Q36CP - Horngren'S Financial And Managerial Accounting

Question

This problem continues the Canyon Canoe Company situation from Chapter 10. Amber and Zack Wilson are continuing their analysis of the company’s position and believe the company will need to borrow \(15,000 in order to expand operations. They consult Rivers Nation Bank and secure a 6%, one-year note on September 1, 2019, with interest due at maturity. Additionally, the company hires an employee, John Vance, on September 1. John will receive a salary of \)3,000 per month. Payroll deductions include federal income tax at 25%, OASDI at 6.2%, Medicare at 1.45%, and monthly health insurance premium of \(250. The company will incur matching FICA taxes, FUTA tax at 0.6%, and SUTA tax at 5.4%. Round calculations to two decimals. Omit explanations on journal entries.

Requirements 

1. Record the issuance of the \)15,000 note payable on September 1, 2019. 
2. Record the employee payroll and employer payroll tax entries on September 30, 2019. 
3. Record all payments related to September’s payroll. Payments are made on October 15, 2019. 
4. Record the entry to accrue interest due on the note at December 31, 2019. 

Record the entry Canyon Canoe Company would make to record the payment to the bank on September 1, 2020.

Step-by-Step Solution

Answer

1. Long term notes payable = $15,000
2. Salaries expense = $3,500
3. Salaries payable = $1,771
4. Interest expense = $300
5. Interest expense= $600

Step 1: Meaning of Job order costing

The job order cost system is applied when particular client orders are utilized to create items. Every output is regarded as a task. Each job's costs are monitored. The provision of services is also seen as employment.

Step 2: (1) Recording journal entry

Date	Particulars	Debit ($)	Credit ($)
Sep. 1, 2019	Cash	15,000
	Long-Term Notes Payable		15,000

Step 3: (2) Recording journal entry

Date	Particulars	Debit ($)	Credit ($)
Sep. 30, 2019	Salaries Expense	3,000
	FICA-OASDI Taxes payable		186
	FICA-Medicare Taxes Payable		44
	Employee Income Taxes     Payable		750
	Employee Health Insurance     Payable		250
	Salaries payable		1,771

Working notes:

Calculate the amount of FICA-OASDI taxes payable as given below

$\begin{array}{rcl}FICA-OASDI taxes payable& =& Salary\times Rate\\ & =& \$3,000\times 6.2\%\\ & =& \$186\end{array}$

Calculate the amount of FICA-Medicare taxes payable as given below:

$\begin{array}{rcl}FICA-Mediacre taxes payable& =& Salary\times Rate\\ & =& \$3,000\times 1.45\%\\ & =& \$44\end{array}$

Calculate the amount of employee income taxes payable as given below

$\begin{array}{rcl}Employee income taxes payable& =& Salary\times Rate\\ & =& \$3,000\times 25\%\\ & =& \$750\end{array}$

Date	Particulars	Debit ($)	Credit ($)
	Payroll Tax Expense	410
	FICA-OASDI Taxes payable		186
	FICA-Medicare Taxes Payable		44
	Federal Unemployment Taxes     Payable		18
	State Unemployment Taxes    Payable		162

Working notes:

Calculate the amount of Federal unemployment taxes payable as given below:

$\begin{array}{rcl}Federal unempoyment taxes payable& =& Salary\times Rate\\ & =& \$3,000\times 0.6\%\\ & =& \$18\end{array}$

Calculate the amount of State unemployment taxes payable as given below:

$\begin{array}{rcl}State Unempoyment taxes payable& =& Salary\times Rate\\ & =& \$3,000\times 5.4\%\\ & =& \$162\end{array}$

Calculate the amount of payroll tax expense as given below:

FICA-OASDI taxes payable	$186
FICA-Medicare taxes payable	$44
Federal Unemployment taxes payable	$18
Unemployment Taxes payable	$162
Payroll tax expense	$410

Step 4: (3) Recording journal entry

Date	Particulars	Debit ($)	Credit ($)
Oct. 13, 2019	Salaries payable	1,771
	Cash		1,771

Preparing journal entries to record the payments for withholding and employee payroll taxes on October 15, 2019.

Date	Particulars	Debit ($)	Credit ($)
Oct. 15, 2019	FICA-OASDI taxes payable	372
	FICA-Medicare taxes payable	87
	Employee Income taxes payable	750
	Employee Health Insurance payable	250
	Federal unemployment taxes payable	18
	State unemployment taxes payable	162
	Cash		1,639

Step 5: (4) Recording journal entry

Date	Particulars	Debit ($)	Credit ($)
Dec. 31, 2019	Interest expense	300
	Interest payable		300

Working notes:

Calculation of Interest expense

$\begin{array}{rcl}Interest expense& =& Borrowed money\times FUTA tax rate\times \frac{Number of month}{Month in year}\\ & =& \$15,000\times 6\%\times \frac{4}{12}\\ & =& \$300\end{array}$

Step 6: (5) Recording journal entry

Date	Particulars	Debit ($)	Credit ($)
Sep. 1, 2020	Note payable	15,000
	Interest payable	300
	Interest expense	600
	Cash		15,900

Working notes:

Calculation of Interest expense

$\begin{array}{rcl}Interest expense& =& Borrowed money\times FUTA tax rate\times \frac{Number of month}{Month in year}\\ & =& \$15,000\times 6\%\times \frac{8}{12}\\ & =& \$600\end{array}$