Week Four Exercise Assignment: Liability For Payroll Account
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Below are the core assignment instructions for payroll accounting, current liabilities entries, and notes payable transactions, including required journal entries, adjusting entries, and presentation of liabilities in financial statements.
Assume the following payroll tax rates and payroll information for Brookhaven Publishing: Social Security taxes (4% on the first $55,000 earned per employee), Medicare taxes (1.5% on the first $130,000), federal income taxes ($7,500 withheld), state income taxes (4%), insurance withholdings (1%), state unemployment taxes (5.4% on the first $7,000), and federal unemployment taxes (0.8% on the first $7,000). The company incurred a salary expense of $50,000 during February, with no wages paid yet and employees earning less than $5,000.
Upcoming tasks include preparing the payroll journal entry that accounts for deductions and employer payroll tax expense, recording current liabilities from multiple transactions including borrowings, warranty liabilities, merchandise purchases, and accrued expenses, and recording notes payable transactions including interest accruals and current liabilities presentation in the balance sheet.
Paper For Above instruction
The following comprehensive analysis and journal entries address payroll accounting, current liabilities, and notes payable management, illustrating the application of accounting principles to typical business transactions in accordance with accounting standards.
Payroll Accounting for Brookhaven Publishing
To accurately record payroll expenses and related liabilities for Brookhaven Publishing, the accountant must consider both the employee deductions and employer payroll taxes. The payroll expense is straightforward, but the deductions and taxes require detailed calculation based on the provided rates and employee earnings.
Since employees earned less than $5,000 and no wages were paid in February, the gross payroll for the period is $50,000. The deductions include federal and state income taxes, Social Security, Medicare, and insurance withholdings. The employer also incurs payroll taxes as a matching expense for Social Security and Medicare, plus liabilities for unemployment taxes.
Calculations for Deductions and Employer Taxes
- Employee Deductions:
- Federal Income Tax Withholding: $7,500 (given)
- State Income Tax: 4% of gross earnings = 0.04 * $50,000 = $2,000
- Insurance Withholdings: 1% of gross earnings = 0.01 * $50,000 = $500
- Social Security Taxes: 4% of gross earnings = 0.04 * $50,000 = $2,000
- Medicare Taxes: 1.5% of gross earnings = 0.015 * $50,000 = $750
- Employer Payroll Taxes (Matching):
- Social Security: $2,000
- Medicare: $750
- State Unemployment Taxes: 5.4% on first $7,000 per employee.
- Federal Unemployment Taxes: 0.8% on first $7,000 per employee.
Because all employees earned less than $5,000, each is subject to unemployment taxes on their entire earnings, assuming the total payroll is for multiple employees with similar earnings. To simplify, calculations assume total earnings per employee are below the wage base thresholds.
Record the Payroll Expense and Deductions
Dr. Salaries and Wages Expense 50,000
Cr. Wages Payable 50,000
Record employee deductions:
Dr. Wages Payable 12,750
Cr. Federal Income Taxes Payable 7,500
Cr. State Income Taxes Payable 2,000
Cr. Insurance Withholdings Payable 500
Cr. Social Security Taxes Payable 2,000
Cr. Medicare Taxes Payable 750
Upon payment, the company would debit Wages Payable and credit cash for net wages, but since wages are unpaid, the above entries record accruals.
Record Employer Payroll Tax Expenses
Dr. Payroll Tax Expense (Sum of employer taxes)
Cr. Social Security Taxes Payable
Cr. Medicare Taxes Payable
Cr. Federal Unemployment Taxes Payable
Cr. State Unemployment Taxes Payable
Calculating employer taxes:
Social Security: $2,000
Medicare: $750
State unemployment: 5.4% $7,000 per employee number of employees (assumed for simplicity)
Federal unemployment: 0.8% * $7,000 per employee
In practice, the total employer payroll tax expense includes the above amounts, summing up to an approximate total of $2,000 for Social Security, $750 for Medicare, plus unemployment taxes, which are roughly calculated based on the $7,000 wage base per employee.
Current Liabilities: Entries and Disclosures
For the transactions involving Visconti’s, the accounting records include the following journal entries:
December 1 Borrowing:
Dr. Cash 10,000
Cr. Notes Payable 10,000
December 10 Warranty liability:
Dr. Warranty Expense (calculated based on expected sales)
Cr. Warranty Liability (estimated warranty costs)
December 22 Merchandise purchase:
Dr. Merchandise Inventory 16,000
Cr. Accounts Payable 16,000
December 26 Borrowing:
Dr. Cash 5,000
Cr. Notes Payable 5,000
December 31 Repair costs:
Dr. Repair Expense 162 (6 units * $27)
Cr. Cash or Accounts Payable 162
December 31 accrued salaries:
Dr. Salaries Expense 1,400
Cr. Salaries Payable 1,400
Adjusting entries on December 31 to accrue interest on the notes involve calculating the interest based on the principal, interest rate, and elapsed days, using a 360-day year convention.
Interest on December 1 note:
Interest = Principal Rate Time in days / 360
= $10,000 15% 30 / 360 = $125
Interest on December 26 note:
Interest = $5,000 15% 6 / 360 ≈ $1.25
Interest on September 11 note:
Interest = $60,000 14% 80 / 360 ≈ $1,866.67
Notes Payable and Related Transactions for Red Bank Enterprises
The activities include borrowing, issuing notes for purchases, and settling obligations, with interest calculations made on the 360-day year basis. Journal entries include:
Borrowed $55,000:
Dr. Cash 55,000
Cr. Notes Payable 55,000
Issued note to Harris Motors:
Dr. Delivery Truck 50,000
Cr. Notes Payable 50,000
Purchased merchandise and issued note:
Dr. Merchandise Inventory 15,000
Cr. Notes Payable 15,000
Issued note to Datatex:
Dr. Overdue Account Payable 60,000
Cr. Notes Payable 60,000
Note payments:
Dr. Notes Payable to Bank 55,000
Cr. Cash 55,000
Interest accruals:
For 90-day note ($55,000 at 12%):
Interest = 55,000 12% (days / 360)
For 180-day note ($50,000 at 12%):
Interest = 50,000 12% (days / 360)
For 30-day note to Pans:
Interest = 15,000 12% (30 / 360)
For 30-day note to Datatex:
Interest = 60,000 14% (30 / 360)
Current Liabilities Section as of December 31
The current liabilities comprise notes payable, accrued interest, and accounts payable. The subtotal of accounts payable is $203,600, with additional accrued interest calculated above and outstanding notes payable due within a year.
Conclusion
This comprehensive approach to payroll, liabilities, and notes payable demonstrates essential accounting practices, emphasizing accurate journal entries, interest calculations, and appropriate disclosure in financial statements. Properly recording these transactions ensures compliance with accounting standards and provides transparent financial reporting for stakeholders.
References
- Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
- Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2018). Introduction to Financial Accounting (11th ed.). Pearson.
- Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (16th ed.). McGraw-Hill Education.
- Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Intermediate Accounting (16th ed.). Wiley.
- United States Department of the Treasury. (2020). Internal Revenue Manual. IRS.gov.
- Financial Accounting Standards Board (FASB). (2020). Accounting Standards Codification. fasb.org.
- AccountingTools. (2022). Payroll Accounting. accountingTools.com.
- Journal of Accountancy. (2021). Current liabilities and disclosures. journalofaccountancy.com.
- Investopedia. (2023). Notes Payable. investopedia.com.
- American Institute of CPAs (AICPA). (2019). Financial Reporting and Accounting Standards. cpa.org.