APPENDIX F. Payroll Accounting. Brief

Transcription

1 APPENDIX F Payroll Accounting ASSIGNMENT CLASSIFICATION TABLE Learning Objectives Questions Brief Exercises Exercises A Problems B Problems 1. Compute and record the payroll for a pay period. 1, 2, 3, 5, 6, 7, 8 1, 2 1, 2, 3, 4 1A, 2A, 3A 1B, 2B, 3B 2. Describe and record employer payroll taxes. 3. Discuss the objectives of internal control for payroll. 2, 3, 4, 8 3 3, 5 1A, 2A, 3A 1B, 2B, 3B 9, A 4B Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-1

2 ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Time Allotted (min.) F-1A Prepare payroll register and payroll entries. Simple F-2A Journalize payroll transactions and adjusting entries. Moderate F-3A F-4A Prepare entries for payroll and payroll taxes; prepare W-2 data. Identify internal control weaknesses and make recommendations for improvement. Moderate Simple F-1B Prepare payroll register and payroll entries. Simple F-2B Journalize payroll transactions and adjusting entries. Moderate F-3B F-4B Prepare entries for payroll and payroll taxes; prepare W-2 data. Identify internal control weaknesses and make recommendations for improvement. Moderate Simple F-2 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)

3 ANSWERS TO QUESTIONS 1. Gross pay is the amount an employee actually earns. Net pay, the amount an employee is paid, is gross pay reduced by both mandatory and voluntary deductions, such as FICA taxes, union dues, federal income taxes, etc. Gross pay should be recorded as wages or salaries expense. 2. Both employees and employers are required to pay FICA taxes. 3. No. When an employer withholds federal or state income taxes from employee paychecks, the employer is merely acting as a collection agent for the taxing body. Since the employer holds employees funds, these withholdings are a liability for the employer until they are remitted to the government. 4. FICA stands for Federal Insurance Contribution Act; FUTA stands for Federal Unemployment Tax Act; and SUTA stands for State Unemployment Tax Act. 5. A W-4 statement shows the employee s name, address, social security number, marital status and the number of allowances claimed for income tax withholding purposes. A W-2 statement contains the employee s name, address, social security number, wages, tips, other compensation, social security taxes withheld, wages subject to social security taxes, and federal, state and local income taxes withheld. 6. Payroll deductions can be classified as either mandatory (required by law) or voluntary (not required by law). Mandatory deductions include FICA taxes and income taxes. Examples of voluntary deductions are health and life insurance premiums, pension contributions, union dues, and charitable contributions. 7. The employee earnings record is used in: (1) determining when an employee has earned the maximum earnings subject to FICA taxes, (2) filing state and federal tax returns, and (3) providing each employee with a statement of gross earnings and tax withholdings for the year. 8. (a) The three types of taxes are: (1) FICA, (2) federal unemployment, and (3) state unemployment. (b) The tax liability accounts are classified as current liabilities in the balance sheet. Payroll tax expense is classified under operating expenses in the income statement. 9. The main internal control objectives associated with payrolls are: (1) to safeguard company assets from unauthorized payments of payrolls and (2) to assure the accuracy and reliability of the accounting records pertaining to payrolls. 10. The four functions associated with payroll are: (1) hiring employees, (2) timekeeping, (3) preparing the payroll, and (4) paying the payroll. Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-3

4 SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE F-1 Gross earnings: Regular pay (40 X $16)... $ Overtime pay (7 X $24) $ Gross earnings... $ Less: FICA taxes payable ($808 X 7.65%)... $ Federal income taxes payable Net pay... $ BRIEF EXERCISE F-2 Jan. 15 Salaries and Wages Expense FICA Taxes Payable ($808 X 7.65%) Federal Income Taxes Payable Salaries and Wages Payable Jan. 15 Salaries and Wages Payable Cash BRIEF EXERCISE F-3 Jan. 31 Payroll Tax Expense... 11,634 FICA Taxes Payable ($84,000 X 7.65%) 6,426 Federal Unemployment Taxes Payable ($84,000 X.8%) State Unemployment Taxes Payable ($84,000 X 5.4%)... 4,536 BRIEF EXERCISE F-4 (a) Timekeeping (b) Hiring (c) Preparing the payroll (d) Paying the payroll F-4 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)

5 SOLUTIONS TO EXERCISES EXERCISE F-1 (a) 1. Regular 40 X $14.00 = $ Overtime 4 X $21.00 = Gross earnings $ FICA taxes $49.27 = ($644 X 7.65%). 3. Federal income taxes $ State income taxes $12.88 = ($644 X 2%). 5. Net pay $ = ($ $49.27 $55.00 $12.88 $28.00). (b) Salaries and Wages Expense FICA Taxes Payable Federal Income Taxes Payable State Income Taxes Payable Health Insurance Payable Salaries and Wages Payable EXERCISE F-2 D. Edwards $4,200 X 7.65% = $ Edwards s total gross earnings for the year are $87,700 ($83,500 + $4,200), which is below the $106,800 maximum for FICA taxes. M. Ihrke ($1,200 X 6.2%) + ($4,200 X 1.45%) = $ Ihrke s total gross earnings for the year are $109,800. Thus, only $1,200 of the gross earnings ($4,200 $3,000) for this pay period are subject to Social Security taxes. In addition, $4,200 is subject to Medicare (1.45%) taxes. A. Seligman ($2,300 X 6.2%) + ($4,200 X 1.45%) = $ Seligman s total gross earnings for the year are $108,700. Thus, only $2,300 of the gross earnings ($4,200 $1,900) for this pay period are subject to Social Security taxes. Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-5

6 EXERCISE F-2 (Continued) P. Paik ($4,200 X 1.45%) = $60.90 Paik s gross earnings prior to this pay period equal the maximum amount subject to Social Security taxes. However, all of the gross earnings in the December 31 pay period are subject to Medicare taxes. EXERCISE F-3 (a) See next page. (b) Jan. 31 Salaries and Wages Expense... 1, FICA Taxes Payable Federal Income Taxes Payable Health Insurance Payable Salaries and Wages Payable... 1, F-6 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)

7 EXERCISE F-3 (Continued) (a) WELSTEAD COMPANY Payroll Register For the Week Ending January 31 Employee W. Jeong C. Garrison J. Buss Totals Total Hours Regular Overtime $ $1, Earnings Deductions $ $ Gross Pay $ $1, FICA Taxes $ $ Federal Income Taxes $ $ Health Insurance Total $ $48.00 $ $ Net Pay $ $1, Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-7

8 EXERCISE F-3 (Continued) (b) Jan. 31 Payroll Tax Expense FICA Taxes Payable Federal Unemployment Taxes Payable ($1,721 X.8%) State Unemployment Taxes Payable ($1,721 X 5.4%) EXERCISE F-4 (a) (1) $1,100 [$10,000 see (2) below $8,900]. (2) $10,000 (FICA taxes $ %). (3) $400 ($10,000 X 4%). (4) $2,660 ($10,000 $7,340). (5) $6,000($10,000 $4,000). (b) Feb. 28 Salaries and Wages Expense... 10,000 FICA Taxes Payable Federal Income Taxes Payable... 1,395 State Income Taxes Payable Union Dues Payable Salaries and Wages Payable... 7, Salaries and Wages Payable... 7,340 Cash... 7,340 EXERCISE F-5 (a) FICA tax ($786,000 X 6.2%) + ($850,000 X 1.45%)... $61,057 SUTA tax ($90,000 X 5.4%)... 4,860 FUTA tax ($90,000 X 0.8%) Total payroll tax... $66,637 (b) Payroll Tax Expense... 66,637 FICA Taxes Payable... 61,057 State Unemployment Taxes Payable... 4,860 Federal Unemployment Taxes Payable F-8 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)

9 SOLUTIONS TO PROBLEMS PROBLEM F-1A (a) ETHRIDGE DRUG STORE Payroll Register For the Week Ended February 15, 2014 Earnings Deductions Employee Hours Regular A. Joseph J. Wilgus P. Kirk L. Zhang Totals , Overtime Gross Pay FICA Fed. State U.F. Total Net Pay , , Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-9

10 PROBLEM F-1A (Continued) (b) Feb. 15 Salaries and Wages Expense... 2, FICA Taxes Payable Federal Income Taxes Payable State Income Taxes Payable United Fund Contributions Payable Salaries and Wages Payable... 1, Payroll Tax Expense FICA Taxes Payable ($2,182 X 7.65%) Federal Unemployment Taxes Payable ($2,182 X.8%) State Unemployment Taxes Payable ($2,182 X 5.4%) (c) Feb. 16 Salaries and Wages Payable... 1, Cash... 1, (d) Feb. 28 FICA Taxes Payable ($ $166.93) Federal Income Taxes Payable Cash F-10 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)

11 PROBLEM F-2A (a) Jan. 10 Union Dues Payable Cash FICA Taxes Payable Federal Income Taxes Payable... 1, Cash... 1, U.S. Savings Bonds Payable Cash State Income Taxes Payable Cash Federal Unemployment Taxes Payable State Unemployment Taxes Payable... 1, Cash... 2, Salaries and Wages Expense... 46, FICA Taxes Payable... 3, Federal Income Taxes Payable... 1, State Income Taxes Payable Union Dues Payable United Fund Contributions Payable... 1, Salaries and Wages Payable. 38, Salaries and Wages Payable... 38, Cash... 38, Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-11

12 PROBLEM F-2A (Continued) (b) Jan. 31 Payroll Tax Expense... 6, FICA Taxes Payable ($46,200 X 7.65%)... 3, Federal Unemployment Taxes Payable ($46,200 X.8%) State Unemployment Taxes Payable ($46,200 X 5.4%)... 2, F-12 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)

13 PROBLEM F-3A (a) Salaries and Wages Expense ,000 FICA Taxes Payable... 35,440 Federal Income Taxes Payable ,000 State Income Taxes Payable... 13,520 United Fund Contributions Payable... 25,000 Health Insurance Payable... 26,800 Salaries and Wages Payable ,240 (b) Payroll Tax Expense... 39,070 FICA Taxes Payable... 35,440 Federal Unemployment Taxes Payable ($110,000 X.8%) State Unemployment Taxes Payable ($110,000 X 2.5%)... 2,750 (c) Employee Wages, Tips, Other Compensation Federal Income Tax Withheld State Income Tax Withheld FICA Wages FICA Tax Withheld S. Brand R. Morin $56,000 27,000 $20,500 11,000 $1,456 (1) 702 (2) $56,000 27,000 $4,284 2,066 (1) $56,000 X 2.6%. (2) $27,000 X 2.6%. Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-13

14 PROBLEM F-4A (a) Weaknesses (b) Recommended Procedures 1. Hours worked are marked on time card by employee. Time cards should be punched by a time clock and the punching of the clock by employees should be supervised so that one employee cannot punch more than one card. Employees give the approved cards to payroll. The manager should deliver the cards to payroll in order to prevent possible alterations by employees during delivery. 2. Department manager indicates the rates of pay. Rates of pay should be authorized in writing by the human resources department. The department manager pays the employees. The treasurer s department should pay employees. Payment is in cash. Payment should be made by check. 3. Manager prepares payroll register which is sent to the payroll department. The payroll department should prepare the payroll register on the basis of the clock cards approved by the manager. A payroll supervisor pays each employee by check. Payment to employees should be made by the treasurer s department. F-14 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)

15 PROBLEM F-1B (a) RALPH S HARDWARE Payroll Register For the Week Ending March 15, 2014 Earnings Deductions Employee Hours Regular K. Litwack E. Burgess R. Perez H. Hosseini Totals , Overtime Gross Pay FICA Fed. State U.F. Total Net Pay , , Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-15

16 PROBLEM F-1B (Continued) (b) Mar. 15 Salaries and Wages Expense... 2, FICA Taxes Payable Federal Income Taxes Payable State Income Taxes Payable United Fund Contributions Payable Salaries and Wages Payable... 1, Payroll Tax Expense FICA Taxes Payable ($2,433 X 7.65%) Federal Unemployment Taxes Payable ($2,433 X.8%) State Unemployment Taxes Payable ($2,433 X 5.4%) (c) Mar. 16 Salaries and Wages Payable... 1, Cash... 1, (d) Mar. 31 FICA Taxes Payable ($ $186.12) Federal Income Taxes Payable Cash F-16 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)

17 PROBLEM F-2B (a) Jan. 10 Union Dues Payable Cash FICA Taxes Payable Federal Income Taxes Payable... 1, Cash... 1, U.S. Savings Bonds Payable Cash State Income Taxes Payable Cash Federal Unemployment Taxes Payable State Unemployment Taxes Payable... 1, Cash... 2, Salaries and Wages Expense... 50, FICA Taxes Payable... 3, Federal Income Taxes Payable... 1, State Income Taxes Payable United Fund Contributions Payable... 1, Union Dues Payable Salaries and Wages Payable. 42, Salaries and Wages Payable... 42, Cash... 42, Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-17

18 PROBLEM F-2B (Continued) (b) 1. Jan. 31 Payroll Tax Expense... 7, FICA Taxes Payable ($50,600 X 7.65%)... 3, Federal Unemployment Taxes Payable ($50,600 X.8%) State Unemployment Taxes Payable ($50,600 X 5.4%)... 2, F-18 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)

19 PROBLEM F-3B (a) Salaries and Wages Expense ,000 FICA Taxes Payable... 37,983 Federal Income Taxes Payable ,000 State Income Taxes Payable... 17,600 United Fund Contributions Payable... 27,500 Health Insurance Premiums Payable... 32,200 Salaries and Wages Payable ,717 (b) Payroll Tax Expense... 42,108 FICA Taxes Payable... 37,983 Federal Unemployment Taxes Payable ($125,000 X.8%)... 1,000 State Unemployment Taxes Payable ($125,000 X 2.5%)... 3,125 (c) Employee Wages, Tips, Other Compensation Federal Income Tax Withheld State Income Tax Withheld FICA Wages FICA Tax Withheld Jin Chien Nina Harris $59,000 26,000 $19,500 9,200 $1,888 (1) 832 (2) $59,000 26,000 $4,514 1,989 (1) $59,000 X 3.2%. (2) $26,000 X 3.2%. Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-19

20 PROBLEM F-4B (a) Weaknesses (b) Recommended Procedures 1. Department managers have too much authority in hiring. The human resources department should do the hiring. An interview should not be the sole basis for hiring or rejecting an applicant. The qualifications of each applicant should be determined and letters of recommendation should be obtained. The pay rate should not be manually written on the W-4 form. The human resources department should notify the payroll department of new hires through a hiring authorization form. 2. The chief accountant manually signs the payroll checks. The treasurer should sign the payroll checks. The department managers distribute the payroll checks. A representative of the treasurer s department should distribute the payroll checks. The department managers retain custody of unclaimed checks. A representative of the treasurer s department should have custody of unclaimed checks. F-20 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)

21 PROBLEM F-4B (Continued) (a) Weaknesses (b) Recommended Procedures 3. The assignment of duties among the payroll clerks does not result in any independent internal verification. The duties of the payroll clerks should be assigned so that one clerk computes gross earnings for all employees. Then the computations made should be verified by the clerk that did not make the initial determination of the data. Each month the duties of the clerks should be reversed. Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-21

22 BYP F-1 REAL-WORLD FOCUS (a) A worker who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. Get Pub. 15-A, Employer s Supplemental Tax Guide, for more information on how to determine whether an individual providing services is an independent contractor or an employee. Generally, people in business for themselves are not employees. For example, doctors, lawyers, veterinarians, construction contractors, and others in an independent trade in which they offer their services to the public are usually not employees. However, if the business is incorporated, corporate officers who work in the business are employees. (b) Payments for the services of a child under the age of 18 who works for his or her parent in a trade or business (sole proprietorship or a partnership in which each partner is a parent of the child) are not subject to social security and Medicare taxes. If these services are for work other than in a trade or business, such as domestic work in the parent s private home, they are not subject to social security and Medicare taxes until the child reaches 21. (c) Any employee without a social security card can get one by completing Form SS-5, Application for a Social Security Card. (d) Tips that your employee receives are generally subject to withholding. Your employee must report cash tips to you by the 10th of the month after the month the tips are received. The report should include tips you paid over to the employee for charge customers and tips that the employee received directly from customers. No report is required for months when tips are less than $20. Your employee reports the tips on Form 4070, Employee s Report of Tips to Employer, or on a similar statement. F-22 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)

23 BYP F-1 (Continued) (e) In general, you must deposit income tax withheld and both the employer and employee social security and Medicare taxes (minus any advance EIC payments) by mailing or delivering a check, money order, or cash to a financial institution that is an authorized depositary for Federal taxes. However, some taxpayers are required to deposit using the Electronic Federal Tax Deposit System (EFTPS). Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-23

24 BYP F-2 DECISION-MAKING ACROSS THE ORGANIZATION (a) OXFORD SERVICES INC. Month Number of Employees Days Worked Daily Rate Cost January-March April-May June-October November-December Total Cost (20 X 3) 50 (25 X 2) 90 (18 X 5) 46 (23 X 2) $ $11,520 14,400 17,280 13,248 $56,448 PERMANENT EMPLOYEES Salaries ($28,000 X 2)... $56,000 Additional payroll costs FICA taxes (7.65% X $56,000)... $4,284 Federal unemployment taxes (.8% X $14,000) State unemployment taxes (5.4% X $14,000) Medical and dental insurance (2 X $100 X 12)... 2,400 7,552 $63,552 Longwell Processing Company would save $7,104 ($63,552 $56,448), as shown, by discharging the two employees and accepting the Oxford Services Inc. plan. (b) Jen should consider the following additional factors: 1. The effect on the morale of the continuing employees if two employees are terminated. 2. The anticipated efficiency of Oxford Services Inc. workers compared to the efficiency of the two employees who would be terminated. F-24 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)

25 BYP F-2 (Continued) 3. The effect on management control and supervision of using Oxford Services Inc. personnel. 4. The time that may be required to indoctrinate the different Oxford Services Inc. personnel into the Longwell Processing Company s procedures. Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-25

26 BYP F-3 COMMUNICATION ACTIVITY Dear Mr. Forseth: In response to your request, I wish to explain the types of taxes that are involved in determining the payroll and in recording and paying employer payroll taxes. The taxes that are involved in determining the payroll are as follows: 1. FICA taxes. These taxes were enacted by Congress to provide workers with supplemental retirement, employment disability, and medical benefits. These benefits are financed by a tax levied on employees earnings. The tax rate and tax base are set by Congress and both change intermittently. The current rate is 7.65% on the first $106,800 of gross earnings. FICA taxes are withheld by the employer and then remitted to the government. These taxes are not an expense to the employer. 2. Federal income taxes. Employers are required to withhold federal income taxes from employees each pay period. The amount depends on the employee s gross earnings, the number of allowances claimed by the employee, and the length of the pay period. The amounts withheld are remitted by the employer to the government. These taxes are not an expense to the employer. 3. State and city income taxes. Where applicable, these income taxes are similar to federal income taxes. There are three types of payroll taxes that are levied on employers that are recognized as payroll tax expense by the employer. 1. FICA taxes. The employer must match each employee s FICA contribution. The employer s tax is subject to the same rate and maximum earnings applicable to the employee. 2. Federal unemployment taxes. These taxes provide benefits to employees who lose their jobs through no fault of their own. The tax is 6.2% on the first $7,000 of gross earnings paid to each employee during a calendar year. The employer is allowed a maximum credit of 5.4% on the federal rate for contributions to state unemployment taxes. F-26 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)

27 BYP F-3 (Continued) 3. State unemployment taxes. These taxes also provide benefits to employees who lose their jobs. The basic rate is usually 5.4% on the first $7,000 of wages paid to an employee during the year. Very truly yours, Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only) F-27

28 BYP F-4 ETHICS CASE (a) The stakeholders in this situation are: Jerry Martin, owner and manager. Sixteen part-time employees of Jerry s. Andrea Sun, public accountant. (b) Not withholding federal and state taxes from employees payroll is both illegal and unethical. Also, not paying FICA taxes, and state and federal unemployment taxes, is illegal and unethical. (c) Andrea Sun, as Jerry s public accountant, should not be an accomplice to improper payroll deductions and accounting. Andrea should constantly remind Jerry of the consequences of his illegal payroll payments and the unrecorded payments. She should advise Jerry that not only is the government deprived of its proper tax revenues, but employees are deprived of social security and possibly Medicare credits as well as workmen s compensation insurance. (d) An important internal control principle is to make no payments from cash receipts. All cash receipts should be deposited daily intact in the bank and all disbursements should be made by properly authorized and signed checks. F-28 Copyright 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution s Manual (For Instructor Use Only)