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Chapter 13: 14Q (page 691)

Faith Battle operates a health food store, and she has been the only employee. Her business is growing, and she is considering hiring some additional staff to help her in the store. Explain to her the various payroll deductions that she will have to account for, including their potential impact on her financial statements, if she hires additional staff.

Short Answer

Expert verified

Employers normally hold on to each employee’s remuneration value to make up for income taxes, the employee’s share of Federal Insurance Contributions Act (FICA) taxes, and various items like health insurance. These amounts are listed as payroll expenses and will decrease Battle’s income.

Step by step solution

01

Meaning of payroll deductions

Payroll deductions is the value deducted from the salary of the employee as tax and for different purposes.

02

Various payroll deductions that Faith Battle will have to account for, including their potential impact on her financial statements

The employer must keep aside amounts to make up for the employer’s share of Federal Insurance Contributions Act (FICA) taxes and state and as well as federal non employment taxes. These amounts are reported as payroll expenses and will lessen Battle’s income. The amount kept aside for both employee and the employee’s part will be listed as current liabilities till they are paid to the right third party.

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Most popular questions from this chapter

Under what conditions should a short-term obligation be excluded from current liabilities?

EXCEL (Equity Securities Entries and Disclosures) Parnevik Company has the following securities in its

investment portfolio on December 31, 2017 (all securities were purchased in 2017): (1) 3,000 shares of Anderson Co. common

stock which cost \(58,500, (2) 10,000 shares of Munter Ltd. common stock which cost \)580,000, and (3) 6,000 shares of King Company

preferred stock which cost \(255,000. The Fair Value Adjustment account shows a credit of \)10,100 at the end of 2017.

In 2018, Parnevik completed the following securities transactions.

1. On January 15, sold 3,000 shares of Anderson’s common stock at \(22 per share less fees of \)2,150.

2. On April 17, purchased 1,000 shares of Castle’s common stock at \(33.50 per share plus fees of \)1,980.

On December 31, 2018, the market prices per share of these securities were Munter \(61, King \)40, and Castle $29. In addition, the

accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik

will not actively trade these securities because the top management intends to hold them for more than one year.

Instructions

(a) Prepare the entry for the security sale on January 15, 2018.

(b) Prepare the journal entry to record the security purchase on April 17, 2018.

(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2018.

(d) How should the unrealized gains or losses be reported on Parnevik’s income statement and balance sheet?

(Equity Method) On January 1, 2017, Pennington Corporation purchased 30% of the common shares of Edwards

Company for \(180,000. During the year, Edwards earned a net income of \)80,000 and paid dividends of $20,000.

Instructions

Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company

in 2017.

Question: In accounting for short-term debt expected to be refinanced to long-term debt:

  1. GAAP uses the authorization date to determine classification of short-term debt to be refinanced.
  2. IFRS uses the authorization date to determine classification of short-term debt to be refinanced.
  3. IFRS uses the financial statement date to determine classification of short-term debt to be refinanced.
  4. GAAP uses the date of issue, but only for secured debt, to determine classification of short-term debt to be refinanced.

Distinguish between the accounting treatment for marketable versus nonmarketable equity securities.
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