Problem 13 - Accounting

Question

Dowling Company had gross wages of \(\$ 356,000\) during the week ended December 6 . The amount of wages subject to social security tax was \(\$ 285,000\), while the amount of wages subject to federal and state unemployment taxes was \(\$ 18,000\). Tax rates are as follows: \(\begin{array}{ll}\text { Social security } & 6.0 \% \\ \text { Medicare } & 1.5 \% \\ \text { State unemployment } & 5.4 \% \\ \text { Federal unemployment } & 0.8 \%\end{array}\) The total amount withheld from employee wages for federal taxes was \(\$ 66,900\). a. Journalize the entry to record the payroll for the week of December 6 . b. Journalize the entry to record the payroll tax expense incurred for the week of December 6 .

Step-by-Step Solution

Answer

To record payroll, debit Wages Expense and credit relevant taxes and cash accounts. For payroll tax expense, debit Payroll Tax Expense and credit each tax payable account.

Step 1: Calculate Employee Deductions

First, calculate the amounts deducted from employee wages. Since Social Security tax is 6.0% on \(285,000, the deduction is \( 0.06 \times 285,000 = 17,100 \). Medicare tax is 1.5% on the full wage amount of \)356,000, giving \( 0.015 \times 356,000 = 5,340 \). No further calculations are necessary for federal taxes since they are given as $66,900.

Step 2: Calculate Total Deductions

Add up all the deductions to get the total deductions. \( 17,100 \) (Social Security) + \( 5,340 \) (Medicare) + \( 66,900 \) (Federal Taxes) = \( 89,340 \).

Step 3: Determine Net Pay

Subtract the total deductions from the gross wages to find the net pay. \( 356,000 - 89,340 = 266,660 \).

Step 4: Journalize Payroll Entry

Record the payroll as follows:- Debit "Wages Expense" \( 356,000 \)- Credit "Social Security Taxes Payable" \( 17,100 \)- Credit "Medicare Taxes Payable" \( 5,340 \)- Credit "Federal Income Taxes Payable" \( 66,900 \)- Credit "Cash" (or "Salaries Payable") \( 266,660 \).

Step 5: Calculate Employer Payroll Taxes

The employer's taxes include the same amounts as employee Social Security and Medicare contributions. Additionally, calculate unemployment taxes. Federal unemployment at 0.8% on \(18,000 is \( 0.008 \times 18,000 = 144 \), and state unemployment at 5.4% on \)18,000 is \( 0.054 \times 18,000 = 972 \).

Step 6: Journalize Payroll Tax Expense Entry

Record the employer payroll tax expenses as follows:- Debit "Payroll Tax Expense" for total of the employer's taxes \( 17,100 + 5,340 + 144 + 972 = 23,556 \)- Credit "Social Security Taxes Payable" \( 17,100 \)- Credit "Medicare Taxes Payable" \( 5,340 \)- Credit "Federal Unemployment Taxes Payable" \( 144 \)- Credit "State Unemployment Taxes Payable" \( 972 \).

Key Concepts

Journal Entries

When it comes to payroll accounting, journal entries are the records that keep track of the company's financial transactions related to payroll. These entries help in summarizing the effects of payroll transactions in the accounting records.

Every time payroll is processed, a journal entry must be made to account for the wages earned by employees and the deductions taken out of those wages. This keeps financial records accurate and prepares the company for various reporting requirements. For Dowling Company, the journal entry to record payroll involved debiting "Wages Expense" of $356,000, which shows the total amount owed to employees.

• "Debiting" Wages Expense means acknowledging an increase in this expense, which affects the company’s profits.
• Credits were made to several payables accounts: Social Security, Medicare, and Federal Income Taxes. These credits denote liabilities, meaning the company owes these amounts to various tax agencies.
• Finally, "Cash" (or "Salaries Payable") was credited with $266,660, representing the net amount actually given to employees.

Keeping these records right is essential for accurate financial statements.

Payroll Tax Calculations

Payroll tax calculations are crucial to determining both the employer's and the employee's tax responsibilities. Understanding this component of payroll accounting ensures compliance with tax laws and accurate financial reporting.

At Dowling Company, payroll tax calculations involved determining Social Security, Medicare, state, and federal unemployment taxes.

• Social Security Tax: This was calculated as 6% of $285,000, resulting in a liability of $17,100, both for employees and for the employer.
• Medicare Tax: Applied to the entire wage of $356,000 at a rate of 1.5%, which equaled $5,340.
• Federal and State Unemployment Taxes: Only $18,000 of wages was taxable. The federal rate of 0.8% contributed to a $144 liability, and the state rate of 5.4% resulted in a $972 liability.

By accurately performing these calculations, a company ensures its employees are properly taxed and the company itself doesn't face unexpected liabilities.

Employee Deductions

Employee deductions represent amounts subtracted from the gross wages based on various mandatory and voluntary deductions. These deductions are critical, as they determine the net pay an employee takes home. For Dowling Company, the main deductions included Social Security, Medicare, and Federal Income Taxes.

The process of calculating employee deductions started with calculating Social Security and Medicare taxes.

• Social Security was computed as 6% of applicable wages, yielding $17,100.
• Medicare was 1.5% of the entire $356,000, resulting in a $5,340 deduction.
• The employee's federal taxes, already determined, was $66,900.

Summing these deductions gave a total of $89,340, which, when subtracted from the gross wages, led to the net pay. Understanding how each deduction affects the total wages ensures transparency and fairness in payroll processing.

Net Pay Calculation

Net pay calculation involves determining the actual amount an employee receives after all deductions are made from their gross wages. Since employees often focus primarily on their take-home pay, clear net pay calculations are highly important.

For Dowling Company, the calculation of net pay followed a straightforward formula:

• Start with gross wages: $356,000.
• Subtract total deductions, such as taxes and other withholdings, which amounted to $89,340.
• This resulted in a net pay of $266,660.

Companies ensure their employees understand their net pay by providing pay stubs or statements detailing each deduction. This not only builds trust but also helps employees manage their own finances better.