Palto Industries pays its employees monthly.Payroll information follows: 1.The monthly gross salary for all its employees is $85,000.Palto Industries withholds 20% of the employees' gross salary for federal taxes,6.5% for state taxes,and 7.5% for Social Security (FICA)taxes.
2)Palto Industries incurs other employee-related costs.Specifically,the company must (1)match the Social Security taxes withheld from the employees,(2)contribute 3% of the employees' gross pay to the employees' pension fund,and (3)pay 5% of the employees' gross pay for health insurance premiums on behalf of the employees.
What is the journal entry to be made by Palto Industries for the gross pay and withholdings for their monthly payroll? Assume salaries will be paid two days after the journal entry.
A) $\begin{array}{lccc}
\text { Compensation Expense } & 85,000 & \
\quad \text { Salaries and Wages Payable } && 85,000 & \
\end{array}$

B) $\begin{array}{lccc}
\text { Compensation Expense } &85,000 & \
\quad \text { Federal Income Tax Witholding Payable } && 17,000 \
\quad \text { State Income Tax Withholding Payable } & & 5,525\
\quad \text { Social Security Withholding Payable } & & 6,375\
\quad \text { Salaries and Wages Payable } & & 56,100 \
\end{array}$
C)$\begin{array}{lccc}
\text { Compensation Expense } & 85,000 \
\text { Tax Expense } & 28,900\
\text { Federal Tax Withholding Payable } & & 17,000 \
\text { State and FICA Tax Withholding Payable } & &11,900\
\text { Salaries and Wages Payable } & &85,000 \
\end{array}$
D)$\begin{array}{lccc}
\text { Compensation Expense } &85,000 & \
\text { Federal Tax Expense } &17,000 & \
\text { State Tax Expense } & 5,525 & \
\text { Social Security Tax Expense } & 6,375 & \
\quad \text { Salaries and Wages Payable } & & 113,900 \
\
\end{array}$
E) $\begin{array}{lccc}
\text {Compensation Expense } & 113,900 & \
\quad \text { Federal Tax Withholding Payable } & & 17,000 \
\quad \text { State Tax Withholding Payable } && 5,525 \
\quad \text { Social Security Tax Withholding Payable } & & 6,375 \
\quad \text { Salaries and Wages Payable } && 85,000
\end{array}$

Question

Palto Industries pays its employees monthly.Payroll information follows: 1.The monthly gross salary for all its employees is $85,000.Palto Industries withholds 20% of the employees' gross salary for federal taxes,6.5% for state taxes,and 7.5% for Social Security (FICA)taxes.
2)Palto Industries incurs other employee-related costs.Specifically,the company must (1)match the Social Security taxes withheld from the employees,(2)contribute 3% of the employees' gross pay to the employees' pension fund,and (3)pay 5% of the employees' gross pay for health insurance premiums on behalf of the employees.
What is the journal entry to be made by Palto Industries for the gross pay and withholdings for their monthly payroll? Assume salaries will be paid two days after the journal entry.
A) $\begin{array}{lccc}
\text { Compensation Expense } & 85,000 & \
\quad \text { Salaries and Wages Payable } && 85,000 & \
\end{array}$

B) $\begin{array}{lccc}
\text { Compensation Expense } &85,000 & \
\quad \text { Federal Income Tax Witholding Payable } &&  17,000 \
\quad \text { State Income Tax Withholding Payable } & &  5,525\
\quad \text { Social Security Withholding Payable } & & 6,375\
\quad \text { Salaries and Wages Payable } & & 56,100 \
\end{array}$
C)$\begin{array}{lccc}
\text {  Compensation Expense } & 85,000  \
\text { Tax Expense } & 28,900\
\text { Federal Tax Withholding Payable } & & 17,000 \
 \text { State and FICA Tax Withholding Payable } & &11,900\
\text { Salaries and Wages Payable } & &85,000  \
\end{array}$
D)$\begin{array}{lccc}
\text {  Compensation Expense } &85,000  & \
\text { Federal Tax Expense } &17,000 & \
\text { State Tax Expense } & 5,525 & \
\text { Social Security Tax Expense } & 6,375 & \
\quad \text { Salaries and Wages Payable } & & 113,900 \
\
\end{array}$
 E) $\begin{array}{lccc}
\text {Compensation Expense } & 113,900 & \
\quad \text { Federal Tax Withholding Payable } & & 17,000 \
\quad \text { State Tax Withholding Payable } && 5,525 \
\quad \text { Social Security Tax Withholding Payable } & & 6,375 \
\quad \text { Salaries and Wages Payable } && 85,000
\end{array}$

Quizplus · Accepted Answer

Option B is the best choice as it follows the correct accounting principle of recognizing both the gross pay and withholding amounts separately in the accounting records. The salaries and wages payable account is credited for the net pay, which is the gross pay minus the total withholdings. The federal income tax withholding payable, state income tax withholding payable, and social security withholding payable accounts are all credited for the amounts withheld from employees. This option also does not include the employer-related expenses of matching social security, contributing to the pension fund, and paying health insurance premiums because they are not yet incurred and will be recognized in the future when the payment is actually made.