Chapter 10, Problem 4AP

To determine

Prepare journal entry to record the given transactions.

Explanation of Solution

Payroll tax:

Payroll tax refers to the tax that are equally contributed by employees and 
employer based on the salary and wages of an employee. Payroll tax includes taxes 
like federal tax, local income tax, state tax, social security tax and federal and 
state unemployment tax.

(a)

Prepare journal entry to record accrual of the monthly payroll.

Date	Account titles and explanation	Debit ($)	Credit ($)
May 31	Administrative Salaries expense	42,000
	Sales salaries expense	51,000
	Custodial salaries expense	7,000
	Federal income tax withholdings      payable		17,800
	Payroll payable		82,200
	(To record the accrual payroll for the month of May)

(Table 1)

• Administrative salaries expense is a component of stockholder’s equity and there is an increase the value of expense. Hence, debit administrative salaries expense account by $42,000.
• Sales salaries expense is a component of stockholder’s equity and there is an increase the value of expense. Hence, debit sales salaries expense account by $51,000.
• Custodial salaries expense is a component of stockholder’s equity and there is an increase the value of expense. Hence, debit custodial salaries expense account by $7,000.
• Federal income tax withholdings payable is liability and there is an increase in the value of liability. Hence, credit the federal income tax withholdings payable by $17,800.
• Payroll payable is a liability and there is an increase in the value of liability. Hence, credit payroll payable by $82,200.

(b)

Prepare journal entry to record payment of the net payroll.

Date	Account titles and explanation	Debit ($)	Credit ($)
May 31	Payroll payable	82,200
	Cash		82,200
	(To record payment of payroll for the month of May)

(Table 2)

• Payroll payable is a liability and there is a decrease in the value of liability. Hence, debit payroll payable by $82,200.
• Cash is an asset and there is a decrease in the value of an asset. Hence, credit the cash by $82,200.

(c)

Prepare journal entry to record accrual of the employer’s payroll taxes.

Date	Account titles and explanation	Debit ($)	Credit ($)
May 31	Payroll tax expense	6,604
	Medicare tax payable(1)		1,450
	Social security tax payable (2)		4,650
	Federal unemployment taxes      Payable(3)		84
	State unemployment taxes      Payable(4)		420
	(To record employer’s payroll taxes)

(Table 3)

• Payroll Tax Expense is a component of stockholder’s equity and there is an increase in the value of liability. Hence, debit the payroll tax expense account by $6,604.
• Medicare Tax Payable is a liability and there is an increase in the value of the liability. Hence, credit Medicare tax payable account by $1,450.
• Social Security Tax Payable is a liability and there is an increase in the value of the liability. Hence, credit social security tax payable account by $4,650.
• Federal Unemployment Taxes Payable is liability and there is an increase in the value of the liability. Hence, credit federal unemployment taxes payable account by $84.
• State Unemployment Taxes Payable is liability and there is an increase in the value of the liability. Hence, credit state unemployment taxes payable account by $420.

Working Notes:

Calculate the Medicare tax payable.

$\begin{array}{c}\text{Medicare tax payable}\}=\left\{\begin{array}{l}\text{1}\text{.45\%}\times \text{Salaries subject }\\ \text{to Medicare tax}\end{array}\right\}\\ =0.0145\times \$100,000\\ =\$1,450\end{array}$ (1)

Calculate the social security tax payable.

$\begin{array}{c}\text{Social security tax payable}\}=\left\{\begin{array}{l}\text{6}\text{.2\%}\times \text{Salaries subject }\\ \text{to social security tax}\end{array}\right\}\\ =0.062\times \$75,000\\ =\$4,650\end{array}$ (2)

Calculate the federal unemployment tax payable.

$\begin{array}{c}\begin{array}{l}\text{Federal unemployment}\\ \text{ tax}\text{payable}\end{array}\}=\left\{\begin{array}{l}\text{0}\text{.6\% × Salaries subject }\\ \text{to unemployment tax}\end{array}\right\}\\ =0.006\times \$14,000\\ =\$84\end{array}$ (3)

Calculate the state unemployment tax payable.

$\begin{array}{c}\begin{array}{l}\text{State unemployment }\\ \text{tax payable}\end{array}\}=\left\{\begin{array}{l}\text{2\%}\times \text{Salaries subject }\\ \text{to unemployment tax}\end{array}\right\}\\ =0.02\times \$21,000\\ =\$420\end{array}$ (4)

(d)

Prepare journal entry to record payment of these payroll- related liabilities.

Date	Account titles and explanation	Debit ($)	Credit ($)
May 31	Federal income tax withholdings payable	17,800
	Medicare tax payable (1)	1,450
	Social security tax payable (2)	4,650
	Federal unemployment taxes payable (3)	84
	State unemployment taxes payable (4)	420
	Cash		24,404
	(To record the payment of payroll-related liabilities)

(Table 4)

• Federal income tax withholdings payable is liability and there is a decrease in the value of liability. Hence, debit the federal income tax withholdings payable by $17,800.
• Medicare Tax Payable is a liability and there is an increase in the value of the liability. Hence, credit Medicare tax payable account by $1,450.
• Social Security Tax Payable is a liability and there is an increase in the value of the liability. Hence, credit social security tax payable account by $4,650.
• Federal Unemployment Taxes Payable is liability and there is an increase in the value of the liability. Hence, credit federal unemployment taxes payable account by $84.
• State Unemployment Taxes Payable is liability and there is an increase in the value of the liability. Hence, credit state unemployment taxes payable account by $420.
• Cash is an asset and there is a decrease in the value of an asset. Hence, credit the cash by $24,404.