Chapter 11, Problem 8E

1.

To determine

Prepare the journal entry to record the accrued payroll including employee deductions for July.

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.

Prepare the journal entry to record the accrued payroll:

Date	Account Title and explanation	Debit ($)	Credit ($)
July 31	Sales Salaries Expense	200,000
	Office Salaries Expense	168,000
	Employee Federal Income Tax Payable		90,000
	Employee State Income Tax Payable		20,000
	FICA Tax Payable – Social security tax		22,320
	FICA Tax Payable – Medicare tax		5,220
	Employee Medical Insurance Payable (1)		2,800
	Employee Life Insurance Payable (2)		1,600
	Employee Union Dues Payable		1,000
	Salaries payable		217,060
	(To record the payment of payroll)

Table (1)

Working note:

Calculate the amount of employee medical insurance payable:

$\begin{array}{c}\text{Employee medical insurance payable}=\text{Medical insurance premium}\times \text{Tax rate}\\ =\text{\$7,000}\times \text{40\%}\\ =\$2,800\end{array}$ (1)

Calculate the amount of employee life insurance payable:

$\begin{array}{c}\text{Employee life insurance payable}=\text{Life Insurance premium amount}\times \text{Tax rate}\\ =\$4,000\times 40\%\\ =\$1,600\end{array}$ (2)

• Sales 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 $200,000.
• Office 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 $168,000.
• Employee Federal income tax payable is a liability and there is an increase in the value of liability. Hence, credit the Employee Federal income tax payable by $90,000.
• Employee state income tax payable is a liability and there is an increase in the value of liability. Hence, credit the Employee income tax payable by $20,000.
• 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 $22,320.
• 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 $5,220.
• Employee Medical insurance payable is a liability and it is increased. Therefore, credit employee medical insurance payable with $2,800.
• Employee Life insurance payable is a liability and it is increased. Therefore, credit employee life insurance payable with $1,600.
• Employee Union dues payable is a liability and it is increased. Therefore, credit employee union dues payable with $1,000.
• Salaries payable is a liability and it is increased. Therefore, credit salaries payable with $217,060.

2.

To determine

Prepare the journal entry to record the cash payment of the net payroll for July.

Explanation of Solution

Prepare the journal entry to record the cash payment of the net payroll:

Date	Account Title and explanation	Debit ($)	Credit ($)
July 31	Salaries payable	217,060
	Cash		217,060
	(To record the cash payment of the net payroll)

Table (2)

• Salaries payable is a liability and it is decreased. Therefore, debit salaries payable with $217,060.
• Cash is an asset and it is decreased. Therefore, credit cash with $217,060.

3.

To determine

Prepare the journal entry to record the accrued employer payroll taxes.

Explanation of Solution

Prepare the journal entry to record the accrued employer payroll tax:

Date	Account Title and explanation	Debit ($)	Credit ($)
July 31	Payroll tax expense	30,450
	Federal Unemployment tax payable (3)		300
	State Unemployment tax payable (4)		2,700
	FICA Tax Payable – Social security tax		22,320
	FICA Tax Payable – Medicare tax		5,220
	(To record the employer payroll taxes)

Table (3)

Working note:

Calculate the amount of Federal Unemployment tax payable:

$\begin{array}{c}\text{Federal Unemployment tax payable}=\text{Unemployement taxamount}\times \text{Tax rate}\\ =\$50,000\times 0.6\%\\ =\$300\end{array}$ (3)

Calculate the amount of State Unemployment tax payable:

$\begin{array}{c}\text{State Unemployment tax payable}=\text{Unemployement tax amount}\times \text{Tax rate}\\ =\$50,000\times 5.4\%\\ =\$2,700\end{array}$ (4)

Prepare the journal entry to record the employee benefits expense:

Date	Account Title and explanation	Debit ($)	Credit ($)
July 31	Employee benefits expense	6,600
	Employee Medical Insurance Payable		4,200
	Employee Life Insurance Payable		2,400
	(To record the cost benefits of the employee)

Table (4)

Working note:

Calculate the amount of Employee Medical Insurance Payable:

$\begin{array}{c}\text{Employee Medical Insurance Payable}=\text{Medical Insurance premium amount}\times \text{Tax rate}\\ =\$7,000\times 60\%\\ =\$4,200\end{array}$ (5)

Calculate the amount of Employee Life Insurance Payable:

$\begin{array}{c}\text{Employee Life Insurance Payable}=\text{Insurance premium amount}\times \text{Tax rate}\\ =\$4,000\times 60\%\\ =\$2,400\end{array}$ (6)

• Employee benefits expense is an expense account and it is increased. Therefore, debit employee benefits expense with $6,600.
• Employee Medical Insurance Payable is a liability and it is increased. Therefore, credit employee medical insurance payable with $4,200.
• Employee Life Insurance Payable is a liability account and it is increased. Therefore, credit Employee Life Insurance Payable with $2,400.

4.

To determine

Prepare the journal entry to record the cash payment of all liabilities related to payroll

Explanation of Solution

Prepare the journal entry to record the cash payment of all liabilities related to payroll

Date	Account Title and explanation	Debit ($)	Credit ($)
	Employee Federal Income Tax Payable	90,000
	Employee State Income Tax Payable	20,000
	FICA Tax Payable – Social security tax	44,640
	FICA Tax Payable – Medicare tax	10,440
	Employee Medical Insurance Payable	7,000
	Employee Life Insurance Payable	4,000
	Employee Union Dues Payable	1,000
	State Unemployment Taxes payable	2,700
	Federal Unemployment Taxes payable	300
	Cash		180,080
	(To record the payment of all liabilities related to payroll)

Table (5)

• Employee Federal income tax payable is a liability and there is a decrease in the value of liability. Hence, debit the Employee Federal income tax payable by $90,000.
• Employee state income tax payable is a liability and there is a decrease in the value of liability. Hence, debit the Employee income tax payable by $20,000.
• FICA tax – social and security tax payable is a liability and there is a decrease in the value of liability. Hence, debit the FICA tax – social and security tax payable by $44,640.
• FICA tax – medical tax payable is a liability and there is a decrease in the value of liability. Hence, debit the FICA tax – medical tax payable by $10,440.
• Employee Medical insurance payable is a liability and it is decreased. Therefore, debit employee medical insurance payable with $7,000.
• Employee Life insurance payable is a liability and it is decreased. Therefore, debit employee life insurance payable with $4,000.
• Employee Union dues payable is a liability and it is decreased. Therefore, debit employee union dues payable with $1,000.
• State Unemployment taxes payable is a liability and it is decreased. Therefore, debit state unemployment taxes payable with $2,700.
• Federal unemployment taxes payable is a liability and it is decreased. Therefore, debit federal unemployment taxes payable with $300.
• Cash is an asset and it is decreased. Therefore, credit cash account with $180,080.