Chapter 3, Problem 7P

Payment and distribution of payroll

The general ledger of Berskshire Mountain Manufacturing Inc. showed the following credit balances on January 15:

Direct labor earnings amounted to $10,500 from January 16 to 31. Indirect labor was $5,700, and sales and administrative salaries for the same period amounted to $3,800. All wages are subject to FICA, FUTA, state unemployment taxes, and 10% income tax withholding.

Required:

1. 1. Prepare the journal entries for the following:
   1. a. Recording the payroll.
   2. b. Paying the payroll.
   3. c. Recording the employer’s payroll tax liability.
   4. d. Distributing the payroll costs for January 16–31.
2. 2. Prepare the journal entry to record the payment of the amounts due for the month to the government for FICA and income tax withholdings.
3. 3. Calculate the amount of total earnings for the period from January 1 to 15.
4. 4. Should the same person be responsible for computing the payroll, paying the payroll and making the entry to distribute the payroll? Why or why not?

To determine

Pass journal entry to record the foregoing transactions.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Payroll Account: A payroll account is a separate checking account for the company to record the payment of the payroll checks to their employees. A payroll account includes the money a company pays to their employees like salaries, wages, bonuses and withheld taxes.

Pass journal entry to record the foregoing transactions.

Date	Description	Post Ref	Debit ($)	Credit($)
a.	Payroll		20,000
	FICA tax payable			1,600
	Employees income tax payable			2,000
	Wages payable			16,400
	(To record the payroll)
b.	Wages payable		16,400
	Cash			16,400
	(To record payment of payroll )
c.	Factory overhead		2,106
	Payroll tax expense		494
	FICA tax payable			1,600
	Federal unemployment tax payable			200
	State unemployment tax payable			800
	(To record employer’s payroll tax liability)
d.	Work in process		10,500
	Factory overhead		5,700
	Sales and administrative salaries		3,800
	Payroll			20,000
	(To record the distribution of payroll cost)

Table (1)

Working Notes (1): Calculate the factory overhead.

$\begin{array}{c}\text{Factory Overhead}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Direct labor earnings}\\ +\text{Indirect labor}\end{array}\right)\\ \times \left(8\%+1\%+4\%\right)\end{array}\right)\\ =\left(\begin{array}{l}\left(\text{\$10,500}+\$5,700\right)\\ \times \left(\text{0}\text{.08}+0.01+0.04\right)\end{array}\right)\\ =\$2,106\end{array}$

(2) Calculate the payroll tax expense.

$\begin{array}{c}\text{Payroll Tax Expense}=\left(\begin{array}{l}\text{Administrative salaries}\\ \times \left(8\%+1\%+4\%\right)\end{array}\right)\\ =\left(\left(\$3,800\right)\times 0.08+0.01+0.04\right)\\ =\$494\end{array}$

To determine

Pass journal entry to record the payment of the due amount.

Explanation of Solution

Pass journal entry to record the payment of the due amount.

Date	Description	Post Ref	Debit ($)	Credit($)
	FICA tax payable		6,300
	Employees income tax payable		3,937.50
	Cash			10,237.50
	(To record the payment of due amount)

Table (2)

Working Notes (1): Calculate the FICA tax payable.

$\begin{array}{c}\text{FICA Tax Payable}=\left(\begin{array}{l}\left(\begin{array}{l}\text{FICA tax payable}\\ \text{ of credit balance}\end{array}\right)\\ +\left(\begin{array}{l}\text{FICA tax payable}\\ \text{ of recording payroll}\end{array}\right)\\ +\left(\begin{array}{l}\text{FICA tax payable}\\ \text{ of paying payroll}\end{array}\right)\end{array}\right)\\ =\$3,100+\$1,600+\$1,600\\ =\$6,300\end{array}$

(2) Calculate the employee income tax payable.

$\begin{array}{c}\left(\begin{array}{l}\text{Employee Income }\\ \text{Tax Payable}\end{array}\right)=\left(\begin{array}{l}\left(\begin{array}{l}\text{Employees income }\\ \text{tax payable}\\ \left(\text{credit balance}\right)\end{array}\right)\\ +\left(\begin{array}{l}\text{Employees income }\\ \text{tax payable}\\ \left(\text{Payroll recording}\right)\end{array}\right)\end{array}\right)\\ =\$1,937.50+\$2,000\\ =\$3,937.50\end{array}$

To determine

Compute the amount of total earnings from January 1^st to 15^th.

Explanation of Solution

Compute the amount of total earnings.

$\begin{array}{c}\text{Total Earnings}=\frac{\left(\begin{array}{l}\text{Federal unemployment }\\ \text{tax payable}\end{array}\right)}{1\%}\\ =\frac{\$193.75}{0.01}\\ =\$19,375\end{array}$

Therefore, the amount of total earnings is $19.375.

To determine

Explain whether the same person is responsible for computing and paying the payroll or not.

Explanation of Solution

Payroll is computed by the payroll department. For paying the payroll, treasury department is responsible and to record the entry for distribution of payroll. To prevent theft and to provide checks for each department’s work a better internal control is required.