Ch. 11 Payroll Accounting

What are reversals, and how do they affect accounting?

Accruals generally are estimates, so they must be corrected by reversing entries during the next accounting period when the actual expenses and liabilities are recorded.

When a company purchases a computer on credit for $2,500, which of the following journal entries is made? a. Debit assets and debit liabilities b. Debit assets and credit liabilities c. Credit assets and debit liabilities d. Credit assets and credit owner's equity

b. Debit assets and credit liabilities

Which of the following is not a payroll department internal control? a. Segregation of duties b. Physical payouts c. Computer edits d. Balancing accounts

d. Balancing accounts

What journal entry is made to record the deposit of federal income tax? a. Debit payroll taxes expense, credit federal income tax payable b. Debit cash, credit federal income tax payable c. Credit payroll taxes expense, debit cash d. Debit federal income tax payable, credit cash

d. Debit federal income tax payable, credit cash

What effect do revenues have on accounts? a. Increasing expenses b. Decreasing liabilities c. Decreasing owner's equity d. Increasing owners equity

d. Increasing owners equity

In the modern audit process how does testing occur? a. Checking every transaction b. Checking those transactions indicated by the company c. Checking similar transactions to the last audit d. Sampling

d. Sampling

What account has an entry when the deposit of state income tax withheld is made? a. Employees' income tax payable b. Payroll tax expenses c. State tax expense d. State income tax payable

d. State income tax payable

Anderson Distributions pays its employees on a weekly basis. The totals for the payroll for the week ended January 10, 2014 are as follows: Regular Wages $12,400.00 Overtime pay 1,800.00 Commissions paid 2,200.00 Social security tax withheld 1,016.80 Medicare tax withheld 237.80 Federal income tax withheld 2,460.00 State income tax withheld 246.00 Life insurance premiums withheld 30.00 After-tax health insurance premiums withheld 22.00 Use 0.6% to calculate the employer's FUTA tax and 2.7% to calculate the employer's SUTA tax. Show the journal entries that should be made to record the payroll.

Date Jan 10, 2014 Wages/salary expense $16,400.00 - Debit S.S. tax payable $1,016.80 - Credit Med. tax payable 237.80 - Credit Fed. income tax payable 2,460.00 - Credit State income tax payable 246.00 - Credit Life insurance prem. payable 30.00 - Credit Health insurance prem. payable 22.00 - Credit Wages/salary payable 12,38740 - Credit Date Jan 10, 2014 Payroll tax expense $1,7953.80 - Debit S.S. tax payable $1,016.80 - Credit Med. tax payable 237.80 - Credit FUTA tax payable 98.40 - Credit SUTA tax payable 442.80 - Credit Date Jan 10, 2014 Wages/salary payable $12,387.40 - Debit Cash $12,387.40 - Credit

T or F: The income statement summarizes an organization's revenues, expenses, and earnings for the current year only.

False: The income statement summarizes the organization's revenues, expenses, and earnings for the current and preceding fiscal years.

T or F: The payroll expense journal will debit salaries/wages payable and credit an expense account for the labor cost.

False: The payroll expense journal will debit an expense account for the labor costs (salary expense) and credit a liability account (accrued salaries/wages).

T or F: The property owned by a business is known as its liabilities.

False: The property owned by a business is known as assets.

Payroll expenses may be recorded in one of two ways, functionally or by type of pay. Explain.

If payroll expenses are recorded functionally, entries must be based on the process supported by the expenses (e.g., manufacturing, sales, administration). This means that the payroll would have to be distributed into different labor distribution expense accounts and a separate Labor Distribution Subsidiary Ledger would have to be kept. Recording payroll expenses by type of pay can be done where the payroll register breaks down employees' wages into regular and overtime pay.

What is the chart of accounts?

In most companies, a "chart of accounts" lists each account by name and number, with the number being used to identify accounts in an automated system.

What is the role of an internal auditor?

The job of a company's internal auditor is to review the efficiency of the organization's internal control procedures and to identify weaknesses in the controls.

What is the purpose of the journal?

The journal is used to list all the necessary information about a transaction in one place. The journal is the first accounting record of business transactions and is therefore referred to as a record of original entry.

What is the purpose of an external audit?

The purposes of an external audit include: *To determine the accuracy of financial statements. *To depict the company's financial condition and determine whether the notes to financial statements accurately summarize the company's accounting policies and procedures. *To guard against any possible conflict of interest. *To safeguard the company's assets. *To provide an objective opinion as to the fairness of the financial statements.

T or F: A journal entry containing more than one debit or more than one credit is called a compound entry.

True

T or F: A separate account is kept for each asset, liability, and owner's equity item that business has.

True

T or F: After all amounts on the balance sheet have been recorded in accounts, the total debits must equal the total credits.

True

T or F: After entries have been recorded in the journal, they are posted to the General Ledger.

True

T or F: Amounts charged for the sale of services or goods are referred to as revenue.

True

T or F: Any accounting period of 12 consecutive months can serve as a company's fiscal year.

True

T or F: At the end of each pay period, many businesses enter the hours worked, gross earnings, deductions, and net pay of their employees in the payroll register.

True

T or F: Blank checks should never be stored in the same place as the check signing machine.

True

T or F: Entering an amount on the left side of an account is called debiting the account.

True

T or F: General ledger accounts are arranged in the order they appear on the chart of accounts.

True

T or F: One method of reducing phantom employees is the physical payout.

True

T or F: Payments of expenses decrease assets and decrease owner's equity.

True

T or F: Payroll expenses are accrued when the payroll period ending date and the accounting period ending date do not coincide.

True

T or F: Revenue can be obtained in the form of cash or accounts receivable.

True

T or F: The balance sheet is a financial statement that shows the financial position of a business on a certain date.

True

T or F: The purpose of a journal entry is to provide all the essential information about a business transaction.

True

T or F: Under generally accepted accounting principles, the realization principle governs the recording of revenue.

True

Explain accrual accounting as it applies to payroll.

Under accrual accounting, revenue is recognized and recorded when earned and expenses are recognized and recorded when incurred. Accrual entries are made at the end of an accounting period to estimate payroll expenses and liabilities incurred between the end of the last payroll period and the accounting period end.

What is a balance sheet?

A balance sheet is a statement of the financial position of a business at a specific period in time. It is an itemized list showing the business's assets, liabilities, and owner's equity.

Name the five types of accounts that are generally used by businesses to classify transactions.

Asset, Liability, Expense, Revenue, and Equity.

T or F: The general ledger is classified as a record of original entry.

False: The general ledger is the record of final entry.

The payroll records of Redwood Lumber for the week ended January 10, 2014 are as follows: Gross earnings $50,000.00 Social security tax withheld 3,100.00 Medicare tax withheld 725.00 Federal income tax withheld 7,500.00 State income tax withheld 750.00 City income tax withheld 375.00 Life insurance premium withheld 200.00 Health insurance premium withheld 120.00 Credit union contributions withheld 100.00 Savings Bond deductions 350.00 Record the weekly payroll information for January 10, 2014 in the journal.

Date Jan 10, 2014 Wages/salary expense $50,000.00 - Debit S.S. tax payable $3,100.00 - Credit Med. tax payable 725.00 - Credit Fed. income tax payable 7,500.00 - Credit State income tax payable 750.00 - Credit City income tax payable 375.00 - Credit Life insurance prem. payable 200.00 - Credit Health insurance prem. payable 120.00 - Credit Credit union contributions payable 100.00 - Credit Savings Bond deductions payable 350.00 - Credit Wages/salary payable 36,780.00 - Credit

Solar Products' payroll was $40,000 on January 17, 2014. The applicable tax rates are as follows: Social security , 6.2% (employer's rate); Medicare, 1.45%, FUTA, 0.6%; and SUTA, 2.7%. Show the journal entry that would be made to record the employer's payroll taxes, assuming no employee has reached any applicable wage limit.

Date Jan 17, 2014 Payroll tax expense $4,380.00 - Debit S.S. tax payable $2,480.00 - Credit Med. tax payable 580.00 - Credit FUTA tax payable 240.00 - Credit SUTA tax payable 1,080.00 - Credit

What are earnings per share?

Earnings per share show the company's net income divided by the weighted average number of outstanding shares of stock.

What effect do expenses have on owner's equity?

Expenses have the effect of decreasing owner's equity.

T or F: Accounts payable are assets.

False: Accounts payable are liabilities.

T or F: In a business, the assets must always be equal to the liabilities minus the owner's equity.

False: Assets must equal liabilities plus owner's equity.

T or F: Paychecks that cannot be delivered should be returned to the payroll department.

False: Payroll checks that cannot be delivered should be returned to a department other than payroll and be locked up until the employee returns and can receive the check.

T or F: Regardless of the accounting periods or fiscal year that a company uses, payroll taxes do not have to be reported on a calendar year basis.

False: Payroll taxes are always reported on a calendar year basis.

T or F: The revenue earned during the accounting period appears on the balance sheet.

False: Revenue appears on the income statement.

What reconciliation steps should be taken before filing quarterly and year-end returns?

In preparing to file quarterly Forms 941 and annual Form 940, employers should verify the following: *That FUTA, social security, and medicare tax deposits for the quarter equal the current tax rates for each, multiplied by the taxable wages for each, taking into account any wages subject to additional medicare tax. *The total Form 941 tax deposits for the quarter equal the liability section for Form 941 (Line 11 of Form 941 equals Line 14 of Form 941 or the "Total liability for the quarter" line of Schedule B, whichever applies), although monthly depositors may pay their lawful $100 of 2% deposit shortfall with Form 941, in which case total deposits would not equal the liability. *Total FUTA tax deposits equal Part 4, Line 13 and Part 5, Line 17 of Form 940.

Within a payroll system there are checks and balances to ensure the accuracy of a company's financial records and the security of its assets. What are they called?

Internal controls

Who would be interested in the financial records of business?

Management, stockholders, investors, employees, and auditors would be interested in the financial records of a business.

What effect does revenue have on owner's equity?

Revenue has the effect of increasing owner's equity.

What are subsidiary ledgers?

Subsidiary ledgers are used for a single type of account and are subordinate to the general ledger. For example, entries documenting payroll expenses and liabilities may be contained in a subsidiary ledger known as the Payroll Register. Other subsidiary ledgers that contain several accounts might include Accounts Payable, Accounts Receivable, and Fixed Assets.

Employer Gail Winters and her employees are subject to social security, medicare, FUTA and SUTA taxes. During the payroll period ending January 17, 2014, her employees earned wages of $30,000, all of which is taxable. The federal income tax withheld amounted to $4,500. The employer pays FUTA tax of $180 and SUTA tax of $810. a. Journalize the payroll for the payroll period ending January 17, 2014. b. Journalize and record the employer's payroll taxes on January 17, 2014. c. Journalize and record the payment of wages to the employees on January 24, 2014.

a. Date Jan 17, 2014 Wages/salary expense $30,000.00 - Debit S.S. tax payable $1,860.00 - Credit Med. tax payable 435.00 - Credit Fed. income tax payable 4,500.00 - Credit Wages/salary payable 23,205.00 - Credit b. Date Jan 17, 2014 Payroll tax expense $3,285.00 - Debit S.S. tax payable $1,860.00 - Credit Med. tax payable 435.00 - Credit FUTA tax payable 180.00 - Credit SUTA tax payable 810.00 - Credit c. Date Jan 24, 2014 Wages/salary payable $23,205.00 - Debit Cash $23,205.00 - Credit

Some of the ledger accounts of the Morris Bookkeeping Service, owned and operated by Paul Morris, are listed below. In the columns at the right, indicate whether these accounts are shown on the income statement or the balance sheet. a. Accounts payable b. Accounts receivable c. Advertising expense d. Cash e. Salaries payable f. Office equipment g. Paul Morris, capital h. Miscellaneous expense i. Office furniture j. Rent expense

a. Accounts payable - Balance Sheet b. Accounts receivable - Balance Sheet c. Advertising expense - Income Statement d. Cash - Balance Sheet e. Salaries payable - Balance Sheet f. Office equipment - Balance Sheet g. Paul Morris, capital - Balance Sheet h. Miscellaneous expense - Income Statement i. Office furniture - Balance Sheet j. Rent expense - Income Statement

Enter the normal balance (debit or credit) for each of the following accounts. a. Accounts receivable b. Social security tax payable c. Sales d. Sales tax payable e. Accounts payable f. Wage garnishments g. Payroll taxes expense h. Professional fees payable i. Freight expense j. Life insurance premiums payable

a. Accounts receivable - Debit b. Social security tax payable - Credit c. Sales - Credit d. Sales tax payable - Credit e. Accounts payable - Credit f. Wage garnishments - Credit g. Payroll taxes expense - Debit h. Professional fees payable - Credit i. Freight expense - Debit j. Life insurance premiums payable - Credit

If a pay period ends August 22, employees are paid August 29, and the payroll tax deposit is due September 15, when should the payroll expenses be recorded? a. August 22 b. August 23 c. August 29 d. September 15

a. August 22

Classify each item that follows as an asset, liability, or owner's equity. a. Cash b. Loan payable to a bank c. Delivery equipment d. Account payable to a creditor e. Office furniture f. Owner's financial interest g. Petty cash h. Mortgage payable to a bank i. FUTA taxes payable

a. Cash - Asset b. Loan payable to a bank - Liability c. Delivery equipment - Asset d. Account payable to a creditor - Liability e. Office furniture - Asset f. Owner's financial interest - Owner's Equity g. Petty cash - Asset h. Mortgage payable to a bank - Liability i. FUTA taxes payable - Liability

How are marketable securities classified? a. Current assets b. Tangible assets c. Intangible assets d. Current liabilities

a. Current assets

What financial statement shows the net income or net loss of a business? a. Income statement b. Balance sheet c. Statement of owner's equity d. Statement of cash flow

a. Income statement

a. Assume that the gross weekly payroll is $100,000 for Emerson Hardware Distributors and the accounting month ends on Thursday, during the weekly payroll period. Since the weekly payroll period has not ended as of the end of the accounting month, the company needs to accrue for four days (Mon.-Thurs.), which is 80% of the weekly payroll. Use 0.6% FUTA tax and 3% for SUTA tax. Make the entries to record the accrued payroll for Emerson Hardware Distributors for Monday, January 20, to Thursday, January 23, 2014.

a. Jan 23, 2014 Accrued payroll expense $80,000.00 - Debit Accrued payroll liability $80,000.00 - Credit To record the estimated salaries due from Jan. 20- Jan. 23. Jan 23, 2014 Accrued payroll tax expense $9,000.00 - Debit Accrued social security tax payable $4,960.00 - Credit Accrued medicare tax payable 1,160.00 - Credit Accrued FUTA tax payable 480.00 - Credit Accrued SUTA tax payable 2,400.00 - Credit To record the estimated payroll tax expenses on wages from Jan. 20 - Jan. 23.

Where are business transactions first recorded? a. Journal b. General ledger c. Trial balance d. Balance sheet

a. Journal

When each transaction is described by a business document that proves the transaction did occur, which accounting concept is being applied? a. Objectivity b. Cost c. Matching d. Business entity

a. Objectivity

At the start of 2014, employees of New Frontiers accrue vacation amounting to $4,000 for the month. During the third week in January, an employee uses vacation time amounting to $900. a. Make the entry to record the employee's accrual of vacation leave for the month of January. b. Make the entry to record the employee's actual use of vacation leave.

a. Vacation expense $4,000 - Debit Vacation liability payable $4,000 - Credit To record the employees' accrual of vacation leave for the month of January. b. Vacation liability payable $900 - Debit Cash $900 - Credit To record the employees' actual use of vacation leave.

What account is credited for child support withheld? a. Child support expense b. Child support payable c. Accounts payable d. Payroll taxes expense

b. Child support payable

b. Based on the January 23 accrual, record the reversal entries to be made on January 24, 2014, when the employees are paid.

b. Jan 24, 2014 Accrued payroll liability $80,000.00 - Debit Accrued payroll expense $80,000.00 - Credit To record the reversal of estimated salaries due from Jan. 20- Jan. 23. Jan 24, 2014 Accrued social security tax payable $4,960.00 - Debit Accrued medicare tax payable 1,160.00 - Debit Accrued FUTA tax payable 480.00 - Debit Accrued SUTA tax payable 2,400.00 - Debit Accrued payroll tax expense $9,000.00 - Credit To record the reversal of estimated payroll tax expenses on wages from Jan. 20 - Jan. 23.

Which of the following accounts describes the legal obligation of a business to pay its debts? a. Asset b. Liability c. Owner's equity d. Expenses

b. Liability

When revenue and expenses are recorded in the same accounting period, which accounting concept is being applied? a. Business entity b. Matching c. Realization d. Continuing concern

b. Matching

What document records payroll data for each payroll period? a. Earnings record b. Payroll register c. Payroll ledger d. Accounts receivable ledger

b. Payroll register

What is the process of transferring entries from the journal to the general ledger called? a. Journalizing b. Posting c. Footing d. Balancing

b. Posting

When the same accounting concepts are applied in the same way in each accounting period, which accounting concept is being applied? a. Objectivity b. Continuing concern c. Consistency d. Business entity

c. Consistency

In what account is the payment of salaries and wages recorded? a. Asset b. Liability c. Expense d. Revenue

c. Expense

FUTA and SUTA taxes payable are what type of accounts? a. Owner's equity b. Assets c. Liabilities d. Net worth

c. Liabilities

What is the common name for a journal? a. Record of final entry b. Record of secondary entry c. Record of original entry d. Record of cross-reference

c. Record of original entry

What is the difference between the debits and credits to an account called? a. Single-entry b. Double-entry c. Cross-footing d. Balance

d. Balance