Chapter 10, Problem 3AP

To determine

Prepare journal entries on April 30 for the following transactions.

Explanation of Solution

Payroll taxes:

Payroll taxes are the types of taxes normally calculated as certain percentage of the salary. FICA taxes, Employee federal income taxes payable, Federal unemployment taxes payable and State unemployment taxes payable are the coming under the category of payroll tax.

FICA taxes:

The tem FICA stands for Federal Insurance Contributions Act. It is one of the important payroll taxes. It is the tax imposed on employees as well as employers to contribute Medicare and social security. Federal programs for helping the disabled people, children, deceased workers etc. are coming under the category of social security.

Record the journal entries for payroll and payroll taxes in the books of Corporation B:

a.

Date	Account Title and Explanation	Debit ($)	Credit ($)
April 30	Officers’ salaries (E–)	32,000
	Sales salaries (E–)	67,000
	Federal Income Tax Withholding Payable (L+)		19,000
	FICA Tax Payable (L+)		7,500
	Health Insurance Premium Payable (L+)		1,600
	Union Dues Payable (L+)		1,200
	Payroll Payable (L+)		69,700(1)
	(To record the accrual of payroll)

Table (1)

• Officers’ salaries are component of a stockholders’ equity and it is increased which decreases the equity by $32,000. Therefore, debit the officers’ salaries account by $32,000.
• Sales salaries are component of stockholders’ equity and it is increased which decreases the equity by $67,000. Therefore, debit sales salaries account by $67,000.
• Federal income tax withholding payable is a liability and it is increased by $19,000. Therefore, credit the federal income tax withholding payable account with $19,000.
• FICA tax payable is a liability and it is increased by $7,500. Therefore, credit the FICA tax payable account by $7,500.
• Health insurance premium payable is a liability and it is increased by $1,600. Therefore, credit the Health insurance premium payable account by $1,600.
• Union dues payable is a liability and it is increased by $1,200. Therefore, credit the Union dues payable account by $1,200.
• Payroll payable is a liability and it is increased by $69,700. Therefore, credit the payroll payable account by $69,700.

Working note:

Compute the amount of payroll payable:

Computation of Payroll Payable
Details	Amount ($)
Officers’ salaries	32,000
Sales salaries	67,000
Total Payroll	99,000
Less:
Federal Income Tax Withholding	19,000
FICA Tax	7,500
Health Insurance Premium	1,600
Union Dues	1,200
Net Payroll Payable	69,700

Table (2)

(1)

b.

Date	Account Title and Explanation	Debit ($)	Credit ($)
April 30	Payroll Payable	69,700(1)
	Cash		69,700(1)
	(To record the payment of net payroll)

Table (3)

• Payroll payable is a liability and it is decreased by $69,700. Therefore, debit the payroll payable account by$69,700.
• Cash is an asset and it is decreased by $69,700. Therefore, credit cash account by $69,700.

c.

Date	Account Title and Explanation	Debit ($)	Credit ($)
April 30	Payroll Tax Expenses	11,070(4)
	FICA Tax Payable		7,500
	Federal Unemployment Tax Payable		330(2)
	State Unemployment Tax Payable		3,240(3)
	( To record the employer’s payroll taxes)

Table (4)

• Payroll taxes are component of stockholders’ equity ad it is increased which decreases the equity by $11,070. Therefore, debit the officers’ salaries account by $11,070.
• FICA tax payable is a liability and it is increased by $7,500. Therefore, credit the FICA tax payable account with $7,500.
• Federal unemployment tax payable is a liability and it is increased by $330. Therefore, credit the Federal unemployment tax payable account by $330.
• State unemployment tax payable is a liability and it is increased by $3,240. Therefore, credit the state unemployment tax payable account by $3,240.

Working notes:

Compute the amount of federal unemployment tax payable:

$\begin{array}{c}\text{Federal Unemolyment Tax Payable}\text{= }\left(\begin{array}{l}\text{Salaries subject to federal unemployment tax}\times \\ \text{ Federal unemployemen tax }\end{array}\right)\\ =\$55,000\times 0.6\%\\ =\$330\end{array}$ (2)

Compute the amount of state unemployment tax payable:

$\begin{array}{c}\text{State Unemolyment Tax Payable = }\left(\begin{array}{l}\text{Salaries subject to state unemployment tax}\times \\ \text{Federal}\text{unemployment}\text{tax}\end{array}\right)\\ =\$60,000\times 5.4\%\\ =\$3,240\end{array}$ (3)

Compute the amount of employer’s payroll tax:

FICA Tax Payable= $7,500

Federal Unemployment Tax Payable = $330 (2)

State Unemployment Tax Payable= $3,240(3)

Employer’s Payroll Tax Expense= $11,070

Table (5)

(4)

d.

Date	Account Title and Explanation	Debit ($)	Credit ($)
April 30	Federal Income Tax Withholding Payable	19,000
	FICA Tax Payable	15,000(5)
	Health Insurance Premium Payable	1,600
	Union Dues Payable	1,200
	Federal Unemployment Tax Payable	330(2)
	State Unemployment Tax Payable	3,240(3)
	Cash		40,370(6)
	(To record the payment of payroll related liabilities)

Table (6)

• Federal income tax withholding payable is a liability and it is decreased by $19,000. Therefore, debit the federal income tax withholding payable account by $19,000.
• FICA tax payable is a liability and it is decreased by $15,000. Therefore, debit the FICA tax payable account by $15,000.
• Health insurance premium payable is a liability and it is decreased by $1,600. Therefore, debit the Health insurance premium payable account by $1,600.
• Union dues payable is a liability and it is decreased by $1,200. Therefore, debit the Union dues payable account by $1,200.
• Federal unemployment tax payable is a liability and it is decreased by $330. Therefore, debit the Federal unemployment tax payable account by $330.
• State unemployment tax payable is a liability and it is decreased by $3,240. Therefore, debit the state unemployment tax payable account by $3,240.
• Cash is an asset and it is decreased by $40,370. Therefore, credit cash account by $40,370.

Working note:

Compute the amount of total FICA tax payable:

Employees contribution For FICA = $7,500

Employer’s contribution For FICA = $7,500

Total FICA Tax Payable= $15,000

Table (7)

(5)

Compute the total amount of cash paid by the employer for the payroll related liabilities:

Computation of Total Cash Paid for Payroll Related Liabilities
Particulars	Amount ($)
Federal Income Tax Withholding Payable	19,000
FICA Tax Payable	15,000(5)
Health Insurance Premium Payable	1,600
Union Dues Payable	1,200
Federal Unemployment Tax Payable	330(2)
State Unemployment Tax Payable	3,240(3)
Total Cash Paid for Payroll Related Liabilities	40,370

Table (8)

(6)