Example 5-10 Spencili Company is an employer located in a state with an unemployment compensation law containing merit-rating provisions for employers who meet certain requirements. Below is a summary of the total wages for the years 2019 to 2022, inclusive. For the purpose of the illustration, assume that the total wages and taxable wages are the same amount. Quarter 2019 2020 2021 2022 1st $11,000 $10,000 $8,500 $10,500 2nd 10,000 9,000 9,500 11,000 3rd 10,000 9,500 10,000 11,000 4th 10,500 9,750 9,500 9,500 Total $41,500 $38,250 $37,500 $42,000 The State Unemployment Compensation Commission maintains a separate account for each employer. The account is credited with contributions paid into the unemployment compensation fund by the employer and is charged with unemployment benefits paid from the fund. For 2023, the state law set up the following contribution rate schedule for employers: Reserve Ratio Rate Negative reserve balance 6.7% 0% to less than 8% 5.9% 8% to less than 10% 5.0% 10% to less than 12% 4.1% 12% to less than 15% 3.2% 15% and over 2.5% The state law under discussion defines: average annual payroll—average of last three years, annual payroll—wages paid from October 1 to September 30 each year. The following computations show the state contributions made by Spencili Company for the calendar years 2019 to 2022, inclusive, the federal tax imposed under FUTA, and the method of arriving at the contribution rate for the calendar year 2023: 2019 Taxable wages $41,500 Rate (SUTA) ×2.7% State contributions $1,120.50 Federal tax: 0.6% of $41,500 249.00 Total unemployment tax $1,369.50 2020 Taxable wages $38,250 Rate (SUTA) ×2.7% State contributions $1,032.75 Federal tax: 0.6% of $38,250 229.50 Total unemployment tax $1,262.25 2021 Taxable wages $37,500 Rate (SUTA) ×3.4% State contributions $1,275.00 Federal tax: 0.6% of $37,500 225.00 Total unemployment tax $1,500.00 2022 Taxable wages $42,000 Rate (SUTA) ×3.7% State contributions $1,554.00 Federal tax: 0.6% of $42,000 252.00 Total unemployment tax $1,806.00 Remember that the average annual payroll is the average of the last three annual payrolls, with each annual payroll period running from October 1 to September 30. Assume that Spencili Company paid state contributions of $960 in 2017 and $1,010 in 2018 and that $1,850 was charged to the employer’s account for unemployment compensation benefits during 2021 and 2022. The contribution rate for 2023 is computed as follows: Computation of rate for 2022: Annual payroll period ending 9/30/20 $39,000 Annual payroll period ending 9/30/21 37,750 Annual payroll period ending 9/30/22 42,000 Total of last 3 annual payroll periods $118,750 Average annual payroll: $118,750 ÷ 3 = $39,583 Contributions for 2017 $960.00 Contributions for 2018 1,010.00 Contributions for 2019 1,120.50 Contributions for 2020 1,032.75 Contributions for 2021 1,275.00 Contributions for 2022 (first nine months) 1,202.50 Total contributions $6,600.75 Less amount of benefits paid 1,850.00 Balance in reserve account 9/30/22 $4,750.75 $4,750.75 ÷ Average annual payroll, $39,583 = 12% Since the reserve is 12 percent of the average annual payroll, the tax rate for 2023 is 3.2 percent (the ratio is between 12% and 15%). Note: For this textbook edition the rate 0.6% was used for the net FUTA tax rate for employers. Example 5-10 The following unemployment tax rate schedule is in effect for the calendar year 2023 in State A, which uses the reserve-ratio formula in determining employer contributions: Reserve Ratio Contribution Rate 0.0% or more, but less than 1.0% 6.7% 1.0% or more, but less than 1.2% 6.4% 1.2% or more, but less than 1.4% 6.1% 1.4% or more, but less than 1.6% 5.8% 1.6% or more, but less than 1.8% 5.5% 1.8% or more, but less than 2.0% 5.2% 2.0% or more, but less than 2.2% 4.9% 2.2% or more, but less than 2.4% 4.6% 2.4% or more, but less than 2.6% 4.3% 2.6% or more, but less than 2.8% 4.0% 2.8% or more, but less than 3.0% 3.7% 3.0% or more, but less than 3.2% 3.4% 3.2% or more 3.1% Hyram Company, which is located in State A, had an average annual payroll of $850,000 for the three 12-month periods ending on June 30, 2022 (the computation date for the tax year 2023). As of June 30, 2022, the total contributions that had been made to Hyram Company's reserve account, in excess of the benefits charged, amounted to $17,440. Compute the following: a. Hyram Company's reserve ratio for 2022. Round your answer to two decimal places. b. 2023 contribution rate for the company. Round your answer to one decimal place. c. Smallest contribution that the company can make in order to reduce its tax rate if State A permits voluntary contributions.

Example 5-10 Spencili Company is an employer located in a state with an unemployment compensation law containing merit-rating provisions for employers who meet certain requirements. Below is a summary of the total wages for the years 2019 to 2022, inclusive. For the purpose of the illustration, assume that the total wages and taxable wages are the same amount. Quarter 2019 2020 2021 2022 1st $11,000 $10,000 $8,500 $10,500 2nd 10,000 9,000 9,500 11,000 3rd 10,000 9,500 10,000 11,000 4th 10,500 9,750 9,500 9,500 Total $41,500 $38,250 $37,500 $42,000 The State Unemployment Compensation Commission maintains a separate account for each employer. The account is credited with contributions paid into the unemployment compensation fund by the employer and is charged with unemployment benefits paid from the fund. For 2023, the state law set up the following contribution rate schedule for employers: Reserve Ratio Rate Negative reserve balance 6.7% 0% to less than 8% 5.9% 8% to less than 10% 5.0% 10% to less than 12% 4.1% 12% to less than 15% 3.2% 15% and over 2.5% The state law under discussion defines: average annual payroll—average of last three years, annual payroll—wages paid from October 1 to September 30 each year. The following computations show the state contributions made by Spencili Company for the calendar years 2019 to 2022, inclusive, the federal tax imposed under FUTA, and the method of arriving at the contribution rate for the calendar year 2023: 2019 Taxable wages $41,500 Rate (SUTA) ×2.7% State contributions $1,120.50 Federal tax: 0.6% of $41,500 249.00 Total unemployment tax $1,369.50 2020 Taxable wages $38,250 Rate (SUTA) ×2.7% State contributions $1,032.75 Federal tax: 0.6% of $38,250 229.50 Total unemployment tax $1,262.25 2021 Taxable wages $37,500 Rate (SUTA) ×3.4% State contributions $1,275.00 Federal tax: 0.6% of $37,500 225.00 Total unemployment tax $1,500.00 2022 Taxable wages $42,000 Rate (SUTA) ×3.7% State contributions $1,554.00 Federal tax: 0.6% of $42,000 252.00 Total unemployment tax $1,806.00 Remember that the average annual payroll is the average of the last three annual payrolls, with each annual payroll period running from October 1 to September 30. Assume that Spencili Company paid state contributions of $960 in 2017 and $1,010 in 2018 and that $1,850 was charged to the employer’s account for unemployment compensation benefits during 2021 and 2022. The contribution rate for 2023 is computed as follows: Computation of rate for 2022: Annual payroll period ending 9/30/20 $39,000 Annual payroll period ending 9/30/21 37,750 Annual payroll period ending 9/30/22 42,000 Total of last 3 annual payroll periods $118,750 Average annual payroll: $118,750 ÷ 3 = $39,583 Contributions for 2017 $960.00 Contributions for 2018 1,010.00 Contributions for 2019 1,120.50 Contributions for 2020 1,032.75 Contributions for 2021 1,275.00 Contributions for 2022 (first nine months) 1,202.50 Total contributions $6,600.75 Less amount of benefits paid 1,850.00 Balance in reserve account 9/30/22 $4,750.75 $4,750.75 ÷ Average annual payroll, $39,583 = 12% Since the reserve is 12 percent of the average annual payroll, the tax rate for 2023 is 3.2 percent (the ratio is between 12% and 15%). Note: For this textbook edition the rate 0.6% was used for the net FUTA tax rate for employers. Example 5-10 The following unemployment tax rate schedule is in effect for the calendar year 2023 in State A, which uses the reserve-ratio formula in determining employer contributions: Reserve Ratio Contribution Rate 0.0% or more, but less than 1.0% 6.7% 1.0% or more, but less than 1.2% 6.4% 1.2% or more, but less than 1.4% 6.1% 1.4% or more, but less than 1.6% 5.8% 1.6% or more, but less than 1.8% 5.5% 1.8% or more, but less than 2.0% 5.2% 2.0% or more, but less than 2.2% 4.9% 2.2% or more, but less than 2.4% 4.6% 2.4% or more, but less than 2.6% 4.3% 2.6% or more, but less than 2.8% 4.0% 2.8% or more, but less than 3.0% 3.7% 3.0% or more, but less than 3.2% 3.4% 3.2% or more 3.1% Hyram Company, which is located in State A, had an average annual payroll of $850,000 for the three 12-month periods ending on June 30, 2022 (the computation date for the tax year 2023). As of June 30, 2022, the total contributions that had been made to Hyram Company's reserve account, in excess of the benefits charged, amounted to $17,440. Compute the following: a. Hyram Company's reserve ratio for 2022. Round your answer to two decimal places. b. 2023 contribution rate for the company. Round your answer to one decimal place. c. Smallest contribution that the company can make in order to reduce its tax rate if State A permits voluntary contributions.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Question

Example 5-10

Spencili Company is an employer located in a state with an unemployment compensation law containing merit-rating provisions for employers who meet certain requirements. Below is a summary of the total wages for the years 2019 to 2022, inclusive. For the purpose of the illustration, assume that the total wages and taxable wages are the same amount.

Quarter	2019	2020	2021	2022
1st	$11,000	$10,000	$8,500	$10,500
2nd	10,000	9,000	9,500	11,000
3rd	10,000	9,500	10,000	11,000
4th	10,500	9,750	9,500	9,500
Total	$41,500	$38,250	$37,500	$42,000

The State Unemployment Compensation Commission maintains a separate account for each employer. The account is credited with contributions paid into the unemployment compensation fund by the employer and is charged with unemployment benefits paid from the fund.

For 2023, the state law set up the following contribution rate schedule for employers:

Reserve Ratio	Rate
Negative reserve balance	6.7%
0% to less than 8%	5.9%
8% to less than 10%	5.0%
10% to less than 12%	4.1%
12% to less than 15%	3.2%
15% and over	2.5%

The state law under discussion defines: average annual payroll—average of last three years, annual payroll—wages paid from October 1 to September 30 each year.

The following computations show the state contributions made by Spencili Company for the calendar years 2019 to 2022, inclusive, the federal tax imposed under FUTA, and the method of arriving at the contribution rate for the calendar year 2023:

2019
	Taxable wages	$41,500
	Rate (SUTA)	×2.7%
	State contributions		$1,120.50
	Federal tax: 0.6% of $41,500		249.00
	Total unemployment tax		$1,369.50

2020
	Taxable wages	$38,250
	Rate (SUTA)	×2.7%
	State contributions		$1,032.75
	Federal tax: 0.6% of $38,250		229.50
	Total unemployment tax		$1,262.25

2021
	Taxable wages	$37,500
	Rate (SUTA)	×3.4%
	State contributions		$1,275.00
	Federal tax: 0.6% of $37,500		225.00
	Total unemployment tax		$1,500.00

2022
	Taxable wages	$42,000
	Rate (SUTA)	×3.7%
	State contributions		$1,554.00
	Federal tax: 0.6% of $42,000		252.00
	Total unemployment tax		$1,806.00

Remember that the average annual payroll is the average of the last three annual payrolls, with each annual payroll period running from October 1 to September 30.

Assume that Spencili Company paid state contributions of $960 in 2017 and $1,010 in 2018 and that $1,850 was charged to the employer’s account for unemployment compensation benefits during 2021 and 2022. The contribution rate for 2023 is computed as follows:

Computation of rate for 2022:
	Annual payroll period ending 9/30/20	$39,000
	Annual payroll period ending 9/30/21	37,750
	Annual payroll period ending 9/30/22	42,000
	Total of last 3 annual payroll periods	$118,750

Average annual payroll:
$118,750 ÷ 3 = $39,583

Contributions for 2017		$960.00
Contributions for 2018		1,010.00
Contributions for 2019		1,120.50
Contributions for 2020		1,032.75
Contributions for 2021		1,275.00
Contributions for 2022 (first nine months)		1,202.50
Total contributions		$6,600.75
Less amount of benefits paid		1,850.00
Balance in reserve account 9/30/22		$4,750.75

$4,750.75 ÷ Average annual payroll, $39,583 = 12%

Since the reserve is 12 percent of the average annual payroll, the tax rate for 2023 is 3.2 percent (the ratio is between 12% and 15%).

Note: For this textbook edition the rate 0.6% was used for the net FUTA tax rate for employers.

Example 5-10

The following unemployment tax rate schedule is in effect for the calendar year 2023 in State A, which uses the reserve-ratio formula in determining employer contributions:

Reserve Ratio	Contribution Rate
0.0% or more, but less than 1.0%	6.7%
1.0% or more, but less than 1.2%	6.4%
1.2% or more, but less than 1.4%	6.1%
1.4% or more, but less than 1.6%	5.8%
1.6% or more, but less than 1.8%	5.5%
1.8% or more, but less than 2.0%	5.2%
2.0% or more, but less than 2.2%	4.9%
2.2% or more, but less than 2.4%	4.6%
2.4% or more, but less than 2.6%	4.3%
2.6% or more, but less than 2.8%	4.0%
2.8% or more, but less than 3.0%	3.7%
3.0% or more, but less than 3.2%	3.4%
3.2% or more	3.1%

Hyram Company, which is located in State A, had an average annual payroll of $850,000 for the three 12-month periods ending on June 30, 2022 (the computation date for the tax year 2023). As of June 30, 2022, the total contributions that had been made to Hyram Company's reserve account, in excess of the benefits charged, amounted to $17,440. Compute the following:

a. Hyram Company's reserve ratio for 2022. Round your answer to two decimal places.

b. 2023 contribution rate for the company. Round your answer to one decimal place.

c. Smallest contribution that the company can make in order to reduce its tax rate if State A permits voluntary contributions.

d. Tax savings realized by the company, taking into consideration the voluntary contribution made in (c) if the taxable payroll in 2023 is $980,000.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.