X = $2,759 million

c. In order for a product warranty to be reported as a liability in the financial statements, it must qualify as a contingent liability. Contingent liabilities are only reported as liabilities on the balance sheet if it is probable that the liability will occur and the amount of the liability is reasonably estimable .

2,759,000,000 2,759,000,000

(16)

a. Damage Awards and Fines 365,000

EPA Fines Payable 240,000

Litigation Claims Payable 125,000

Note to Instructors: The “damage awards and fines” would be disclosed on the income statement under “Other expenses.”

b. The company experienced a hazardous materials spill at one of its plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $240,000, which the company is contesting in court. Although the company does not admit fault, legal counsel believes that the fine payment is probable. In addition, an employee has sued the company. A $125,000 out-of- court settlement has been reached with the employee. The EPA fine and out-of- court settlement have been recognized as an expense for the period. There is one other outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident.

Ex. 10–22

Quick Assets Current Liabilities

$500,000 + $200,000

$500,000

$486,000 + $210,000

$580,000

b. The quick ratio decreased between the two balance sheet dates. The major reason is a significant increase in inventory which likely drove the increase in accounts payable. Cash also declined, possibly to purchase the inventory. As a result, quick assets actually declined, while the current liabilities increased.

The quick ratio for December 31, 2014, is not yet at an alarming level. However, the trend suggests that the company’s current asset (working capital) management should be watched closely.

a. Quick Ratio =

= 1.4

December 31, 2014: = 1.2

December 31, 2013:

(17)

a. Apple Inc. Dell, Inc.

Quick Ratio 1.3

Quick Assets Current Liabilities Apple Inc. (in millions):

$11,261 + $14,359 + $11,560

$20,722 Dell, Inc. (in millions):

$13,913 + $452 + $10,136

$19,483

b. It is clear that Apple Inc.’s short-term liquidity is stronger than Dell’s.

Apple’s quick ratio is 38% [(1.8 – 1.3) ÷1.3] higher. Apple has a much stronger relative cash and short-term investment position than does Dell. Apple’s cash, accounts receivable, and short-term investments are over 89% of total current assets, compared to Dell’s 84% of total current assets. In addition, Dell’s relative accounts payable position is larger than Apple’s, indicating the possibility that Dell has longer supplier payment terms than does Apple. A quick ratio of 1.8 for Apple suggests ample flexibility to make strategic investments with its excess cash, while a quick ratio of 1.3 for Dell indicates an efficient, but tight, quick asset management policy.

Quick Ratio =

1.8

= 1.3

= Quick Ratio =

Quick Ratio =

(18)

Prob. 10–1A

1. Feb. 3 Merchandise Inventory 410,000

Accounts Payable—Onifade Co. 410,000

Mar. 3 Accounts Payable—Onifade Co. 410,000

Apr. 17 Notes Payable 410,000

Interest Expense ($410,000 × 45/360 × 6%) 3,075

Cash 413,075

June 1 Cash 250,000

July 21 Tools 296,000

31 Notes Payable 250,000

Interest Expense ($250,000 × 60/360 × 7.5%) 3,125

Cash 3,125

Aug. 30 Notes Payable 250,000

Cash 251,875

Sept. 19 Notes Payable 300,000

Cash 300,000

Dec. 1 Office Equipment 340,000

Cash 40,000

12 Litigation Loss 165,000

(19)

2. a. Product Warranty Expense 32,500

Warranty expense for the current year.

b. Interest Expense 1,800

Interest Payable 1,800

Interest on notes, $30,000 × 8.0% × 30/360 × 9.

(20)

1. a. Dec. 30 Sales Salaries Expense 350,000 Warehouse Salaries Expense 180,000

Bond Deductions Payable 14,850

Group Insurance Payable 12,150

b. Dec. 30 Payroll Tax Expense 52,795

State Unemployment Tax Payable¹ 1,890

Federal Unemployment Tax Payable² 280

1$35,000 × 5.4%

2$35,000 × 0.8%

2. a. Dec. 30 Sales Salaries Expense 350,000

Warehouse Salaries Expense 180,000

Social Security Tax Payable¹ 40,500

Medicare Tax Payable² 10,125

1$675,000 × 6%

2$675,000 × 1.5%

b. Jan. 5 Payroll Tax Expense 92,475

State Unemployment Tax Payable³ 36,450 Federal Unemployment Tax Payable⁴ 5,400

3$675,000 × 5.4%

4$675,000 × 0.8%

(21)

1. Gross Federal Income Social Security Medicare Earnings Tax Withheld Tax Withheld Tax Withheld

Arnett………… $ 8,250.00 $ 1,512.00 $ 495.00 $ 123.75

Cruz……… 57,600.00 9,996.00 3,456.00 864.00

Edwards……… 24,000.00 4,977.00 1,440.00 360.00

Harvin………… 6,000.00 1,133.00 360.00 90.00

Nicks………… 110,000.00 24,409.00 6,600.00 1,650.00

Shiancoe……… 116,000.00 26,670.00 6,960.00 1,740.00

Ward……… 7,830.00 1,407.00 469.80 117.45

$19,780.80 $4,945.20 2. a. Social security tax paid by employer………$19,780.80

b. Medicare tax paid by employer……… 4,945.20 c. Earnings subject to unemployment compensation tax,

$10,000 for all employees except Arnett, Harvin, and Ward.

Thus, total earnings subject to SUTA and FUTA are

$62,080 [(4 × $10,000) + $8,250 + $6,000 + $7,830].

State unemployment compensation tax: $62,080 × 5.4%……… 3,352.32 d. Federal unemployment compensation tax: $62,080 × 0.8%………… 496.64 e. Total payroll tax expense……… $28,574.96 Employee

(22)

Social Federal U.S. Sales Office

Total Security Medicare Income Savings Net Ck. Salaries Salaries

Employee Hours Regular Overtime Total Tax Tax Tax Bonds Total Pay No. Expense Expense

Aaron 46 2,720.00 612.00 3,332.00 199.92 49.98 766.36 100.00 1,116.26 2,215.74 901 3,332.00

Cobb 41 2,480.00 93.00 2,573.00 154.38 38.60 553.20 110.00 856.18 1,716.82 902 2,573.00

Clemente 48 2,800.00 840.00 3,640.00 218.40 54.60 691.60 120.00 1,084.60 2,555.40 903 3,640.00

DiMaggio 35 1,960.00 1,960.00 117.60 29.40 411.60 558.60 1,401.40 904 1,960.00

Griffey, Jr. 45 2,480.00 465.00 2,945.00 176.70 44.18 618.45 130.00 969.33 1,975.67 905 2,945.00

Mantle 1,800.00 108.00 27.00 432.00 120.00 687.00 1,113.00 906 1,800.00

Robinson 36 1,944.00 1,944.00 116.64 29.16 291.60 130.00 567.40 1,376.60 907 1,944.00

Williams 2,000.00 120.00 30.00 440.00 125.00 715.00 1,285.00 908 2,000.00

Vaughn 42 2,480.00 186.00 2,666.00 159.96 39.99 533.20 50.00 783.15 1,882.85 909 2,666.00

16,864.00 2,196.00 22,860.00 1,371.60 342.91 4,738.01 885.00 7,337.52 15,522.48 19,060.00 3,800.00

2. Sales Salaries Expense 19,060.00

Office Salaries Expense 3,800.00

Social Security Tax Payable 1,371.60

Medicare Tax Payable 342.91

Employees Federal Income Tax Payable 4,738.01

Bond Deductions Payable 885.00

Salaries Payable 15,522.48

EARNINGS DEDUCTIONS PAID ACCOUNT DEBITED

(23)

1. Dec. 2 Bond Deductions Payable 3,400

Cash 3,400

2 Social Security Tax Payable 9,273

Cash 27,046

13 Operations Salaries Expense 43,200

Officers Salaries Expense 27,200

Employees State Income Tax Payable 3,474

Medical Insurance Payable 4,500

13 Salaries Payable 46,296

Cash 46,296

13 Payroll Tax Expense 6,265

State Unemployment Tax Payable 350

Federal Unemployment Tax Payable 125

Cash 27,020

19 Medical Insurance Payable 31,500

Cash 31,500

(24)

Dec. 27 Operations Salaries Expense 42,800

Cash 51,360

Federal Unemployment Tax Payable 75

27 Employees State Income Tax Payable 20,884

Cash 20,884

31 Bond Deductions Payable 3,400

Cash 3,400

31 Pension Expense 60,000

Cash 45,000

To record pension cost and unfunded liability.

2. a. Dec. 31 Operations Salaries Expense 8,560

Accrued wages for the period.

b. 31 Vacation Pay Expense 15,000

(25)

1. Apr. 15 Cash 225,000

May 1 Equipment 310,400

15 Notes Payable 225,000

Cash 1,125

July 14 Notes Payable 225,000

Cash 228,000

Aug. 16 Merchandise Inventory 90,000

Accounts Payable—Exige Co. 90,000

Sept. 15 Accounts Payable—Exige Co. 90,000

Oct. 28 Notes Payable 320,000

Cash 320,000

30 Notes Payable 90,000

Interest Expense ($90,000 × 45/360 × 6%) 675

Cash 90,675

Nov. 16 Store Equipment 450,000

Cash 50,000

Dec. 16 Notes Payable 20,000

Interest Expense ($20,000 × 30/360 × 9%) 150

Cash 20,150

28 Litigation Loss 87,500

(26)

2. a. Product Warranty Expense 26,800

Warranty expense for the current year.

b. Interest Expense 4,275

Interest Payable 4,275

Interest on notes, $20,000 × 9% × 45/360 × 19.

(27)

1. a. Dec. 30 Sales Salaries Expense 625,000 Warehouse Salaries Expense 240,000

b. Dec. 30 Payroll Tax Expense 90,735

State Unemployment Tax Payable¹ 1,620

Federal Unemployment Tax Payable² 240

1$30,000 × 5.4%

2$30,000 × 0.8%

2. a. Dec. 30 Sales Salaries Expense 625,000

Warehouse Salaries Expense 240,000

Social Security Tax Payable¹ 71,100

Medicare Tax Payable² 17,775

1$1,185,000 × 6%

2$1,185,000 × 1.5%

b. Jan. 4 Payroll Tax Expense 162,345

State Unemployment Tax Payable³ 63,990 Federal Unemployment Tax Payable⁴ 9,480

3$1,185,000 × 5.4%

4$1,185,000 × 0.8%

(28)

1. Gross Federal Income Social Security Medicare Earnings* Tax Withheld Tax Withheld Tax Withheld

Addai……… $44,880 $ 9,372 $ 2,692.80 $ 673.20

Kasay……… 25,200 3,731 1,512.00 378.00

McGahee………… 67,410 12,999 4,044.60 1,011.15

Moss……… 55,200 9,396 3,312.00 828.00

Stewart……… 4,500 758 270.00 67.50

Tolbert……… 4,875 669 292.50 73.13

Wells……… 84,000 18,872 5,040.00 1,260.00

$17,163.90 $4,290.98

* The gross earnings are determined by multiplying the monthly earnings by the number of months of employment based on the date of hire.

2. a. Social security tax paid by employer………$17,163.90 b. Medicare tax paid by employer……… 4,290.98 c. Earnings subject to unemployment compensation tax,

$10,000 for all employees except Stewart and Tolbert.

Thus, total earnings subject to SUTA and FUTA are

$59,375 [(5 × $10,000) + $4,500 + $4,875].

State unemployment compensation tax: $59,375 × 5.4%……… 3,206.25 d. Federal unemployment compensation tax: $59,375 × 0.8%………… 475.00 e. Total payroll tax expense……… $25,136.13 Employee

(29)

Social Federal U.S. Sales Office

Total Security Medicare Income Savings Net Ck. Salaries Salaries

Employee Hours Regular Overtime Total Tax Tax Tax Bonds Total Pay No. Expense Expense

Carlton 52 2,000.00 900.00 2,900.00 174.00 43.50 667.00 60.00 944.50 1,955.50 328 2,900.00

Grove 4,000.00 240.00 60.00 860.00 100.00 1,260.00 2,740.00 329 4,000.00

Johnson 36 1,872.00 1,872.00 112.32 28.08 355.68 496.08 1,375.92 330 1,872.00

Koufax 45 2,320.00 435.00 2,755.00 165.30 41.33 578.55 44.00 829.18 1,925.82 331 2,755.00

Maddux 37 1,665.00 1,665.00 99.90 24.98 349.65 62.00 536.53 1,128.47 332 1,665.00

Seaver 3,200.00 192.00 48.00 768.00 120.00 1,128.00 2,072.00 333 3,200.00

Spahn 46 2,080.00 468.00 2,548.00 152.88 38.22 382.20 573.30 1,974.70 334 2,548.00

Winn 48 2,000.00 600.00 2,600.00 156.00 39.00 572.00 75.00 842.00 1,758.00 335 2,600.00

Young 43 2,160.00 243.00 2,403.00 144.18 36.05 480.60 80.00 740.83 1,662.17 336 2,403.00

14,097.00 2,646.00 23,943.00 1,436.58 359.16 5,013.68 541.00 7,350.42 16,592.58 16,743.00 7,200.00

2. Sales Salaries Expense 16,743.00

Office Salaries Expense 7,200.00

Social Security Tax Payable 1,436.58

Medicare Tax Payable 359.16

Employees Federal Income Tax Payable 5,013.68

Bond Deductions Payable 541.00

Salaries Payable 16,592.58

EARNINGS DEDUCTIONS PAID ACCOUNT DEBITED

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1. Dec. 1 Medical Insurance Payable 2,520

Cash 2,520

Medicare Tax Payable 728

Cash 8,131

Cash 2,300

12 Sales Salaries Expense 14,500

Medical Insurance Payable 420

Cash 15,418

Cash 7,938

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Dec. 26 Sales Salaries Expense 14,250

Cash 15,873

30 Employees State Income Tax Payable 6,258

Cash 6,258

Cash 2,300

Cash 55,400

To record pension cost and unfunded liability.

2. Dec. 31 Sales Salaries Expense 4,275

Office Salaries Expense 825

Accrued wages for the period.

31 Vacation Pay Expense 13,350

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1. Jan. 3 Petty Cash 4,500

Cash 4,500

Feb. 26 Office Supplies 1,680

Miscellaneous Selling Expense 570

Miscellaneous Administrative Expense 880

Cash 3,130

Apr. 14 Merchandise Inventory 31,300

Accounts Payable 31,300

May 13 Accounts Payable 31,300

Cash 31,300

17 Cash 21,200

Cash Short and Over 40

Sales 21,240

June 2 Notes Receivable 180,000

Accounts Receivable—Ryanair 180,000

Aug. 1 Cash 182,400

Interest Revenue 2,400

($180,000 × 8% × 60/360 = $2,400).

24 Cash 7,600

Allowance for Doubtful Accounts 1,400

Accounts Receivable—Finley 9,000

Sept. 15 Accounts Receivable—Finley 1,400

Cash 1,400

Accounts Receivable—Finley 1,400

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Sept. 15 Land 654,925

Interest Expense 15,075

($670,000 × 90/360 × 9%).

Oct. 17 Cash 135,000

Accumulated Depreciation—Office Equipment 64,000 Loss on Sale of Office Equipment 21,000

Office Equipment 320,000

Nov. 30 Sales Salaries Expense 135,000

State Unemployment Tax Payable* 270

Federal Unemployment Tax Payable** 40

*$5,000 × 5.4%

**$5,000 × 0.8%

Dec. 14 Notes Payable 670,000

Cash 670,000

Cash 139,700

Pension cost of $190,400 funded at $139,700.

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2.

Balance according to bank statement $283,000

Add deposit in transit, not recorded by bank 29,500

$312,500

Deduct outstanding checks 68,540

Adjusted balance $243,960

Balance according to company’s records $245,410

Deduct:

Bank service charges 750

Error in recording check 700

Adjusted balance $243,960

3. Miscellaneous Expense 750

Accounts Payable 700

Cash 1,450

4. a. Bad Debt Expense 18,000

To record estimated uncollectible accounts,

$16,000 + $2,000.

b. Cost of Merchandise Sold 3,300

Merchandise Inventory 3,300

To record inventory shrinkage.

c. Insurance Expense 22,820

Prepaid Insurance 22,820

To record expired insurance.

d. Office Supplies Expense 3,920

Office Supplies 3,920

To record supplies used during the period.

KORNETT COMPANY Bank Reconciliation

December 31, 2014

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e. Depreciation Expense—Buildings 36,000 Depreciation Expense—Office Equipment 44,000 Depreciation Expense—Store Equipment 5,000

Accumulated Depreciation—Buildings 36,000

Accumulated Depreciation—Office Equipment 44,000 Accumulated Depreciation—Store Equipment 5,000

To record depreciation for the period.

Computations:

Buildings ($900,000 × 4.0%)………$36,000 Office Equipment

[20% × ($246,000 – $26,000)]……… 44,000 Store Equipment

[1/2 × 10% × ($112,000 – $12,000)]………… 5,000

f. Amortization Expense—Patents 6,000

Patents 6,000

To record patent amortization,

$48,000 ÷ 8 years.

g. Depletion Expense 30,000

Accumulated Depletion 30,000

To record depletion,

($546,000 ÷ 910,000 tons) × 50,000 tons.

h. Vacation Pay Expense 10,500

To record vacation pay for the period.

i. Product Warranty Expense 76,000

To record product warranty for the period,

$1,900,000 × 4.0%.

j. Interest Receivable 1,875

Interest Revenue 1,875

To record interest earned on note receivable, $100,000 × 75/360 × 9%.

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5.

Current assets:

Petty cash $ 4,500

Cash 243,960

Notes receivable 100,000

Accounts receivable $470,000

Less allowance for doubtful accounts 16,000 454,000

Merchandise inventory—at cost 320,000

Interest receivable 1,875

Prepaid insurance 45,640

Office supplies 13,400

Total current assets $1,183,375

Property, plant, and equipment:

Land $654,925

Buildings $900,000

Less accumulated depreciation 36,000 864,000

Office equipment $246,000

Store equipment $112,000

Mineral rights $546,000

Less accumulated depletion 30,000 516,000

Total property, plant, and equipment 2,343,925

Intangible assets:

Patents 42,000

Total assets $3,569,300

KORNETT COMPANY Balance Sheet December 31, 2014

Assets

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Current liabilities:

Social security tax payable $ 25,470

Medicare tax payable 4,710

Employees federal income tax payable 40,000

State unemployment tax payable 270

Federal unemployment tax payable 40

Salaries payable 157,000

Accounts payable 131,600

Interest payable 28,000

Product warranty payable 76,000

Vacation pay payable (current portion) 7,140

Notes payable (current portion) 70,000

Total current liabilities $ 540,230

Long-term liabilities:

Vacation pay payable $ 3,360

Unfunded pension liability 50,700

Notes payable 630,000

Total long-term liabilities 684,060

Total liabilities $1,224,290

Capital stock $ 500,000

Retained earnings 1,845,010

Total stockholders’ equity 2,345,010

Total liabilities and stockholders’ equity $3,569,300 Liabilities

Stockholders’ Equity

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CP 10–1

The firm has no implicit or explicit contract to pay any bonus. The bonus is discretionary, even if the firm paid a two-week bonus for 10 straight years. The firm is not behaving unethically for reducing the bonus to one week—regardless of the reason. Tonya Latirno, on the other hand, has taken things into her own hands. Sensing that she is being cheated, she tries to rectify the situation to her own advantage by working overtime that isn’t required. This behavior could be considered fraudulent, even though Tonya is actually present on the job during the overtime hours. The point is that the overtime is not required by the firm. Tonya is incorrect in thinking that her behavior is justified because she did not receive the full two-week bonus. In fact, this behavior would not be justified even if she had a legitimate claim against the company. If she had a claim or grievance against the firm, then it should be handled by other procedural or legal means.

CP 10–2

Sumana’s interpretation of the pension issue is correct. The employee earns the pension during the working years. The pension is part of the employee’s

compensation that is deferred until retirement. Thus, Felton should record an expense equal to the amount of pension benefit earned by the employee for the period. This gives rise to the rather complex issue of estimating the amount of the pension expense. Francie indicates that the complexity of this calculation makes determining the annual pension expense impossible. This is not so. There are a number of mathematical and statistical approaches (termed “actuarial”

approaches) that can reliably estimate the amount of benefits earned by the workforce for a given year.

As a side note, Francie’s perspective can be summarized as “pay as you go.” In her interpretation, there is no expense until a pension is paid to the retiree. Failing to account for pension promises when they are earned is not considered sound accounting.

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a. The so-called “underground economy” hides transactions from IRS scrutiny by conducting business with cash (not check or credit card, which leaves an audit trail). The intent in many such transactions is to evade income tax illegally. However, just because a transaction is in cash does not exempt it from taxation. Tina Song also appears to perform construction services on a cash basis to evade reporting income while paying employees with cash to avoid paying social security and Medicare payroll taxes. The IRS reports that nearly 86% of the persons convicted of evading employment taxes were sentenced to an average of 17 months in prison and ordered to make

restitution to the government for the taxes evaded, plus interest and penalties.

b. Marvin should respond that he would rather receive a payroll check as a normal employee does. Receiving cash as an employee, rather than a payroll check, subverts the U.S. tax system. That is, such cash payments do not include deductions for payroll taxes, as required by law. That is why, for example, cash tips must be formally reported to the IRS and subjected to payroll tax deductions by the employer. In addition, if Marvin followed Tina’s advice, Marvin not only would be avoiding payroll deductions, but would also be underreporting income. This would subject Marvin to potential fines and possible criminal prosecution for underreporting income.

CP 10–4

The purpose of this activity is to familiarize students with retrieving and using IRS forms. Students should be able to find the three required forms without much difficulty. Encourage students to retrieve the forms from the IRS Web site, since this is a useful source for any IRS form or publication that they might need. IRS Web site forms come in .pdf format, which means an Adobe Acrobat Reader is necessary to open and print the file. This software is available as a free plug-in on most Internet browser software. However, some students may need to download a free version in order to open the forms. This is also a useful exercise, since many sophisticated forms on the Web require an Acrobat Reader.

The W-2 form is the Annual Wage and Tax Statement transmitted by the employer to the IRS. The IRS uses this information to reconcile the taxpayer’s reported income and withholding taxes with the taxpayer’s tax return. Copies of the W-2 are provided for the employee’s own records and for submitting with state and federal tax returns.

Form 940 is the Employer’s Annual Federal Unemployment Tax Return. The FUTA tax is reported annually, while the 941 payroll taxes are reported quarterly to the IRS.

Form 941 is the Employer’s Quarterly Federal Tax Return. This return is used to report federal withholding payroll taxes collected from employees and FICA taxes (both

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This activity does not require the student to research the contingency notes for Altria Group. The contingency disclosure is extensive and complicated. Rather, the student should identify Altria Group’s main business, and from this information determine the likely cause of the contingency disclosures.

a. Altria Group is a holding company for a number of businesses including Philip Morris. Thus, Altria’s primary business is in the manufacture and distribution of tobacco products.

b. The health concerns surrounding tobacco products give rise to numerous lawsuits and legal actions against Altria. The notes to the financial statements include an extensive section describing the scope and status of these actions.

As of December 31, 2011, Altria had over 109 cases pending, including 18 class actions and 1 health care recovery action (by state and federal

governments). Altria’s Form 10-K provides a section describing some of these actions.