Chapter 13, Problem 13.13P

Payroll-related liabilities

• Appendix

Alamar Petroleum Company offers its employees the option of contributing retirement funds up to 5% of their wages or salaries, with the contribution being matched by Alamar. The company also pays 80% of medical and life insurance premiums. Deductions relating to these plans and other payroll information for the first biweekly payroll period of February are listed as follows:

Wages and salaries	$2,000,000
Employee contribution to voluntary retirement plan	84,000
Medical insurance premiums	42,000
Life insurance premiums	9,000
Federal income taxes to be withheld	400,000
Local income taxes to be withheld	53,000
Payroll taxes:
Federal unemployment tax rate	0.60%
State unemployment tax rate (after FUTA deduction)	5.40%
Social Security tax rate	6.20%
Medicare tax rate	1.45%

Required:

Prepare the appropriate journal entries to record salaries and wages expense and payroll tax expense for the biweekly pay period. Assume that no employee’s cumulative wages exceed the relevant wage bases for Social Security, and that all employees’ cumulative wages do exceed the relevant unemployment wage bases.

To determine

Payroll Expenses

Payroll expenses are the amount of expenses that an employer pays to the employees for the work that they perform. These expenses include certain expenses such as employee benefits, state and federal payroll taxes.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit all increase in liabilities, revenues, and stockholders’ equities, and all decrease in assets and expenses.

To prepare: Journal entries to record salaries and wages expense and payroll tax expense for biweekly pay period.

Explanation of Solution

Journal entry to record salaries and wages expense.

Date		Accounts and Explanation			Post Ref	Debit ($)	Credit ($)
		Salaries and Wages Expense				2,000,000
			Withholding Taxes Payable – Federal Income Taxes				400,000
			Withholding Taxes Payable – State income taxes				53,000
			Social Security Taxes Payable				124,000
			Medicare Taxes Payable				29,000
			Medicare Insurance Payable				8,400
			Life Insurance Payable				1,800
			Retirement Plan Payable				84,000
			Salaries and Wages Payable				1,299,800
				(To record salaries and wages expense)

Salaries and wages expense is an expense and it decreases the value of equity. Therefore, it is debited. Withholding taxes payable – Federal income taxes, withholding taxes payable – state income taxes, Social security taxes payable, Medicare taxes payable, Medicare insurance payable, Life insurance payable, Retirement plan payable, and Salaries and wages payable are liabilities and they are increased. Therefore, they are credited.

Journal entry to record payroll tax expense for biweekly pay period.

Date		Accounts and Explanation			Post Ref	Debit ($)	Credit ($)
		Payroll Tax Expense				273,000
			Social Security Taxes Payable				124,000
			Medicare Taxes Payable				29,000
			State Unemployment Taxes Payable				12,000
			Federal Unemployment Taxes Payable				108,000
				(To record payroll taxes expense)

Payroll tax expense is an expense and it decreases the value of equity. Therefore, it is debited. Social Security taxes payable, Medicare taxes payable, State unemployment taxes payable, Federal unemployment taxes payable.

Working notes:

Calculate the amount of social security taxes payable.

$\begin{array}{c}\text{Social security taxes payable = \$2,000,000 }\times \text{ 6}\text{.2\%}\\ \text{= \$124,000}\end{array}$

Calculate the amount of Medicare taxes payable.

$\begin{array}{c}\text{Medicare taxes payable = \$2,000,000 }\times \text{ 1}\text{.45\%}\\ \text{= \$29,000}\end{array}$

Calculate the amount of state unemployment taxes payable.

$\begin{array}{c}\text{State unemployment taxes payable = \$2,000,000 }\times \text{ 5}\text{.4\%}\\ \text{= \$108,000}\end{array}$

Calculate the amount of federal unemployment taxes payable.

$\begin{array}{c}\text{Federal unemployment taxes payable = \$2,000,000}\times \text{0}\text{.6\%}\\ \text{= \$12,000}\end{array}$

Date		Accounts and Explanation			Post Ref	Debit ($)	Credit ($)
		Salaries and wages expense (fringe benefits)				124,800
			Medical insurance payable				33,600
			Life insurance payable				7,200
			Retirement plan payable				84,000
				(To record payroll taxes expense)

Journal entry to record medical insurance payable, life insurance payable and retirement plan payable.

Medicare Insurance Payable, Life Insurance Payable, and Retirement plan payable are liabilities and they are increased. Therefore, they are credited. Salary and wage expense decreases the equity account. Hence, Salaries and wages expense are debited.

Working notes:

Calculate the amount of medical insurance payable paid by employer.

$\begin{array}{c}\text{Medical insurance payable = \$42,000}\times 80\text{\%}\\ \text{= \$33,600}\end{array}$

Calculate the amount of Life insurance payable paid by employer.

$\begin{array}{c}\text{Life insurance payable = \$9,000}\times 80\text{\%}\\ \text{= \$7,200}\end{array}$