Chapter 11
Current Liabilities and Payroll
Study Guide
Do You Know…?
Learning Objective 2: Determine employer liabilities for payroll, including liabilities
arising from employee earnings and deductions from earnings.
□
How to determine the federal income tax withholding for an employee?
(See exercises 10–12)
□
How to determine an employee’s net pay for a period? (See exercises 13–15)
Learning Objective 3: Describe payroll accounting systems that use a payroll
register, employee earnings records, and a general journal.
□
□
The major elements of most payroll systems? (See exercises 16–18)
How to record payment of the period’s payroll? (See exercises 19–21)
Learning Objective 4: Journalize entries for employee fringe benefits, including
vacation pay and pensions.
□
□
The journal entry used to record vacation pay? (See exercises 22–24)
□
How to record Pension Expense under a defined benefit plan? (See exercises 28–30)
How to record Pension Expense under a defined contribution plan?
(See exercises 25–27)
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Chapter 11
1. . Cody Smith’s weekly gross earnings for the week were $3,150. Smith has one
exemption. Using the wage bracket withholding table below with a $100 standard
withholding allowance for each exemption, what is Smith’s federal income tax
withholding?
Table for Percentage Method of Withholding WEEKLY Payroll Period
(a) SINGLE person (including head of household)—
If the amount of wages (after
The amount of
subtracting withholding allowances)
income tax
is:
to withhold is:
Not over $42 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0
Over—
But not over—
of excess over—
$42
—$214 . . $0.00 plus 10%
—$42
$214
—$739 . . $17.20 plus 15%
—$214
$739
—$1,732 . . $95.95 plus 25%
—$739
$1,732
—$3,566 . . $344.20 plus 28%
—$1,732
$3,566
—$7,703 . . $857.72 plus 33%
—$3,566
$7,703
—$7,735 . . $2,222.93 plus 35%
—$7,703
$7,735 . . . . . . . . . . . . . .
$2,234.13 plus 39.6%
—$7,735
Source: Publication 15, Employer’s Tax Guide, Internal Revenue Service, 2013.
2. . Kim Akinson’s weekly gross earnings for the week were $4,750. She has three
exemptions. Using the wage bracket in Exercise 10, what is her federal income tax
withholding? Assume there is a $90 standard withholding allowance for each
exemption.
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Current Liabilities and Payroll
3. . Judy Allen’s biweekly gross earnings for the period were $6,900. Allen has two
exemptions. Using the wage bracket below, calculate her federal income tax
withholding if there is a $80 standard withholding allowance for each
exemption.
Table for Percentage Method of Withholding BIWEEKLY Payroll Period
(a) SINGLE person (including head of household)—
If the amount of wages (after
subtracting withholding allowances)
The amount of income tax
is:
to withhold is:
Not over $85 . . . . . . . . . . . . . . . . . . . . . . . . . .$0
Over—
But not over—
of excess over—
$85
—$428 . . $0.00 plus 10%
—$85
$428
—$1,479 . . $34.30 plus 15%
—$428
$1,479
—$3,463 . . $191.95 plus 25%
—$1,479
$3,463
—$7,133 . . $687.95 plus 28%
—$3,463
$7,133
—$15,406 . . $1,715.55 plus 33%
—$7,133
$15,406
—$15,469 . . $4,445.64 plus 35%
—$15,406
$15,469 . . . . . . . . . . . . . . $4,467.69 plus 39.6%
—$15,469
Source: IRS Publication 15, Employers Tax Guide, Internal Revenue Service, 2013.
4. . Using the information from Exercise 10, calculate Cody Smith’s net pay. Assume
the social security rate is 6% and Medicare is 1.5%.
5. . Using the information from Exercise 11, calculate Kim Akinson’s net pay. Assume
the social security rate is 6% and Medicare is 1.5%.
6. . Using the information from Exercise 12, calculate Judy Allen’s net pay. Assume the
social security rate is 6% and Medicare is 1.5%. She also makes a 1% contribution of
her gross earnings to her retirement fund.
7. . Which element of the payroll system keeps a running total of an employee’s
history, including deductions and wage earnings?
8. . Each month, an employee receives a statement from his employer which gives the
following information: gross wages, FICA tax, social security tax, Medicare tax, and a
calculation of net pay. Which element of the payroll system is the statement an
example of?
9. . A manager of a business would like to review various data for the previous payroll
period, including hours worked, overtime earnings, check numbers, and various
taxes withheld. Which element of the payroll system would the manager use to
review this data?
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5
6
Chapter 11
10. Use the payroll register below to prepare the journal entry to record the salaries
expenses for the week ended January 10, 2015. All miscellaneous deductions
should create a liability payable to the RPC Helpers.
Deductions Withheld
SS Tax
Medicare
Tax
Fed.
Inc.
Tax
Retirement
Savings
Paid
Accounts Debited
Misc.
Total
Net Pay
Check
No.
129
93.60
23.40
60.20
20.00
15.60
212.80
1,347.20
370.50
92.63
217.97
100.00
61.75
842.85
5,332.15
Sales
Salaries
Exp.
Office
Salaries
Exp.
1,560.00
3,650.00
2,525.00
11. . Use the payroll register below to prepare the journal entry to record the salaries
expenses for the week ended February 12, 2015. All miscellaneous deductions
should
create a liability payable to MedHelp Co.
Deductions Withheld
SS Tax
93.60
643.20
Medicare
Tax
Paid
Accounts Debited
Fed. Inc.
Tax
Retirement
Savings
Misc.
Total
Net Pay
Check
No.
60.20
20.00
15.60
212.80
1,347.20
129
230.10 1,052.66
255.00
95.20
2,276.16
13,838.84
23.40
Sales
Salaries
Exp.
Office
Salaries
Exp.
1,560.00
9,790.00
6,325.00
12. . For the pay period ending February 17, 2015, School Tools had gross sales salaries of
$4,790 and office salaries of $6,400. From these wages, the company withheld $290 of
social security taxes, $400 of federal income taxes, and $120 of Medicare taxes. Prepare
the journal entry to record the payroll for the period.
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Current Liabilities and Payroll
7
25. Pet Supply Co. provides a defined contribution pension plan for all employees. The
company promises to contribute 7.5% of gross earnings to the pension. During the
month of March, employees earned gross earnings of $450,750. Prepare the journal
entry to record the expense.
26. Bed Threads Inc. provides a defined contribution pension plan for all employees. The
company agrees to contribute 11% of monthly gross earnings to the pension. For the
month of May, Bed Threads Inc. records a journal entry that credits Salaries Payable for
$14,900. Deductions for the month’s salaries totaled $675. Prepare the journal entry to
record the expense.
27. Tammy’s Sites provides a defined contribution pension plan for all employees. The
company promises to contribute 10% of monthly gross salaries to the pension. During
the month of September, employees received $225,700, after withholdings.
Withholdings and deductions totaled $10,200 for the month. Prepare the journal entry
to record the expense.
28. Pet Supply Co. has a defined benefit pension plan for all employees who have worked
with the company for at least fifteen years. The plan requires an annual contribution of
$67,500. On December 31, 2015, the company contributes the entire cost to the fund.
Prepare the journal entry to record the cost of the fund.
29. Assume that Pet Supply Co. only contributes $39,200 of the required annual
contribution of $67,500 for the defined benefit pension plan. Prepare the journal entry
to record the cost of the fund.
30. Bed Threads Inc.’s defined benefit pension plan requires an annual contribution of
$52,750. On the last day of its 2015 fiscal year, the company contributes $40,750 to the
pension plan. Prepare the journal entry to record the cost of the fund on March 31,
2015.
31. A customer of Surfing Sid’s brings a lawsuit against the company on December 15, 2015.
By the calendar year-end, the company’s lawyer expects there is a reasonably possible
chance the plaintiff will win the suit.
a. What is the correct accounting treatment for 2015?
b. If the lawsuit is still open by the 2016 year-end but now with a remote
possibility, what is the correct accounting treatment for this year?
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8
Chapter 11
32. A competitor of Nana’s Bakeshop brings a suit against the company during the 2015
fiscal year. By year end, the suit is still open. The company’s lawyer expects that the
competitor will probably win but is unable to estimate an amount.
a. What is the correct accounting treatment for 2015?
b. By the 2016 year-end, the suit is still open. However, the lawyer now expects
Nana’s Bakeshop to pay $62,600 to the competitor upon settlement. What is the
correct accounting treatment for this year?
33. A competitor of Surfing Sid’s files a lawsuit for $32,500 against the company in 2015. By
the year-end, the lawsuit has not been settled, but the lawyer believes there is a remote
possibility the competitor will win. What is the correct accounting treatment for the
contingent liability?
34. During March, Equipped has sales of $75,400. All products sold have a 12-month
warranty for repairs. The company estimates the average cost of repairs to be 3% of the
sales price. Prepare the journal entry to record the warranty expense for the month of
March.
35. On July 15, 2015, Equipped repairs a customer’s merchandise that was purchased in
March. To repair the merchandise, the company uses $50 of supplies and incurs labor
charges of $75. Prepare the journal entry to record the repair of the merchandise.
36. Equipped makes total sales of Product A of $320,500 for the month of October and total
sales of Product B of $100,700. Both products have a 24-month warranty. The company
estimates that Product A’s warranty will cost 5% of the sales price, while Product B’s
warranty will cost 7% of the sales price.
a. Prepare the journal entry to record the Product Warranty Expense for the
month.
b. During the month of November, the company uses $1,400 of supplies to repair
Product A and $900 of supplies to repair Product B. Prepare the journal entries
to record the repairs.
37. Mel Corp. has current assets of $3,550 and current liabilities of $4,220. Calculate the
working capital and current ratio, rounding to two decimal places. What do these
numbers indicate?
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Current Liabilities and Payroll
9
38. Use the information in the table to calculate the working capital and current ratio for
2015 and 2016. Round answers to two decimal places. Determine if the change is
favorable or unfavorable.
2016
2015
Current assets
$20,930 $16,789
Current liabilities 18,700
14,320
39. Harbor Time has total assets of $5,970 and current liabilities of $4,930. The company’s
only fixed asset is the machine recorded at $1,200. Calculate the company’s working
capital and current ratio. Does the company have plenty of current assets to pay its
current liabilities?
40. Use the information below taken from Mel Corp.’s balance sheet to calculate the
company’s quick ratio for 2015 and 2016. Does the change indicate a favorable or
unfavorable trend?
Current assets:
Cash
Treasury bills
Accounts receivable
Inventory
Current liabilities:
Accounts payable
Short-term note payable
2016
2015
$775
225
910
400
$790
200
875
325
$690
100
$550
230
41. Equipped has total liabilities of $9,750 on its balance sheet as of the 2015 fiscal yearend. The long-term liabilities include a bond payable for $2,150 and a note payable for
$975. The company’s current assets include: cash, $1,790; cash equivalents, $420; shortterm notes receivable (due in 60 days), $1,700; accounts receivable, $2,825; and
inventory, $1,100. Calculate the quick ratio for the company. Round answers to two
decimal places. Does the company have enough quick assets to pay its current liabilities
in a short period of time?
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10
Chapter 11
42. Use the information below to calculate the quick ratio for the two companies. Round
answers to two decimal places. Which company is in a better position to pay its current
liabilities if necessary in a short period of time?
A Corp. B Corp.
Current assets:
Cash
Commercial paper
Accounts receivable
Inventory
Current liabilities:
Accounts payable
Short-term note payable
$1,060
390
410
685
$325
75
125
350
$ 720
220
$165
90
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