Accounting Study Set 8

Why are deductions from employees' earnings classified as liabilities for the employer

Ethics and professional conduct in business Tonya Latirno is a certified public accountant (CPA) and staff accountant for Kennedy and Kennedy, a local CPA firm. It had been the policy of the firm to provide a holiday bonus equal to two weeks' salary to all employees. The firm's new management team announced on November 15 that a bonus equal to only one week's salary would be made available to employees this year. Tonya thought that this policy was unfair because she and her coworkers planned on the full two-week bonus. The two-week bonus had been given for 10 straight years, so it seemed as though the firm had breached an implied commitment. Thus, Tonya decided that she would make up the lost bonus week by working an extra six hours of overtime per week over the next five weeks until the end of the year. Kennedy and Kennedy's policy is to pay overtime at 150% of straight time. Tonya's supervisor was surprised to see overtime being reported, since there is generally very little additional or unusual client service demands at the end of the calendar year. However, the overtime was not questioned, since firm employees are on the "honor system" in reporting their overtime. Discuss whether the firm is acting in an ethical manner by changing the bonus.

Employee net pay Bella Chen's weekly gross earnings for the week ended October 20 were $2,600, and her federal income tax withholding was $554.76. Assuming the social security rate is 6% and Medicare is 1.5% of all earnings, what is Chen's net pay Todd Thompson's weekly gross earnings for the week ended May 23 were $1,400, and his federal income tax withholding was $247.90. Assuming the social security rate is 6% and Medicare is 1.5% of all earnings, what is Thompson's net pay

Wage and tax statement data and employer FICA tax. Jocame Inc. began business on January 2, 2013. Salaries were paid to employees on the last day of each month, and social security tax, Medicare tax, and federal income tax were withheld in the required amounts. An employee who is hired in the middle of the month receives half the monthly salary for that month. All required payroll tax reports were filed, and the correct amount of payroll taxes was remitted by the company for the calendar year. Early in 2014, before the Wage and Tax Statements (Form W-2) could be prepared for distribution to employees and for filing with the Social Security Administration, the employees' earnings records were inadvertently destroyed. None of the employees resigned or were discharged during the year, and there were no changes in salary rates. The social security tax was withheld at the rate of 6.0% and Medicare tax at the rate of 1.5% on salary. Data on dates of employment, salary rates, and employees' income taxes withheld, which are summarized as follows, were obtained from personnel records and payroll records: Instructions 1. Calculate the amounts to be reported on each employee's Wage and Tax Statement (Form W-2) for 2013, arranging the data in the following form: 2. Calculate the following employer payroll taxes for the year: (a) social security; (b) Medicare; (c) state unemployment compensation at 5.4% on the first $10,000 of each employee's earnings; (d) federal unemployment compensation at 0.8% on the first $10,000 of each employee's earnings; (e) total.

Does a discounted note payable provide credit without interest Discuss.

Liability transactions The following items were selected from among the transactions completed by Aston Martin Inc. during the current year: Instructions 1. Journalize the transactions. 2. Journalize the adjusting entry for each of the following accrued expenses at the end of the current year: a. Product warranty cost, $26,800. b. Interest on the 19 remaining notes owed to Gallardo Co.

Current liabilities Bon Nebo Co. sold 25,000 annual subscriptions of Bjorn 20XX for $85 during December 2014. These new subscribers will receive monthly issues, beginning in January 2015. In addition, the business had taxable income of $840,000 during the first calendar quarter of 2015. The federal tax rate is 40%. A quarterly tax payment will be made on April 12, 2015. Prepare the Current Liabilities section of the balance sheet for Bon Nebo Co. on March 31, 2015.

Liability transactions The following items were selected from among the transactions completed by Warwick Co. during the current year: Instructions 1. Journalize the transactions. 2. Journalize the adjusting entry for each of the following accrued expenses at the end of the current year: a. Product warranty cost, $32,500. b. Interest on the nine remaining notes owed to Oso Co.

Evaluating alternative notes A borrower has two alternatives for a loan: (1) issue a $240,000, 60-day, 8% note or (2) issue a $240,000, 60-day note that the creditor discounts at 8%. a. Calculate the amount of the interest expense for each option. b. Determine the proceeds received by the borrower in each situation. c. Which alternative is more favorable to the borrower Explain.

Employees are subject to taxes withheld from their paychecks. a. List the federal taxes withheld from most employee paychecks. b. Give the title of the accounts credited by amounts withheld.

Payroll forms Group Project Payroll accounting involves the use of government-supplied forms to account for payroll taxes. Three common forms are the W-2, Form 940, and Form 941. Form a team with three of your classmates and retrieve copies of each of these forms. They may be obtained from a local IRS office, a library, or downloaded from the Internet at http://www.irs.gov (go to forms and publications). Briefly describe the purpose of each of the three forms.

Wage and tax statement data on employer FICA tax. Ehrlich Co. began business on January 2, 2013. Salaries were paid to employees on the last day of each month, and social security tax, Medicare tax, and federal income tax were withheld in the required amounts. An employee who is hired in the middle of the month receives half the monthly salary for that month. All required payroll tax reports were filed, and the correct amount of payroll taxes was remitted by the company for the calendar year. Early in 2014, before the Wage and Tax Statements (Form W-2) could be prepared for distribution to employees and for filing with the Social Security Administration, the employees' earnings records were inadvertently destroyed. None of the employees resigned or were discharged during the year, and there were no changes in salary rates. The social security tax was withheld at the rate of 6.0% and Medicare tax at the rate of 1.5%. Data on dates of employment, salary rates, and employees' income taxes withheld, which are summarized as follows, were obtained from personnel records and payroll records: Instructions 1. Calculate the amounts to be reported on each employee's Wage and Tax Statement (Form W-2) for 2013, arranging the data in the following form: 2. Calculate the following employer payroll taxes for the year: (a) social security; (b) Medicare; (c) state unemployment compensation at 5.4% on the first $10,000 of each employee's earnings; (d) federal unemployment compensation at 0.8% on the first $10,000 of each employee's earnings; (e) total.

Ethics and professional conduct in business Marvin Turner was discussing summer employment with Tina Song, president of Motown Construction Service: Tina: I'm glad that you're thinking about joining us for the summer. We could certainly use the help. Marvin: Sounds good. I enjoy outdoor work, and I could use the money to help with next year's school expenses. Tina: I've got a plan that can help you out on that. As you know, I'll pay you $14 per hour, but in addition, I'd like to pay you with cash. Since you're only working for the summer, it really doesn't make sense for me to go to the trouble of formally putting you on our payroll system. In fact, I do some jobs for my clients on a strictly cash basis, so it would be easy to just pay you that way. Marvin: Well, that's a bit unusual, but I guess money is money. Tina: Yeah, not only that, it's tax-free! Marvin: What do you mean Tina: Didn't you know Any money that you receive in cash is not reported to the IRS on a W-2 form; therefore, the IRS doesn't know about the income-hence, it's the same as tax-free earnings. a. Why does Tina Song want to conduct business transactions using cash (not check or credit card) b. How should Marvin respond to Tina's suggestion

Proceeds from notes payable On October 12, Belleville Co. borrowed cash from Texas Bank by issuing a 30-day note with a face amount of $70,000. a. Determine the proceeds of the note, assuming the note carries an interest rate of 6%. b. Determine the proceeds of the note, assuming the note is discounted at 6%. On January 26, Nyree Co. borrowed cash from Conrad Bank by issuing a 45-day note with a face amount of $150,000. a. Determine the proceeds of the note, assuming the note carries an interest rate of 10%. b. Determine the proceeds of the note, assuming the note is discounted at 10%.

Entries for payroll and payroll taxes. The following information about the payroll for the week ended December 30 was obtained from the records of Saine Co: Instructions 1. Assuming that the payroll for the last week of the year is to be paid on December 31, journalize the following entries: a. December 30, to record the payroll. b. December 30, to record the employer's payroll taxes on the payroll to be paid on December 31. Of the total payroll for the last week of the year, $30,000 is subject to unemployment compensation taxes. 2. Assuming that the payroll for the last week of the year is to be paid on January 4 of the following fiscal year, journalize the following entries: a. December 30, to record the payroll. b. January 4, to record the employer's payroll taxes on the payroll to be paid on January 4. Since it is a new fiscal year, all $1,185,000 in salaries is subject to unemployment compensation taxes.

Selected transactions completed by Kornett Company during its first fiscal year ended December 31, 2014, were as follows: Instructions 1. Journalize the selected transactions. 2. Based on the following data, prepare a bank reconciliation for December of the current year: a. Balance according to the bank statement at December 31, $283,000. b. Balance according to the ledger at December 31, $245,410. c. Checks outstanding at December 31, $68,540. d. Deposit in transit, not recorded by bank, $29,500. e. Bank debit memo for service charges, $750. f. A check for $12,700 in payment of an invoice was incorrectly recorded in the accounts as $12,000. 3. Based on the bank reconciliation prepared in (2), journalize the entry or entries to be made by Kornett Company. 4. Based on the following selected data, journalize the adjusting entries as of December 31 of the current year: a. Estimated uncollectible accounts at December 31, $16,000, based on an aging of accounts receivable. The balance of Allowance for Doubtful Accounts at December 31 was $2,000 (debit). b. The physical inventory on December 31 indicated an inventory shrinkage of $3,300. c. Prepaid insurance expired during the year, $22,820. d. Office supplies used during the year, $3,920. e. Depreciation is computed as follows: f. A patent costing $48,000 when acquired on January 2 has a remaining legal life of 10 years and is expected to have value for eight years. g. The cost of mineral rights was $546,000. Of the estimated deposit of 910,000 tons of ore, 50,000 tons were mined and sold during the year. h. Vacation pay expense for December, $10,500. i. A product warranty was granted beginning December 1 and covering a one-year period. The estimated cost is 4% of sales, which totaled $1,900,000 in December. j. Interest was accrued on the note receivable received on October 17. 5. Based on the following information and the post-closing trial balance shown below, prepare a balance sheet in report form at December 31 of the current year.

Entries for discounting notes payable Swain Enterprises issues a 60-day note for $800,000 to Hill Industries for merchandise inventory. Hill Industries discounts the note at 6%. a. Journalize Swain Enterprises' entries to record: 1. the issuance of the note. 2. the payment of the note at maturity. b. Journalize Hill Industries' entries to record: 1. the receipt of the note. 2. the receipt of the payment of the note at maturity.

Federal income tax withholding Bella Chen's weekly gross earnings for the present week were $2,600. Chen has two exemptions. Using the wage bracket withholding table in Exhibit 3 with a $70 standard withholding allowance for each exemption, what is Chen's federal income tax withholding Todd Thompson's weekly gross earnings for the present week were $1,400. Thompson has one exemption. Using the wage bracket withholding table in Exhibit 3 with a $70 standard withholding allowance for each exemption, what is Thompson's federal income tax withholding

Recognizing pension expense The annual examination of Felton Company's financial statements by its external public accounting firm (auditors) is nearing completion. The following conversation took place between the controller of Felton Company (Francie) and the audit manager from the public accounting firm (Sumana). Sumana: You know, Francie, we are about to wrap up our audit for this fiscal year. Yet, there is one item still to be resolved. Francie: What's that Sumana: Well, as you know, at the beginning of the year, Felton began a defined benefit pension plan. This plan promises your employees an annual payment when they retire, using a formula based on their salaries at retirement and their years of service. I believe that a pension expense should be recognized this year, equal to the amount of pension earned by your employees. Francie: Wait a minute. I think you have it all wrong. The company doesn't have a pension expense until it actually pays the pension in cash when the employee retires. After all, some of these employees may not reach retirement, and if they don't, the company doesn't owe them anything. Sumana: You're not really seeing this the right way. The pension is earned by your employees during their working years. You actually make the payment much later-when they retire. It's like one long accrual-much like incurring wages in one period and paying them in the next. Thus, I think that you should recognize the expense in the period the pension is earned by the employees. Francie: Let me see if I've got this straight. I should recognize an expense this period for something that may or may not be paid to the employees in 20 or 30 years, when they finally retire. How am I supposed to determine what the expense is for the current year The amount of the final retirement depends on many uncertainties: salary levels, employee longevity, mortality rates, and interest earned on investments to fund the pension. I don't think that an amount can be determined, even if I accepted your arguments. Evaluate Sumana's position. Is she right or is Francie correct

Entries for payroll and payroll taxes. The following information about the payroll for the week ended December 30 was obtained from the records of Qualitech Co: Instructions 1. Assuming that the payroll for the last week of the year is to be paid on December 31, journalize the following entries: a. December 30, to record the payroll. b. December 30, to record the employer's payroll taxes on the payroll to be paid on December 31. Of the total payroll for the last week of the year, $35,000 is subject to unemployment compensation taxes. 2. Assuming that the payroll for the last week of the year is to be paid on January 5 of the following fiscal year, journalize the following entries: a. December 30, to record the payroll. b. January 5, to record the employer's payroll taxes on the payroll to be paid on January 5. Since it is a new fiscal year, all $675,000 in salaries is subject to unemployment compensation taxes.