Payroll taxes levied against employees become liabilities

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10. Payroll taxes levied against employees become liabilities

A. when the payroll is paid to employees

B. at the end of an accounting period

C. the first of the following month

D. when data are entered in a payroll register

9. Assume that social security taxes are payable at a 6% rate and Medicare taxes are payable at a 1.5% rate with no maximum earnings, and that federal and state unemployment compensation taxes total 4.6% on the first $7,000 of earnings.  If an employee earns $2,500 for the current week and the employee's year-to-date earnings before this week were $6,800, what is the total payroll taxes related to the current week?

A.$344.50

B. $187.50

C. $196.70

D. $9.20

8.McKay Company sells merchandise with a one-year warranty.  In Year 1, sales consisted of 1,200 units.  It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in Year 1 and 70% in Year 2.  In the Year 1 income statement, McKay should show warranty expense of

A. $12,000

B. $3,600

C. $8,400

D. $0

7.The cost of a product warranty should be included as an expense in the

A. period of the sale of the product

B. future period when the cost of repairing the product is paid

C. future period when the product is repaired or replaced

D. period the cash is collected for a product sold on account

6.Which of the following is the most desirable quick ratio?

A. 1.50

B. 2.20

C. 1.80

D. 1.95

5.Thomas Martin receives an hourly wage rate of $40, with time and a half for all hours worked in excess of 40 hours during a week.  Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $350; social security tax rate, 6.0%; and Medicare tax rate, 1.5%.  What is the gross pay for Martin?

A. $1,730

B. $2,080

C. $449

D. $1,581

4. The journal entry a company uses to record partially funded pension rights for its salaried employees at the end of the year is

A, debit Pension Expense; credit Unfunded Pension Liability

B. debit Salary Expense; credit Cash

C. debit Pension Expense; credit Cash

D. debit Pension Expense; credit Unfunded Pension Liability and Cash

3. Which of the following is required to be withheld from employee's gross pay?

A. both federal and state unemployment compensation taxes

B. only federal unemployment compensation tax

C. only state unemployment compensation tax

D. only federal income tax

2. On June 8, Smith Technologies issued a $75,000, 6%, 140-day note payable to Johnson Company.  What is the due date of the note?

A. October 27

B. October 26

C. October 28

D. October 25

1. Taylor Bank lends Guarantee Company $150,000 on January 1.  Guarantee Company signs a $150,000, 8%, 9-month note. The entry made by Guarantee Company on January 1 to record the proceeds and issuance of the note is

A.

. Cash 162,000

    Interest Expense 12,000

    Notes Payable 150,000

B.

Cash 150,000

     Notes Payable 150,000

C.

. Notes Payable 120,000
Interest Payable 7,200
     Cash 120,000

    Interest Expense 7,200

D.

Interest Expense 12,000
Cash 138,000

     Notes Payable 150,000

Answer

General guidance

Concepts and reason
Payroll taxes are the taxes to be paid on the salaries of the employees. Payroll taxes comprises of 2 components:

• Federal Insurance Contributions Act

• Medicare Federal Insurance Contributions Act

Payroll taxes are the major revenue generating source of the government. Payroll taxes are used by the government for various Social and Medicare programs.

Warranty expense is the expense that is recognized based on repairs cost that will be required to honor a warranty on a product sold. Warranty expense is taken in the income statement based on the warranty cost and the quantity of product sold.

Fundamentals

• Payroll tax’s incidence is divided between the employer and the employee in equal proportions. Half of the payroll taxes are deposited by the employer and the other half are deducted from the employee’s salary.

The rationale behind the payment of payroll taxes is that the current working generation of people should fund the Social Security and Medicare programs for the people who are currently retired and in the same way when the current workforce will retire, they will be paid for by the employees working that time.

It is the prime responsibility of the employer to deposit the share of employee’s and as well as their own contribution of payroll taxes, preparing various reconciliations and filing of payroll tax returns.

• Warranty expense is recognized to account for the expense that might have to be occurred in case of product being damaged or catching a fault after sale to the customer. The estimated warranty repair cost to be incurred per product is estimated by the company and is multiplied with the number of products sold to find out the warranty expense to be recorded in the books of account.

Step-by-step

Step 1 of 3

Payroll taxes are deducted from the employee’s salary at the time of payment of salary. Though as per accounting practice, it accrues at the time of entering it in the payroll register, it becomes a liability for payment at the time of payment of salary.

When an employee is paid his salary for the month, the payroll taxes like Medicare and social security is computed and is paid to the government after deduction from the employee’s payroll.

Part 10

Payroll taxes levied against employees become liabilities when the payroll is paid to employees.


Payroll taxes are computed, deducted and paid when the payroll is paid to employees. The accounting principle implies accrual of payroll expense at the end of accounting period. But as per taxation laws, the payroll tax is a liability when the payroll is paid to employees.

Step 2 of 3

Calculate the total payroll taxes related to current week as follows:

Particulars
Amount ($)
Social security taxes on current weak
earnings ($2,500 × 6%)
150
Medicare taxes on current week
earnin

Part 9

The total payroll taxes related to the current week is $196.70.


Regardless of the level of earnings, social security taxes and Medicare taxes are payable at 6% and 1.5% respectively. In case of federal and state unemployment compensation taxes, tax is imposed on first $7,000. $6,800 is already earned by employee year-to-date. $2,500 is earned in the current week.

Hence, only is taxable in the current week as only this amount is attributable towards the current week’s earnings on which federal and state unemployment compensation taxes are to be imposed.

Step 3 of 3

Calculate the warranty expense for Year 1 as follows:

(Quantity sold x repairs percentage in Year 1)
Warranty expense for Year 1 =
x repairs cost per unit
= 1,200 units x 30% x $1

Part 8

In the Year 1 income statement, M company should show warranty expense of $3,600.


Total quantity sold in Year 1 is 1,200 units. The repair cost of each unit sold amounts to $10 and 30% of the repairs as per warranty are to be made in the first year of purchase. 30% of 1,200 units, that is, 360 units are repaired at the cost of $10 per unit. Therefore, the warranty expense in Year 1 in the income statement is .

Answer

Part 10

Payroll taxes levied against employees become liabilities when the payroll is paid to employees.

Part 9

The total payroll taxes related to the current week is $196.70.

Part 8

In the Year 1 income statement, M company should show warranty expense of $3,600.

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