Chapter 9, Problem 24AP

a.

To determine

Compute the gross pay for Person K for the first week in January.

Explanation of Solution

Payroll: Payroll refers to the total amount that is required to be paid by the company to its employees during a week, month or other period. It is the financial record of the wages and bonus, net pay, salary and deductions of a company’s employees.

Gross pay: Gross pay is a payment made to an employee for completion of work allocated by the company. Gross pay is computed by using normal hours worked by the employee with hourly wages rate.

Calculate the gross earnings made to the Person K.

Computation of Gross Earnings
Employee	Hours Worked		x	Wage Rate per Hour ($)	=	Gross Pay ($)
Person K	Regular	40	x	28	=	1,120
	Overtime	12	x	42	=	504
Total		52				1,624

Table (1)

The gross pay for Person K is $1,624.

b.

To determine

Compute the net pay for Person K and Person P for the first week in January.

Explanation of Solution

Net pay: Net pay is the amount of gross pay after deduction of taxes, and any other deductions.

Calculate the net pay made to the Person K:

Calculate the net pay of Person K
Particulars	Amount $	Amount $
Gross Earnings		1,624.00
Deductions:
Federal Income Tax $\left(\$1,624\times 15\%\right)$	243.60
FICA Tax – SS $\left(\$1,624\times 6\%\right)$	97.44
FICA Tax – Medicare $\left(\$1,624\times 1.5\%\right)$	24.36
Total Deductions		(365.40)
Net Pay		1258.60

Table (2)

Therefore, the net pay made to the Person K for the week is $1258.60.

Calculate the net pay made to the Person P:

Calculate the net pay of Person P
Particulars	Amount $	Amount $
Gross Earnings		1,600.00
Deductions:
Federal Income Tax $\left(\$1,600\times 15\%\right)$	288.00
FICA Tax – SS $\left(\$1,600\times 6\%\right)$	96.00
FICA Tax – Medicare $\left(\$1,600\times 1.5\%\right)$	24.00
Total Deductions		(408.00)
Net Pay		1,192.00

Table (3)

Therefore, the net pay made to the Person P for the week is $1,192.00.

c.

To determine

Prepare journal entry to record payment of the wages.

Explanation of Solution

Journal: Journal is the book of original entry. Journal consists of the day-to-day financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.

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

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

Ø  Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Prepare journal entry to record payment of the wages.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
January	Salaries  Expense (1)	3,224.00
	Federal Income tax payable (2)		531.60
	FICA tax –social and security payable (3)		193.44
	FICA tax –medical payable (4)		48.36
	Cash		2,450.60
	(To record the payment of wages by Company W)

(Table 4)

• Salaries expense is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the salaries expense by $3,224.00.
• Federal income tax payable is a liability and there is an increase in the value of liability. Hence, credit the Employee income tax payable by $531.60.
• FICA tax – social and security tax payable is a liability and there is an increase in the value of liability. Hence, credit the FICA tax – social and security tax payable by $193.44.
• FICA tax – medical tax payable is a liability and there is an increase in the value of liability. Hence, credit the FICA tax – medical tax payable by $48.36.
• Cash is an asset and there is a decrease in the value of an asset. Hence, credit the cash by $2,450.60.

Working Notes:

$\begin{array}{c}\text{Salaries expense = Gross pay to Person K+Gross pay to Person P}\\ \text{=\$1,624}\text{.00+\$1,600}\text{.00}\\ \text{=\$3,224}\text{.00}\end{array}$ (1)

$\begin{array}{c}\text{Federal income tax payable =}\left(\begin{array}{l}\text{Federal income tax}\\ \text{ payable to Person K}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Federal income tax}\\ \text{ payable to Person P}\end{array}\right)\\ =\$243.60+\$288.00\\ =\$531.60\end{array}$ (2)

$\begin{array}{c}\text{FICA tax social and security payable =}\left[\begin{array}{l}\left(\begin{array}{l}\text{ Social and security payable}\\ \text{to Person K}\end{array}\right)\text{+}\\ \left(\begin{array}{l}\text{Social and security payable}\\ \text{to Person P}\end{array}\right)\end{array}\right]\\ =\$97.44+\$96.00\\ =\$193.44\end{array}$ (3)

$\begin{array}{c}\text{FICA tax medical tax payable =}\left[\begin{array}{l}\left(\begin{array}{l}\text{ Medical tax payable}\\ \text{to Person K}\end{array}\right)\text{+}\\ \left(\begin{array}{l}\text{medical tax payable}\\ \text{to Person P}\end{array}\right)\end{array}\right]\\ =\$24.36+\$24.00\\ =\$48.36\end{array}$ (4)

d.

To determine

Prepare the journal entry to record the payroll tax expense and fringe benefit expense for Company WP for the week.

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.

Fringe benefits: Fringe benefits are an additional benefit received by an employee other than his/her wages. Life insurance coverage, health insurance, company car, pension plan benefits, paid absences-vacation pay; paid holidays and sick pay are the examples of fringe benefits.

Prepare the journal entry to record the payroll tax expense and fringe benefit expense for Company WP for the week.

Date	Account Titles and Explanation	Debit ($)	Credit ($)
January	Payroll Tax Expense	435.24
	FICA Tax - SS Payable $(\$3,224\times 6\%)$		193.44
	FICA Tax – Medical insurance Payable $(\$3,224\times 1.5\%)$		48.36
	Federal Unemployment Tax payable $(\$3,224\times 0.6\%)$		19.34
	State Unemployment Tax payable $(\$3,224\times 6\%)$		174.10
	(To record the payroll tax expense by Company WP)
January	Vacation Pay Expense (5)	116.00
	Employee Medical Insurance Expense (6)	130.00
	Employee Pension Expense (7)	150.00
	Vacation Pay Payable		116.00
	Employee Medical Insurance Payable		130.00
	Employee Pension Payable		150.00
	(To record the fringe benefit expense by Company WP)

Table (5)

Recording the payroll tax expense by Company WP:

• Payroll Tax Expense is an expense account. Since expenses and losses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Federal Insurance Contribution Act (FICA) Tax – Social security Payable is a liability account. The amount to be paid has increased, so liability increased, and an increase in liability is increased.
• Federal Insurance Contribution Act (FICA) Tax – Medical insurance Payable is a liability account. The amount to be paid has increased, so liability increased, and an increase in liability is increased.
• Federal Unemployment Tax payable is a liability account. The amount to be paid has increased, so liability increased, and an increase in liability is increased.
• State Unemployment Tax payable is a liability account. The amount to be paid has increased, so liability increased, and an increase in liability is increased.

Recording the fringe benefit expense by Company WP:

• Vacation pay expense is an expense account. Since expenses and losses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Employee medical insurance is an expense account. Since expenses and losses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Employee pension Expense is an expense account. Since expenses and losses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Vacation pay payable is a liability account. The amount to be paid has increased, so liability increased, and an increase in liability is increased.
• Employee medical insurance payable is a liability account. The amount to be paid has increased, so liability increased, and an increase in liability is increased.
• Employee pension insurance payable is a liability account. The amount to be paid has increased, so liability increased, and an increase in liability is increased.

Working Note:

Determine the amount of vacation pay expense.

$\begin{array}{c}\text{Vacation pay expense =}\left(\begin{array}{l}\text{ Vacation pay}\\ \text{of Person K}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Vacation pay}\\ \text{of Person P}\end{array}\right)\\ =\left(\$28\times 2\text{ hours}\right)+\$60.00\\ =\$56.00+\$60.00\\ =\$116.00\end{array}$ (5)

Determine the amount of employee medical insurance expense.

$\begin{array}{c}\begin{array}{l}\text{Employee medical }\\ \text{insurance expense}\end{array}\}\text{ =}\left(\begin{array}{l}\text{ Employee medical }\\ \text{insurance expense}\\ \text{of Person K}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Employee medical }\\ \text{insurance expense}\\ \text{of Person P}\end{array}\right)\\ =\$50.00+\$80.00\\ =\$130.00\end{array}$ (6)

Determine the amount of employee pension expense.

$\begin{array}{c}\text{Employee pension expense =}\left(\begin{array}{l}\text{ Employee pension }\\ \text{expense of Person K}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Employee pension}\\ \text{ expense of Person P}\end{array}\right)\\ =\$50.00+\$100.00\\ =\$150.00\end{array}$ (7)

e.

To determine

Ascertain the total compensation costs expense for the first week of January, Year 1 for Company WP.

Explanation of Solution

Compute the total compensation costs expense for the first week of January, Year 1 for Company WP.

Total Compensation Costs
Particulars	Amount $
Salary Expense	3,224.00
Payroll Tax Expense	435.24
Vacation Pay, Medical Insurance, and Pension expense $\left(\text{\$116}+\$130+\$150\right)$	396.00
Total Compensation Expense	4,055.24

Table (6)

Therefore, the total compensation costs expense for the first week of January, Year 1 is $4,055.24.