Deck 10: Payroll Computations, Records, and Payment

Question 1

Determining social security withholding.
The monthly salaries for December and the year-to-date earnings of the employees of Canzano Consulting Company as of November 30 follow.

Determine the amount of social security tax to be withheld from each employee's gross pay for December. Assume a 6.2 percent social security tax rate and an earnings base of $106,800 for the calendar year.

Answer 1

On summarizing the information:
Earning base
Social security tax
The security tax rate is 6.2% for the first $106,800 of salary or wages paid and on excess it is exempted.
Compute taxable earnings of each employee:
Calculation of Taxable earnings for Employee No. 4 is:
Social security tax is calculated at 6.2% of wages earned in the month of December:

Question 2

What are the four bases for determining employee gross earnings?

Answer 2

Methods of computing employee's earnings are:
1. Hourly Rate basis: According to this method, Gross pay is calculated on the basis of number of hours worked and the pre stated rate per hour.
2. Salary Basis: In this method, employees are paid pre-agreed amount for each week, month or other period.
3. Commission basis: In this method workers generally get a percentage of net sales made.
4. Piece rate basis: in this method, workers are paid on the basis of number of units produced.

Question 3

Computing earnings, determining deductions and net amount due, preparing payroll register, journalizing payroll transactions.
Barbara Merino operates Merino Consulting Services. She has four employees and pays them on an hourly basis. During the week ended November 12, 2013, her employees worked the number of hours shown below. Information about their hourly rates, marital status, withholding allowances, and cumulative earnings for the year prior to the current pay period also appears below.

INSTRUCTIONS
1. Enter the basic payroll information for each employee in a payroll register. Record the employee's name, number of withholding allowances, marital status, total hours, overtime hours, and regular hourly rate. Consider any hours worked beyond 40 in the week as overtime hours.
2. Compute the regular earnings, overtime premium, and gross earnings for each employee. Enter the figures in the payroll register.
3. Compute the amount of social security tax to be withheld from each employee's gross earnings. Assume a 6.2 percent social security rate on the first $106,800 earned by the employee during the year. Enter the figures in the payroll register.
4. Compute the amount of Medicare tax to be withheld from each employee's gross earnings. Assume a 1.45 percent Medicare tax rate on all earning paid during the year. Enter the figures in the payroll register.
5. Use the tax tables in Figure 10.2 on pages 309-310 to determine the federal income tax to be withheld. Federal income tax to be withheld from Vasquez's pay is $192 and from Visage's pay is $267. Enter the figures in the payroll register.
6. Compute the net amount due each employee and enter the figures in the payroll register.
7. Complete the payroll register. Allen and Cooke are office workers. Earnings for Vasquez and Visage are charged to consulting wages.
8. Prepare a general journal entry to record the payroll for the week ended November 12, 2013. Use the account titles given in this chapter. Use journal page 32.
9. Prepare the general journal entry to summarize payment of amounts due employees on November 15, 2013.
Analyze: What total deductions were taken from employee paychecks for the pay period ended November 12?

Answer 3

Given data is summarized as under :
Earning base
Social security tax
Medicare tax
1.
Payroll Register with basic information of each employee:
2.
Calculation of Regular pay and Overtime pay is shown hereunder:
Hourly Rate(1)
Overtime Rate (2)
Regular
Hours Worked (3)
Overtime Hours Worked
(4)
Regular Pay
Overtime Pay
Payroll Register record of earnings:
3.
Calculation of Social security tax:
4. Calculation of Medicare Tax
5.
Federal Tax withheld from Tax Tables:
6.
Net Amount Record in Payroll register:
Calculation of Net amount:
7.
Final Part of Payroll register:
8.
General journal entry to record payroll for the week ending November 12, 2013 :
9.
General journal entry to summarize payment of payroll on November 12, 2013 :
Analysis:
All the deductions made on social security tax, Medicare tax and Income tax are the reason for this difference of $770.07.

Question 4

What is the simplest method for finding the amount of federal income tax to be deducted from an employee's gross pay?

Question 5

How can detailed payroll records help managers control expenses?

Question 6

What publication of the Internal Revenue Service provides information about the current federal income tax rates and the procedures that employers should use to withhold federal income tax from an employee's earnings?

Question 7

Give two examples of common payroll fraud.

Question 8

How does the salary basis differ from the hourly rate basis of paying employees?

Question 9

The Home Depot, Inc. reported the following data in its 2009 Annual Report (for the fiscal year ended January 31, 2010) :

Analyze:
What percentage of total current liabilities is made up of accrued salaries and related expenses at January 31, 2010?

Question 10

Determining deduction for Medicare tax.
Using the earnings data given in Exercise 10.3, determine the amount of Medicare tax to be withheld from each employee's gross pay for December. Assume a 1.45 percent Medicare tax rate and that all salaries and wages are subject to the tax.

Question 11

Why should managers check the amount spent for overtime?

Question 12

Computing gross earnings, determining deduction and net amount due, journalizing payroll transactions.
Nature's Best Publishing Company pays its employees monthly. Payments made by the company on October 31, 2013, follow. Cumulative amounts paid to the persons named prior to October 31 are also given.
1. Sara Parker, president, gross monthly salary of $19,400; gross earnings prior to October 31, $170,700.
2. Carolyn Wells, vice president, gross monthly salary of $15,600; gross earnings paid prior to October 31, $151,700.
3. Michelle Clark, independent accountant who audits the company's accounts and performs consulting services, $15,500; gross amounts paid prior to October 31, $43,900.
4. James Wu, treasurer, gross monthly salary of $5,000; gross earnings prior to October 31, $51,800.
5. Payment to Editorial Publishing Services for monthly services of Betty Jo Bradley, an editorial expert, $5,000; amount paid to Editorial Publishing Services prior to October 31, 2013, $33,100.
INSTRUCTIONS
1. Use an earnings ceiling of $106,800 for social security taxes and a tax rate of 6.2 percent and a tax rate of 1.45 percent on all earnings for Medicare taxes. Prepare a schedule showing the following information:
a. Each employee's cumulative earnings prior to October 31.
b. Each employee's gross earnings for October.
c. The amounts to be withheld for each payroll tax from each employee's earnings; the employee's income tax withholdings are Sara Parker, $5,088; Carolyn Wells, $4,388; James Wu, $1,147.
d. The net amount due each employee.
e. The total gross earnings, the total of each payroll tax deduction, and the total net amount payable to employees.
2. Prepare the general journal entry to record the company's payroll on October 31. Use journal page 22. Omit explanations.
3. Prepare the general journal entry to record payments to employees on October 31.
Analyze: What distinguishes an employee from an independent contractor?

Question 13

Payroll Accounting
Colorado Company pays salaries and wages on the last day of each month. Payments made on December 31, 2013, for amounts incurred during December are shown below. Cumulative amounts paid prior to December 31 to the persons named are also shown.
a. Mark Arnold, president, gross monthly salary $14,000; gross earnings paid prior to December 31, $154,000.
b. Heather Anthony, vice president, gross monthly salary $12,000; gross earnings paid prior to December 31, $72,000.
c. Jenny Rios, independent accountant who audits the company's accounts and performs certain consulting services, $13,000; gross amount paid prior to December 31, $35,000.
d. Vlade Tepic, treasurer, gross monthly salary $6,500; gross earnings paid prior to December 31, $71,500.
e. Payment to Wright Security Services for Eddie Wright, a security guard who is on duty on Saturdays and Sundays, $1,000; amount paid to Wright Security Services prior to December 31, $11,000.
INSTRUCTIONS
1. Using the tax rates and earnings ceilings given in this chapter, prepare a schedule showing the following information:
a. Each employee's cumulative earnings prior to December 31.
b. Each employee's gross earnings for December.
c. The amounts to be withheld for each payroll tax from each employee's earnings (employee income tax withholdings for Arnold are $3,216; for Anthony, $2,646; and for Tepic, $1,244).
d. The net amount due each employee.
e. The total gross earnings, the total of each payroll tax deduction, and the total net amount payable to employees.
2. Record the general journal entry for the company's payroll on December 31. Use journal page 32.
3. Record the general journal entry for payments to employees on December 31.
Analyze: What is the balance of the Salaries Payable account after all payroll entries have been posted for the month?

Question 14

What is an exempt employee?

Question 15

What factors affect how much federal income tax must be withheld from an employee's earnings?

Question 16

Determining federal income tax withholding.
Data about the marital status, withholding allowances, and weekly salaries of the four office workers at Amos Publishing Company follow. Use the tax tables in Figure 10.2 on pages 309-310 to find the amount of federal income tax to be deducted from each employee's gross pay.

Question 17

Computing gross earnings.
The hourly rates of four employees of Johnson Enterprises follow, along with the hours that these employees worked during one week. Determine the gross earnings of each employee.

Question 18

How are the federal and state unemployment taxes related?

Question 19

The Home Depot, Inc. reported the following data in its 2009 Annual Report (for the fiscal year ended January 31, 2010) :

Analyze:
By what amount did accrued salaries and related expenses change from fiscal 2009 to fiscal 2010?

Question 20

Recording payroll transactions in the general journal.
Excalibur Publishing has two office employees. A summary of their earnings and the related taxes withheld from their pay for the week ending August 7, 2013, follows.

1. Prepare the general journal entry to record the company's payroll for the week. Use the account names given in this chapter. Use 16 as the page number for the general journal.
2. Prepare the general journal entry to summarize the checks to pay the weekly payroll.

Question 21

The new controller for Ellis Company, a manufacturing firm, has suggested to management that the business change from paying the factory employees in cash to paying them by check. What reasons would you offer to support this suggestion?

Question 22

Does the employee bear any part of the SUTA tax? Explain.

Question 23

Payroll Internal Controls
Several years ago, Paul Rivera opened Tito's Tacos, a restaurant specializing in homemade tacos. The restaurant was so successful that Rivera was able to expand, and his company now operates eight restaurants in the local area.
Rivera tells you that when he first started, he handled all aspects of the business himself. Now that there are eight Tito's Tacos, he depends on the managers of each restaurant to make decisions and oversee day-to-day operations. Paul oversees operations at the company's headquarters, which is located at the first Tito's Tacos.
Each manager interviews and hires new employees for a restaurant. The new employee is required to complete a W-4, which is sent by the manager to the headquarters office. Each restaurant has a time clock and employees are required to clock in as they arrive or depart. Blank time cards are kept in a box under the time clock. At the beginning of each week, employees complete the top of the card they will use during the week. The manager collects the cards at the end of the week and sends them to headquarters.
Paul hired his cousin Anna to prepare the payroll instead of assigning this task to the accounting staff. Because she is a relative, Paul trusts her and has confidence that confidential payroll information will not be divulged to other employees.
When Anna receives a W-4 for a new employee, she sets up an individual earnings record for the employee. Each week, using the time cards sent by each restaurant's manager, she computes the gross pay, deductions, and net pay for all the employees. She then posts details to the employees' earnings records and prepares and signs the payroll checks. The checks are sent to the managers, who distribute them to the employees.
As long as Anna receives a time card for an employee, she prepares a paycheck. If she fails to get a time card for an employee, she checks with the manager to see if the employee was terminated or has quit. At the end of the month, Anna reconciles the payroll bank account and prepares quarterly and annual payroll tax returns.
1. Identify any weaknesses in Tito's Tacos's payroll system.
2. Identify one way a manager could defraud Tito's Tacos under the present payroll system.
3. What internal control procedures would you recommend to Paul to protect against the fraud you identified above?
4. How can detailed payroll records help managers control expenses?

Question 24

Journalizing payroll transactions.
On July 31, 2013, the payroll register of Reed Wholesale Company showed the following totals for the month: gross earnings, $38,600; social security tax, $2,393.20; Medicare tax, $559.70; income tax, $3,055.96; and net amount due, $32,591.14. Of the total earnings, $30,558.46 was for sales salaries and $8,041.54 was for office salaries. Prepare a general journal entry to record the monthly payroll of the firm on July 31, 2013. Use 20 as the page number for the general journal.

Question 25

How does the Fair Labor Standards Act affect the wages paid by many firms? What types of firms are regulated by the act?

Question 26

How are earnings determined when employees are paid on the hourly rate basis?

Question 27

Computing regular earnings, overtime earnings, and gross pay.
During one week, four production employees of Martinez Manufacturing Company worked the hours shown below. All these employees receive overtime pay at one and one-half times their regular hourly rate for any hours worked beyond 40 in a week. Determine the regular earnings, overtime earnings, and gross earnings for each employee.

Question 28

What is the purpose of the Medicare tax?

Question 29

Why should management make sure that a firm has an adequate set of payroll records?

Question 30

What is the purpose of the social security tax?

Question 31

What aspects of employment are regulated by the Fair Labor Standards Act? What is another commonly used name for this act?

Question 32

How does the direct deposit method of paying employees operate?