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Chapter 11: Q2TI (page 591)

Theodore Simpson works for Blair Company all year and earns a monthly salary of \(4,000. There is no overtime pay.

Based on Theodore’s W-4, Blair withholds income taxes at 15% of his gross pay. As of July 31, Theodore had \)28,000 ofcumulative earnings.

Journalize the accrual of salary expense for Blair Company related to the employment of Theodore Simpson for the month ofAugust.

Short Answer

Expert verified

Salary payable =$3,094

Medicare tax payable =$58

Employee income tax payable =$600

OASDI =$248

Step by step solution

01

Definition of Income Tax

The expense to be paid as a specific percentage of the income earned by the business entity over the threshold limits prescribed by the government is known as income tax.

02

Computation of OASDI and Medicare

Date

Particular

Debit ($)

Credit ($)

Salary Expense

4,000

FICA – Medicare tax payable

58

Employee income tax payable

600

Salaries and wages payable

3,094

FICA - OASDI

248

(To salary accrued and withholdings recorded)

Working note:

Calculation of income tax

IncomeTax=GrossPay×Incometaxrate=$4,000×0.15=$600

OASDI for the first $118,500 is charged at a rate of 6.2%.

OASDI=GrossPay×OASDIrate=$4,000×0.062=$248

Calculation of Medicare tax

Medicaretax=Currentmonth'ssalary×Taxrate=$4,000×0.0145=$58

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Most popular questions from this chapter

Liam Wallace is general manager of Moonwalk Salons. During 2018, Wallace worked for the company all year at a \(13,400 monthly salary. He also earned a year-end bonus equal to 5% of his annual salary.

Wallace’s federal income tax withheld during 2018 was \)2,010 per month, plus \(1,608 on his bonus check. State income tax withheld came to \)110 per month, plus \(80 on the bonus. FICA tax was withheld on the annual earnings. Wallace authorized the following payroll deductions: Charity Fund contribution of 2% of total earnings and life insurance of \)15 per month.

Moonwalk incurred payroll tax expense on Wallace for FICA tax. The company also paid state unemployment tax and federal unemployment tax.

Requirements

1. Compute Wallace’s gross pay, payroll deductions, and net pay for the full year 2018. Round all amounts to the nearest dollar.

2. Compute Moonwalk’s total 2018 payroll tax expense for Wallace.

3. Make the journal entry to record Moonwalk’s expense for Wallace’s total earnings for the year, his payroll deductions, and net pay. Debit Salaries Expense and Bonus Expense as appropriate. Credit liability accounts for the payroll deductions and Cash for net pay. An explanation is not required.

4. Make the journal entry to record the accrual of Moonwalk’s payroll tax expense for Wallace’s total earnings.

5. Make the journal entry for the payment of the payroll withholdings and taxes.

How might a business use a payroll register?

The income statement for California Communications follows. Assume California Communications signed a 3-month, 9%, \(3,000 note on June 1, 2018, and that this was the only note payable for the company.

California Communications

Income Statement

Year Ended July 31, 2018

Net Sales Revenue

\) 21,800

Cost of Goods Sold

14,000

Gross Profit

7,800

Operating Expenses:

Selling Expenses

\( 720

Administrative Expenses

1,650

Total Operating Expenses

2,370

Operating Income

5,430

Other Income and (Expenses):

Interest Expense

?

Total Other Income and (Expenses)

?

Net Income before Income Tax Expense

?

Income Tax Expense

1,080

Net Income

\) ?

Requirements

1. Fill in the missing information for California’s year ended July 31, 2018, income statement. Round to the nearest dollar.

2. Compute the times-interest-earned ratio for the company. Round to two decimals.

List the required employee payroll withholding deductions, and provide the tax rate for each.

Freeman Motors, a motorcycle manufacturer, had the following contingencies.

a. Freeman estimates that it is reasonably possible but not likely that it will lose a current lawsuit. Freeman’s attorneys estimate the potential loss will be \(4,500,000.

b. Freeman received notice that it was being sued. Freeman considers this lawsuit to be frivolous.

c. Freeman is currently the defendant in a lawsuit. Freeman believes it is likely that it will lose the lawsuit and estimates the damages to be paid will be \)75,000.

Determine the appropriate accounting treatment for each of the situations Freeman is facing.
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