Warren SM Ch.11 Final

CHAPTER 11CURRENT LIABILITIES AND PAYROLL

EYE OPENERS

1. A discounted note payable has no stated in-terest rate, but provides interest by dis-counting the note proceeds. The discount, which is the difference between the pro-ceeds and the face of the note, is the inter-est and is accounted for as such.

2. a. Income or withholding taxes, social se-curity, and Medicare

b. Employees Federal Income Tax Payable, Social Security Tax Payable, and Medicare Tax Payable

3. There is a ceiling on (c) the social security portion of the FICA tax and (d) the federal unemployment compensation tax.

4. The deductions from employees’ earnings are for amounts owed (liabilities) to others for such items as federal taxes, state and lo-cal income taxes, and contributions to pen-sion plans.

5. Yes. Unemployment compensation taxes are paid by the employer on the first $7,000 of annual earnings for each employee. Therefore, hiring two employees, each earn-ing $12,500 per year, would require the pay-ment of twice the unemployment tax than if only one employee, earning $25,000, was hired.

6. 1. a2. c3. c4. b5. b

7. The use of special payroll checks relieves the treasurer or other executives of the task of signing a large number of regular checks each payday. Another advantage of this sys-tem is that reconciling the regular bank statement is simplified. The paid payroll checks are returned by the bank separately from regular checks and are accompanied by a statement of the special bank account. Any balance shown on the bank’s statement will correspond to the sum of the payroll checks outstanding because the amount of each deposit is exactly the same as the total amount of checks drawn.

8. a. Input data that remain relatively un-changed from period to period (and therefore do not need to be reintroduced

into the system frequently) are called constants.

b. Input data that differ from period to pe-riod are called variables.

9. a. If employees’ attendance records are kept and their preparation supervised in such a manner as to prevent errors and abuses, then one can be assured that wages paid are based on hours actually worked. The use of “In” and “Out” cards, whereby employees indicate by punch-ing a time clock their time of arrival and departure, is especially useful. Em-ployee identification cards or badges can be very helpful in giving additional assurance. Employee identification cards and badges can also contain bar codes that can be used by electronic scanners to account for employee time and control access to authorized loca-tions.

b. The requirement that the addition of names on the payroll be supported by written authorizations from the Person-nel Department can help ensure that payroll checks are not being issued to fictitious persons. Endorsements on payroll checks can be compared with other samples of employees’ signatures. Many businesses directly deposit payroll checks to employee bank accounts, thereby eliminating the need for en-dorsement and check disbursement controls.

10. If the vacation payment is probable and can be reasonably estimated, the vacation pay expense should be recorded during the pe-riod in which the vacation privilege is earned.

11. Employee life expectancies, expected em-ployee retirement dates, employee turnover, employee compensation levels, and invest-ment income on pension contributions are factors that influence the future pension obli-gation of an employer.

12. To match revenues and expenses properly, the liability to cover product warranties should be recorded in the period during which the sale of the product is made.

613613

13. When the defective product is repaired, the repair costs would be recorded by debiting Product Warranty Payable and crediting Cash, Supplies, or another appropriate ac-count.

14. Yes. Since the $5,000 is payable within one year, Company A should present it as a cur-rent liability at September 30.

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PRACTICE EXERCISES

PE 11–1A

a. $100,000.

b. $99,000. [$100,000 – ($100,000 × 60/360 × 6%)]

PE 11–1B

a. $80,000.

b. $79,000. [$80,000 – ($80,000 × 45/360 × 10%)]

PE 11–2A

Total wage payment.............................................................. $ 2,000.00One allowance (provided by IRS)........................................ $67.00Multiplied by allowances claimed on Form W-4................ × 2 134 .00 Amount subject to withholding........................................... $ 1,866 .00

Initial withholding from wage bracket in Exhibit 3............ $ 302.95Plus additional withholding: 28% of excess over $1,533.. 93 .24 *Federal income tax withholding.......................................... $ 396 .19

*($1,866 – $1,533) × 28%.

PE 11–2B

Total wage payment.............................................................. $800.00One allowance (provided by IRS)........................................ $67.00Multiplied by allowances claimed on Form W-4................ × 1 67 .00 Amount subject to withholding........................................... $ 733 .00

Initial withholding from wage bracket in Exhibit 3............ $ 82.95Plus additional withholding: 25% of excess over $653..... 20 .00 *Federal income tax withholding.......................................... $ 102 .95

*($733 – $653) × 25%.

PE 11–3A

Total wage payment........................................... $2,000.00Less: Federal income tax withholding........... $396.19

Earnings subject to social security tax ($100,000 – $98,500)...................... $1,500.00

Social security tax rate.......................... × 6%Social security tax.................................. 90.00Medicare tax ($2,000 × 1.5%)................. 30.00 516.19

Net pay................................................................ $1,483.81

PE 11–3B

Total wage payment........................................... $800.00Less: Federal income tax withholding........... $102.95

Earnings subject to social security tax

$800.00

Social security tax rate.......................... × 6%Social security tax.................................. 48.00Medicare tax ($800 × 1.5%).................... 12.00 162.95

Net pay................................................................ $637.05

PE 11–4A

Salaries Expense........................................................... 44,000Social Security Tax Payable................................... 2,552Medicare Tax Payable............................................. 660Employees Federal Income Tax Payable............... 8,712Salaries Payable...................................................... 32,076

PE 11–4B

Salaries Expense........................................................... 510,000Social Security Tax Payable................................... 29,580Medicare Tax Payable............................................. 7,650Employees Federal Income Tax Payable............... 100,980Retirement Savings Deductions Payable.............. 30,600Salaries Payable...................................................... 341,190

PE 11–5A

Payroll Tax Expense................................................ 3,863.00Social Security Tax Payable.............................. 2,552.00Medicare Tax Payable........................................ 660.00State Unemployment Tax Payable.................... 567.00*Federal Unemployment Tax Payable................ 84.00**

*$10,500 × 5.4%**$10,500 × 0.8%

PE 11–5B

Payroll Tax Expense................................................ 38,222.00Social Security Tax Payable.............................. 29,580.00Medicare Tax Payable........................................ 7,650.00State Unemployment Tax Payable.................... 864.00*Federal Unemployment Tax Payable................ 128.00**

*$16,000 × 5.4%**$16,000 × 0.8%

PE 11–6A

a. Vacation Pay Expense............................................. 30,000Vacation Pay Payable........................................ 30,000

Vacation pay accrued for the period.

b. Pension Expense..................................................... 40,000Cash..................................................................... 40,000

To record pension contribution, 10% × $400,000.

PE 11–6B

a. Vacation Pay Expense............................................. 20,000Vacation Pay Payable........................................ 20,000


b. Pension Expense..................................................... 140,000Cash..................................................................... 106,000Unfunded Pension Liability............................... 34,000

To record pension cost and funding.

PE 11–7A

a.

Apr. 30 Product Warranty Expense................................. 36,000Product Warranty Payable............................. 36,000

To record warranty expense for April,6.0% × $600,000.

b.

Aug. 4 Product Warranty Payable.................................. 220Supplies.......................................................... 140Wages Payable............................................... 80

PE 11–7B

a.

May 31 Product Warranty Expense................................. 10,500Product Warranty Payable............................. 10,500

To record warranty expense for May,3% × $350,000.

b.

July 16 Product Warranty Payable.................................. 140Cash................................................................. 140

EXERCISES

Ex. 11–1

Current liabilities:Federal income taxes payable...................................................... $ 160,000*Advances on magazine subscriptions......................................... 630,000 **

Total current liabilities.............................................................. $ 790,000

*$400,000 × 40%**14,000 × $60 × 9/12 = $630,000

The nine months of unfilled subscriptions are a current liability because I-Generation received payment prior to providing the magazines.

Ex. 11–2

a. 1. Merchandise Inventory............................................. 793,000Interest Expense....................................................... 7,000*

Notes Payable...................................................... 800,000

2. Notes Payable........................................................... 800,000Cash...................................................................... 800,000

b. 1. Notes Receivable...................................................... 800,000Sales..................................................................... 793,000Interest Revenue.................................................. 7,000*

2. Cash........................................................................... 800,000Notes Receivable................................................. 800,000

*$800,000 × 7% × 45/360

Ex. 11–3

a. $240,000 × 8% × 60/360 = $3,200 for each alternative.

b. (1) $240,000 simple-interest note: $240,000 proceeds

(2) $240,000 discounted note: $240,000 – $3,200 interest = $236,800 pro-ceeds

c. Alternative (1) is more favorable to the borrower. This can be verified by com-paring the effective interest rates for each loan as follows:

Situation (1): 8% effective interest rate

($3,200 × 360/60)/$240,000 = 8%

Situation (2): 8.11% effective interest rate

($3,200 × 360/60)/$236,800 = 8.11%

The effective interest rate is higher for the second loan because the creditor lent only $236,800 in return for $3,200 interest over 60 days. In the simple-in -terest loan, the creditor must lend $240,000 for 60 days to earn the same $3,200 interest.

Ex. 11–4

a. Accounts Payable.......................................................... 60,000Notes Payable........................................................... 60,000

b. Notes Payable................................................................. 60,000Interest Expense............................................................. 200*

Cash........................................................................... 60,200

*$60,000 × 4% × 30/360

Ex. 11–5

a. Accounts Payable.......................................................... 44,550Interest Expense............................................................. 450*

Notes Payable........................................................... 45,000

*$45,000 × 6% × 60/360

b. Notes Payable................................................................. 45,000Cash........................................................................... 45,000

Ex. 11–6

a. June 30 Building.......................................................... 600,000Land............................................................... 400,000

Note Payable............................................ 500,000Cash.......................................................... 500,000

b. Dec. 31 Note Payable................................................. 25,000Interest Expense ($500,000 × 6% × 1/2)...... 15,000

Cash.......................................................... 40,000

c. June 30 Note Payable................................................. 25,000Interest Expense ($475,000 × 6% × 1/2)...... 14,250

Cash.......................................................... 39,250

Ex. 11–7

a. $5,847,000, the amount disclosed as the current portion of long-term debt.

b. The current liabilities increased by $377,000 ($5,487,000 – $5,110,000).

c. $13,723,000 ($19,210,000 – $5,487,000)

Ex. 11–8

a. Regular pay (40 hrs. × $40)........................................... $1,600.00Overtime pay (20 hrs. × $70)......................................... 1,400.00 Gross pay........................................................................ $3,000.00

b. Gross pay........................................................................ $3,000.00Less: Social security tax (6% × $3,000)...................... $180.00

Medicare tax (1.5% × $3,000)............................. 45.00Federal withholding........................................... 714.00 939.00

Net pay............................................................................ $ 2,061.00

Ex. 11–9

ComputerConsultant Programmer Administrator

Regular earnings................................. $3,000.00 $ 960.00 $1,440.00Overtime earnings............................... 480 .00 432 .00 Gross pay............................................. $3,000 .00 $1,440 .00 $1,872 .00

Less: Social security tax.................... $ 0.001 $ 86.402 $ 60.003

Medicare tax.............................. 45.00 21.60 28.08Federal income tax withheld4. . 676 .19 262 .95 360 .35

$ 721 .19 $ 370 .95 $ 448 .43 Net pay.................................................. $2,278 .81 $1,069 .05 $ 1,423 .57 1Gross pay exceeds $100,000, so there is no social security tax withheld.2$1,440 × 6% = $86.403[($100,000 – $99,000) × 6%] = $60.004The federal income tax withheld is determined from applying the calculation pro-cedure associated with Exhibit 3 in the chapter, as follows:

Withholding supporting calculations:Computer

Consultant Programmer Administrator

Gross weekly pay................................... $3,000 .00 $1,440 .00 $1,872 .00 Number of withholding allowances...... 2 1 2Multiplied by: Value of one allowance. × $67 .00 × $67 .00 × $67 .00 Amount to be deducted......................... $ 134 .00 $ 67 .00 $ 134 .00 Amount subject to withholding............ $2,866 .00 $1,373 .00 $ 1,738 .00 Initial withholding from wage bracket

in Exhibit 3......................................... $ 302.95 $ 82.95 $ 302.95Plus: Bracket percentage over

bracket excess.................................. 373 .24 5 180 .00 6 57 .40 7

Amount withheld.................................... $ 676 .19 $ 262 .95 $ 360 .35

528% × ($2,866 – $1,533)625% × ($1,373 – $653)728% × ($1,738 – $1,533)

Ex. 11–10

a. Summary: (1) $340,000; (3) $400,000; (8) $5,000; (12) $110,000

Net amount paid..................................................... $252,200Total deductions.................................................... 147,800

(3) Total earnings......................................................... $400,000Overtime.................................................................. 60,000

(1) Regular.................................................................... $340,000

Total deductions.................................................... $147,800

Social security tax.................................................. $ 23,200Medicare tax............................................................ 6,000Income tax withheld............................................... 99,600Medical insurance.................................................. 14,000 142,800

(8) Union dues.............................................................. $ 5,000

Total earnings......................................................... $400,000Factory wages........................................................ $210,000Office salaries......................................................... 80,000 290,000

(12) Sales salaries.......................................................... $110,000

b. Factory Wages Expense................................................ 210,000Sales Salaries Expense.................................................. 110,000Office Salaries Expense................................................. 80,000

Social Security Tax Payable.................................... 23,200Medicare Tax Payable............................................... 6,000Employees Income Tax Payable.............................. 99,600Medical Insurance Payable...................................... 14,000Union Dues Payable................................................. 5,000Salaries Payable........................................................ 252,200

c. Salaries Payable............................................................. 252,200Cash........................................................................... 252,200

d. The amount of social security tax withheld, $23,200, is $800 less than 6.0% of the total earnings of $400,000. This indicates that the cumulative earnings of some employees exceed $100,000. Therefore, it is unlikely that this payroll was paid during the first few weeks of the calendar year.

Ex. 11–11

a. Social security tax (6% × $600,000)......................................... $36,000Medicare tax (1.5% × $740,000)................................................ 11,100State unemployment (4.2% × $20,000).................................... 840Federal unemployment (0.8% × $20,000)................................ 160

$48,100

b. Payroll Tax Expense..................................................... 48,100Social Security Tax Payable................................... 36,000Medicare Tax Payable............................................. 11,100State Unemployment Tax Payable......................... 840Federal Unemployment Tax Payable..................... 160

Ex. 11–12

a. Salaries Expense........................................................... 540,000Social Security Tax Payable................................... 25,380Medicare Tax Payable............................................. 8,100Employees Federal Income Tax Payable............... 108,000Salaries Payable...................................................... 398,520

b. Payroll Tax Expense..................................................... 34,080Social Security Tax Payable................................... 25,380Medicare Tax Payable............................................. 8,100State Unemployment Tax Payable......................... 520*Federal Unemployment Tax Payable..................... 80**

*5.2% × $10,000**0.8% × $10,000

Ex. 11–13

a. Wages Expense............................................................. 200,000Social Security Tax Payable................................... 10,800Medicare Tax Payable............................................. 3,000Employees Federal Income Tax Payable............... 40,000Wages Payable......................................................... 146,200

b. Payroll Tax Expense..................................................... 15,325Social Security Tax Payable................................... 10,800Medicare Tax Payable............................................. 3,000State Unemployment Tax Payable......................... 1,325*Federal Unemployment Tax Payable..................... 200**

*5.3% × $25,000**0.8% × $25,000

Ex. 11–14

Hillman Pizza does have an internal control procedure that should detect the payroll error. Before funds are transferred from the regular bank account to the payroll account, the owner authorizes a voucher for the total amount of the week's payroll. The owner should catch the error, since the extra 210 hours will cause the weekly payroll to be substantially higher than usual.

Ex. 11–15

a. Inappropriate. Each employee should record his or her own time out for lunch. Under the current procedures, one employee could clock in several employees who are still out to lunch. The company would be paying employ-ees for more time than they actually worked.

b. Inappropriate. Payroll should be informed when any employee is terminated. A supervisor or other individual could continue to clock in and out for the terminated employee and collect the extra paycheck.

c. Appropriate. All changes to the payroll system, including wage rate in-creases, should be authorized by someone outside the Payroll Department.

d. Appropriate. The use of a special payroll account assists in preventing fraud and makes it easier to reconcile the company's bank accounts.

e. Inappropriate. Access to the check-signing machine should be restricted.

Ex. 11–16

Grain-Crop Stores Inc. should not compute and report payroll taxes according to its fiscal year. Rather, employers are required to compute and report all payroll taxes on the calendar-year basis, regardless of the fiscal year they may use for fi-nancial reporting purposes. Thus, social security and FUTA maximum earnings limitations apply to the calendar-year payroll.

Ex. 11–17

Vacation Pay Expense................................................... 6,700Vacation Pay Payable............................................... 6,700

Vacation pay accrued for January, $80,400 × 1/12.

Ex. 11–18

a. Dec. 31 Pension Expense.......................................... 124,600Unfunded Pension Liability.................... 124,600

To record quarterly pension cost.

b. Jan. 15 Unfunded Pension Liability......................... 124,600Cash.......................................................... 124,600

Ex. 11–19

The $2,637 million unfunded pension liability is the approximate amount of the pension obligation that exceeds the value of the accumulated net assets of the pension plan. Apparently, Procter & Gamble has underfunded its plan relative to the actuarial obligation that has accrued over time. This can occur when the company contributes less to the plan than the annual pension cost.

The obligation grows yearly by the amount of the periodic pension cost. Thus, the periodic pension cost is an actuarial measure of the amount of pension earned by employees during the year. The annual pension cost is determined by making actuarial assumptions about employee life expectancies, employee turnover, expected compensation levels, and interest.

Ex. 11–20

a. Product Warranty Expense............................................ 8,400Product Warranty Payable....................................... 8,400

To record warranty expense for June, 4% × $210,000.

b. Product Warranty Payable............................................. 235Supplies..................................................................... 140Wages Payable.......................................................... 95

Ex. 11–21

a. The warranty liability represents estimated outstanding automobile warranty claims. Of these claims, $13,644 million is estimated to be due during 2007, while the remainder ($8,289 million) is expected to be paid after 2007. The distinction between short- and long-term liabilities is important to creditors in order to accurately evaluate the near-term cash demands on the business, relative to the quick current assets and other longer-term demands.

b. Product Warranty Expense........................... 15,500,000,000Product Warranty Payable....................... 15,500,000,000

$20,433 + X – $14,000 = $21,933X = $21,933 – $20,433 + $14,000X = $15,500 million

Ex. 11–22

a. Damage Awards and Fines............................................ 580,000EPA Fines Payable.................................................... 410,000Litigation Claims Payable........................................ 170,000

Note to Instructors: The “damage awards and fines” would be disclosed on the income statement under “Other expenses.”

b. The company experienced a hazardous materials spill at one of its plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $410,000, which the company is contesting in court. Although the company does not admit fault, legal counsel believes that the fine payment is probable. In addition, an employee has sued the company. A $170,000 out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been recognized as an expense for the period. There is one other outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other lawsuits and un-known liabilities may arise from this incident.

Ex. 11–23

a. Quick Ratio =

December 31, 2009: = 1.30

December 31, 2010: = 1.10

b. The quick ratio decreased between the two balance sheet dates. The major reason is a significant increase in inventory. Cash also declined, possibly to purchase the inventory. As a result, quick assets actually declined, while the current liabilities increased. The quick ratio for December 31, 2010, is not yet at an alarming level. However, the trend suggests that the firm’s current as-set (working capital) management should be watched closely.

Ex. 11–24

a.

Apple Computer, Inc. Dell Inc.

Quick Ratio 2.09 0.92

Quick Ratio =

Apple Computer, Inc.:

Quick Ratio = = 2.09

Dell Inc.:

Quick Ratio = = 0.92

b. It is clear that Apple Computer’s short-term liquidity is stronger than Dell’s. Apple’s quick ratio is 127% [(2.09 – 0.92)/0.92] higher. Apple has a much stronger relative cash and short-term investment position than does Dell. Ap-ple’s cash and short-term investments are over 70% of total current assets (165% of current liabilities), compared to Dell’s 51% of total current assets (58% of current liabilities). In addition, Dell’s relative accounts payable posi-tion is larger than Apple’s, indicating the possibility that Dell has longer sup-plier payment terms than does Apple. A quick ratio of 2.09 for Apple sug-gests ample flexibility to make strategic investments with its excess cash, while a quick ratio of 0.92 for Dell indicates an efficient but tight quick asset management policy.

PROBLEMS

Prob. 11–1A

1.

Jan. 15 Merchandise Inventory......................................... 220,000Accounts Payable—Hood Co......................... 220,000

Feb. 14 Accounts Payable—Hood Co.............................. 220,000Notes Payable.................................................. 220,000

Apr. 15 Notes Payable....................................................... 220,000Interest Expense ($220,000 × 60/360 × 6%)........ 2,200

Cash.................................................................. 222,200

June 2 Cash....................................................................... 187,500Notes Payable.................................................. 187,500

July 10 Tools...................................................................... 157,600Interest Expense ($160,000 × 90/360 × 6%)........ 2,400

Notes Payable.................................................. 160,000

Aug. 1 Notes Payable....................................................... 187,500Interest Expense ($187,500 × 60/360 × 8%)........ 2,500

Notes Payable.................................................. 187,500Cash.................................................................. 2,500

Sept. 30 Notes Payable....................................................... 187,500Interest Expense ($187,500 × 60/360 × 10%)...... 3,125

Cash.................................................................. 190,625

Oct. 8 Notes Payable....................................................... 160,000Cash.................................................................. 160,000

Dec. 1 Office Equipment.................................................. 120,000Notes Payable.................................................. 100,000Cash.................................................................. 20,000

5 Litigation Loss...................................................... 76,000Litigation Claims Payable............................... 76,000

31 Notes Payable....................................................... 10,000Interest Expense ($10,000 × 30/360 × 6%).......... 50

Cash.................................................................. 10,050

Prob. 11–1A Concluded

2. a. Product Warranty Expense...................................... 16,400Product Warranty Payable.................................. 16,400

Warranty expense for the current year.

b. Interest Expense....................................................... 450Interest Payable................................................... 450

Interest on notes, $10,000 × 6% × 30/360 × 9.

Prob. 11–2A

1. a. Dec. 30 Sales Salaries Expense................................ 244,000Warehouse Salaries Expense...................... 135,000Office Salaries Expense............................... 125,000

Employees Income Tax Payable............ 88,704Social Security Tax Payable................... 27,216Medicare Tax Payable............................. 7,560Bond Deductions Payable...................... 11,088Group Insurance Payable....................... 9,072Salaries Payable...................................... 360,360

b. Dec. 30 Payroll Tax Expense..................................... 36,026Social Security Tax Payable................... 27,216Medicare Tax Payable............................. 7,560State Unemployment Tax Payable......... 1,0501

Federal Unemployment Tax Payable..... 2002

1$25,000 × 4.2%2$25,000 × 0.8%


Employees Income Tax Payable............ 88,704Social Security Tax Payable................... 30,2403

Medicare Tax Payable............................. 7,5604

Bond Deductions Payable...................... 11,088Group Insurance Payable....................... 9,072Salaries Payable...................................... 357,336

3$504,000 × 6%4$504,000 × 1.5%

b. Jan. 5 Payroll Tax Expense..................................... 63,000Social Security Tax Payable................... 30,240Medicare Tax Payable............................. 7,560State Unemployment Tax Payable......... 21,1685

Federal Unemployment Tax Payable..... 4,0326

5$504,000 × 4.2%6$504,000 × 0.8%

Prob. 11–3A

1.

Gross Federal Income Social Security MedicareEmployee Earnings Tax Withheld Tax Withheld Tax Withheld

Brooks $ 40,800 $ 6,024 $ 2,448 $ 612.00Croom 36,400 6,838 2,184 546.00Fulmer 22,500 2,790 1,350 337.50Johnson 7,500 930 450 112.50Nutt 120,000 27,036 6,000* 1,800.00Richt 41,400 6,348 2,484 621.00Spurrier 86,000 18,610 5,160 1,290 .00

$20,076 $5,319 .00 *$100,000 maximum × 6%

2. a. Social security tax paid by employer........................................... $20,076.00

b. Medicare tax paid by employer..................................................... 5,319.00

c. Earnings subject to unemployment compensation tax, $8,000 for all employees except Fulmer, who has only $7,500 in gross earnings. Thus, total earnings subject to SUTA and FUTA are $55,500 [(6 × $8,000) + $7,500].State unemployment compensation tax: $55,500 × 4.8%........... 2,664.00

d. Federal unemployment compensation tax: $55,500 × 0.8%....... 444.00

e. Total payroll tax expense.............................................................. $28,503.00

Prob. 11–4A

1. 2010Sept. 12 Sales Salaries Expense................................ 5,023.00

Office Salaries Expense............................... 3,700.00Delivery Salaries Expense........................... 2,713.00

Social Security Tax Payable................... 542.16Medicare Tax Payable............................. 171.55Employees Income Tax Payable............ 1,944.78Medical Insurance Payable..................... 797.00Salaries Payable...................................... 7,980.51

2. Sept. 12 Salaries Payable............................................ 7,980.51Cash.......................................................... 7,980.51

3. Sept. 12 Payroll Tax Expense..................................... 773.71Social Security Tax Payable................... 542.16Medicare Tax Payable............................. 171.55State Unemployment Tax Payable......... 48.00*Federal Unemployment Tax Payable..... 12.00**

*$1,500 × 3.20%**$1,500 × 0.80%

4. Sept. 15 Employees Income Tax Payable.................. 1,944.78Social Security Tax Payable........................ 1,084.32Medicare Tax Payable................................... 343.10

Cash.......................................................... 3,372.20

Prob. 11–5A

1. PAYROLL FOR WEEK ENDING December 10, 2010

EARNINGS DEDUCTIONS PAIDACCOUNTS

DEBITED

NameTotal Hours Regular Overtime Total

SocialSecu-

rityTax

MedicareTax

Federal Income

Tax

U.S.SavingsBonds Total

Net Pay

Ck. No.

Sales Salaries Expense

OfficeSalariesExpense

Beilein 32 512.00 512.00 30.72 7.68 102.40 10.00 150.80 361.20 353 512.00

Calhoun 50 1,280.00 480.00 1,760.00 105.60 26.40 369.60 10.00 511.60 1,248.40 349 1,760.00

Calipari 40 1,120.00 1,120.00 67.20 16.80 240.80 20.00 344.80 775.20 346 1,120.00

Knight 42 1,280.00 96.00 1,376.00 82.56 20.64 316.48 419.68 956.32 345 1,376.00

Odom 3,400.00 51.00 748.00 90.00 889.00 2,511.00 352 3,400.00

Olson 1,600.00 96.00 24.00 384.00 504.00 1,096.00 350 1,600.00

Pitino 34 612.00 612.00 36.72 9.18 91.80 137.70 474.30 351 612.00

Ryan 44 1,360.00 204.00 1,564.00 93.84 23.46 297.16 20.00 434.46 1,129.54 347 1,564.00

Thompson 40 1,040.00 ______ 1,040.00 62 .40 15 .60 218.40 35.00 331.40 708.60 348 1,040.00 _______

7,204.00 780.00 12,984.00 575 .04 194 .76 2,768.64 185.00 3,723.44 9,260.56 7,984.00 5,000.00

2. Sales Salaries Expense.................................................. 7,984.00Office Salaries Expense................................................. 5,000.00

Social Security Tax Payable.................................... 575.04Medicare Tax Payable............................................... 194.76Employees Federal Income Tax Payable................ 2,768.64Bond Deductions Payable........................................ 185.00Salaries Payable........................................................ 9,260.56

Prob. 11–6A

1.

Dec. 2 Bond Deductions Payable.................................... 2,800Cash.................................................................. 2,800

3 Social Security Tax Payable................................ 7,234Medicare Tax Payable........................................... 1,904Employees Federal Income Tax Payable............ 11,739

Cash.................................................................. 20,877

14 Operations Salaries Expense.............................. 34,800Officers Salaries Expense.................................... 22,900Office Salaries Expense....................................... 5,700

Social Security Tax Payable........................... 3,550Medicare Tax Payable..................................... 951Employees Federal Income Tax Payable...... 11,285Employees State Income Tax Payable.......... 2,853Bond Deductions Payable.............................. 1,400Medical Insurance Payable............................. 3,667Salaries Payable.............................................. 39,694

14 Salaries Payable.................................................... 39,694Cash.................................................................. 39,694

14 Payroll Tax Expense............................................. 4,901Social Security Tax Payable........................... 3,550Medicare Tax Payable..................................... 951State Unemployment Tax Payable................. 300Federal Unemployment Tax Payable............. 100


Cash.................................................................. 20,287

18 Medical Insurance Payable.................................. 22,000Cash.................................................................. 22,000

Prob. 11–6A Concluded

Dec. 28 Operations Salaries Expense.............................. 34,200Officers Salaries Expense.................................... 22,400Office Salaries Expense....................................... 5,400

Social Security Tax Payable........................... 3,348Medicare Tax Payable..................................... 930Employees Federal Income Tax Payable...... 11,036Employees State Income Tax Payable.......... 2,790Bond Deductions Payable.............................. 1,400Salaries Payable.............................................. 42,496



30 Bond Deductions Payable.................................... 2,800Cash.................................................................. 2,800

30 Employees State Income Tax Payable................ 17,065Cash.................................................................. 17,065

31 Pension Expense.................................................. 40,000Cash.................................................................. 34,000Unfunded Pension Liability............................ 6,000

To record pension cost and unfunded liability.

2.

Dec. 31 Operations Salaries Expense.............................. 3,420Officers Salaries Expense.................................... 2,240Office Salaries Expense....................................... 540

Salaries Payable.............................................. 6,200Accrued wages for the period.

31 Vacation Pay Expense.......................................... 11,500Vacation Pay Payable...................................... 11,500


Prob. 11–1B

1.

Apr. 1 Cash....................................................................... 60,000Notes Payable.................................................. 60,000

26 Equipment............................................................. 153,600Interest Expense ($160,000 × 180/360 × 8%)...... 6,400

Notes Payable.................................................. 160,000

May 16 Notes Payable....................................................... 60,000Interest Expense ($60,000 × 45/360 × 6%).......... 450

Notes Payable.................................................. 60,000Cash.................................................................. 450

June 15 Notes Payable....................................................... 60,000Interest Expense ($60,000 × 30/360 × 10%)........ 500

Cash.................................................................. 60,500

Sept. 3 Merchandise Inventory......................................... 42,000Accounts Payable—Oatley Co....................... 42,000

Oct. 3 Accounts Payable—Oatley Co............................. 42,000Notes Payable.................................................. 42,000

23 Notes Payable....................................................... 160,000Cash.................................................................. 160,000

Nov. 2 Notes Payable....................................................... 42,000Interest Expense ($42,000 × 30/360 × 9%).......... 315

Cash.................................................................. 42,315

10 Store Equipment................................................... 200,000Notes Payable.................................................. 140,000Cash.................................................................. 60,000

Dec. 10 Notes Payable....................................................... 20,000Interest Expense ($20,000 × 30/360 × 9%).......... 150

Cash.................................................................. 20,150

16 Litigation Loss...................................................... 42,500Litigation Claims Payable............................... 42,500

Prob. 11–1B Concluded

2. a. Product Warranty Expense...................................... 10,400Product Warranty Payable.................................. 10,400

Warranty expense for the current year.

b. Interest Expense....................................................... 1,530Interest Payable................................................... 1,530

Interest on notes, $20,000 × 9% × 51/360 × 6.

Prob. 11–2B


Employees Income Tax Payable............ 198,744Social Security Tax Payable................... 51,714Medicare Tax Payable............................. 15,210Bond Deductions Payable...................... 30,420Group Insurance Payable....................... 45,630Salaries Payable...................................... 672,282

b. Dec. 30 Payroll Tax Expense..................................... 68,304Social Security Tax Payable................... 51,714Medicare Tax Payable............................. 15,210State Unemployment Tax Payable......... 1,1401

Federal Unemployment Tax Payable..... 2402

1$30,000 × 3.8%2$30,000 × 0.8%


Employees Income Tax Payable............ 198,744Social Security Tax Payable................... 60,8403

Medicare Tax Payable............................. 15,2104

Bond Deductions Payable...................... 30,420Group Insurance Payable....................... 45,630Salaries Payable...................................... 663,156

3$1,014,000 × 6%4$1,014,000 × 1.5%

b. Jan. 4 Payroll Tax Expense..................................... 122,694Social Security Tax Payable................... 60,840Medicare Tax Payable............................. 15,210State Unemployment Tax Payable......... 38,5325

Federal Unemployment Tax Payable..... 8,1126

5$1,014,000 × 3.8%6$1,014,000 × 0.8%

Prob. 11–3B

1.

Gross Federal Income Social Security MedicareEmployee Earnings** Tax Withheld Tax Withheld Tax Withheld

Brown $ 18,000 $ 2,760 $ 1,080.00 $ 270.00Carroll 114,000 25,356 6,000.00* 1,710.00Grobe 52,000 10,216 3,120.00 780.00Meyer 25,200 4,212 1,512.00 378.00Saban 61,200 11,124 3,672.00 918.00Tressel 27,200 3,842 1,632.00 408.00Weis 9,000 1,206 540 .00 135 .00

$17,556 .00 $4,599 .00 *$100,000 maximum × 6%**The gross earnings are determined by multiplying the monthly earnings by the number of months of employment based on the date of hire.

2. a. Social security tax paid by employer...................................... $17,556.00

b. Medicare tax paid by employer................................................ 4,599.00

c. Earnings subject to unemployment compensation tax, $10,000 for all employees except Weis, who has only $9,000 in gross earnings. Thus, total earnings subject to SUTA and FUTA are $69,000 [(6 × $10,000) + $9,000].State unemployment compensation tax: $69,000 × 4.8%...... 3,312.00

d. Federal unemployment compensation tax: $69,000 × 0.8%.. 552 .00

e. Total payroll tax expense......................................................... $26,019 .00

Prob. 11–4B

1. 2010Sept. 12 Sales Salaries Expense................................ 6,010.00

Office Salaries Expense............................... 4,470.00Delivery Salaries Expense........................... 3,232.00

Social Security Tax Payable................... 510.72Medicare Tax Payable............................. 205.68Employees Income Tax Payable............ 2,337.88Medical Insurance Payable..................... 854.00Salaries Payable...................................... 9,803.72

2. Sept. 12 Salaries Payable............................................ 9,803.72Cash.......................................................... 9,803.72

3. Sept. 12 Payroll Tax Expense..................................... 788.40Social Security Tax Payable................... 510.72Medicare Tax Payable............................. 205.68State Unemployment Tax Payable......... 57.60*Federal Unemployment Tax Payable..... 14.40**

*$1,800 × 3.20%**$1,800 × 0.80%

4. Sept. 15 Employees Income Tax Payable.................. 2,337.88Social Security Tax Payable........................ 1,021.44Medicare Tax Payable................................... 411.36

Cash.......................................................... 3,770.68

Prob. 11–5B

1. PAYROLL FOR WEEK ENDING December 10, 2010

EARNINGS DEDUCTIONS PAIDACCOUNTS

DEBITED

NameTotal Hours Regular Overtime Total

SocialSecu-

rityTax

MedicareTax

Federal Income

Tax

U.S.SavingsBonds Total

Net Pay

Ck. No.

Sales Salaries Expense

OfficeSalariesExpense

Barnes 3,000.00 45.00 645.00 690.00 2,310.00 653 3,000.00

Calhoun 50 1,280.00 480.00 1,760.00 105.60 26.40 369.60 20.00 521.60 1,238.40 655 1,760.00

Crean 1,800.00 108.00 27.00 432.00 50.00 617.00 1,183.00 657 1,800.00

Donovan 34 680.00 680.00 40.80 10.20 136.00 187.00 493.00 660 680.00

Izzo 45 1,000.00 187.50 1,187.50 71.25 17.81 178.13 267.19 920.31 658 1,187.50

Matta 46 960.00 216.00 1,176.00 70.56 17.64 223.44 25.00 336.64 839.36 654 1,176.00

Self 40 920.00 920.00 55.20 13.80 193.20 40.00 302.20 617.80 656 920.00

Smith 40 880.00 880.00 52.80 13.20 202.40 30.00 298.40 581.60 652 880.00

Williams 36 648.00 ______ 648.00 38.88 9.72 142.56 30.00 221.16 426.84 659 648.00 _______

6,368.00 883.50 12,051.50 543.09 180.77 2,522.33 195.00 3,441.19 8,610.31 7,251.50 4,800.00

2. Sales Salaries Expense.................................................. 7,251.50Office Salaries Expense................................................. 4,800.00

Social Security Tax Payable.................................... 543.09Medicare Tax Payable............................................... 180.77Employees Federal Income Tax Payable................ 2,522.33Bond Deductions Payable........................................ 195.00Salaries Payable........................................................ 8,610.31

Prob. 11–6B

1.

Dec. 1 Medical Insurance Payable.................................. 2,000Cash.................................................................. 2,000


Cash.................................................................. 13,656


14 Sales Salaries Expense........................................ 25,000Officers Salaries Expense.................................... 12,100Office Salaries Expense....................................... 4,500

Social Security Tax Payable........................... 2,288Medicare Tax Payable..................................... 624Employees Federal Income Tax Payable...... 7,405Employees State Income Tax Payable.......... 1,872Bond Deductions Payable.............................. 900Medical Insurance Payable............................. 333Salaries Payable.............................................. 28,178




Cash.................................................................. 13,229

Prob. 11–6B Concluded

Dec. 28 Sales Salaries Expense........................................ 25,400Officers Salaries Expense.................................... 12,400Office Salaries Expense....................................... 4,800

Social Security Tax Payable........................... 2,300Medicare Tax Payable..................................... 639Employees Federal Income Tax Payable...... 7,583Employees State Income Tax Payable.......... 1,917Bond Deductions Payable.............................. 900Salaries Payable.............................................. 29,261



30 Employees State Income Tax Payable................ 10,827Cash.................................................................. 10,827



To record pension cost and unfunded liability.

2.

Dec. 31 Sales Salaries Expense........................................ 2,540Officers Salaries Expense.................................... 1,240Office Salaries Expense....................................... 480

Salaries Payable.............................................. 4,260Accrued wages for the period.

31 Vacation Pay Expense.......................................... 10,600Vacation Pay Payable...................................... 10,600


COMPREHENSIVE PROBLEM 3

1.

Jan. 2 Petty Cash............................................................. 2,000Cash.................................................................. 2,000

Mar. 4 Office Supplies...................................................... 789Miscellaneous Selling Expense........................... 256Miscellaneous Administrative Expense.............. 378

Cash.................................................................. 1,423

Apr. 5 Merchandise Inventory......................................... 14,000Accounts Payable............................................ 14,000

May 7 Accounts Payable................................................. 14,000Cash.................................................................. 14,000

10 Cash....................................................................... 9,455Cash Short and Over............................................ 90

Sales................................................................. 9,545

June 2 Notes Receivable.................................................. 80,000Accounts Receivable—Stevens..................... 80,000

Aug. 1 Cash....................................................................... 81,200Notes Receivable............................................. 80,000Interest Revenue.............................................. 1,200*

*$80,000 × 9% × 60/360 = $1,200

8 Cash....................................................................... 3,400Allowance for Doubtful Accounts....................... 600

Accounts Receivable—Jacobs...................... 4,000

25 Accounts Receivable—Jacobs............................ 600Allowance for Doubtful Accounts.................. 600

25 Cash....................................................................... 600Accounts Receivable—Jacobs...................... 600

Comp. Prob. 3 Continued

Sept. 2 Land....................................................................... 292,500Interest Expense................................................... 7,500*

Notes Payable.................................................. 300,000

*$300,000 × 90/360 × 10%

Oct. 2 Cash....................................................................... 60,000Notes Receivable.................................................. 40,000Accumulated Depreciation—Office Equipment. 25,000Loss on Sale of Office Equipment....................... 15,000

Office Equipment............................................. 140,000

Nov. 30 Sales Salaries Expense........................................ 60,400Office Salaries Expense....................................... 34,500

Employees Federal Income Tax Payable...... 17,082Social Security Tax Payable........................... 5,450Medicare Tax Payable..................................... 1,424Salaries Payable.............................................. 70,944

30 Payroll Tax Expense............................................. 7,066Social Security Tax Payable........................... 5,450Medicare Tax Payable..................................... 1,424State Unemployment Tax Payable................. 160*Federal Unemployment Tax Payable............. 32**

*$4,000 × 4.0%**$4,000 × 0.8%

Dec. 1 Notes Payable....................................................... 300,000Cash.................................................................. 300,000


Pension cost of $85,000 funded at $62,400.


2.

BLACKWELL COMPANYBank ReconciliationDecember 31, 2010

Balance according to bank statement................................ $126,400Add deposit in transit, not recorded by bank.................... 13,200

$139,600Deduct outstanding checks................................................. 30,600 Adjusted balance.................................................................. $109,000

Balance according to company’s records.......................... $109,650Deduct:

Bank service charges.................................................... 350Error in recording check............................................... 300

Adjusted balance.................................................................. $109,000

3. Miscellaneous Administrative Expense....................... 350Accounts Payable.......................................................... 300

Cash........................................................................... 650

4. a. Uncollectible Accounts Expense............................ 7,950Allowance for Doubtful Accounts...................... 7,950

To record estimated uncollectible accounts,$7,200 + $750.

b. Cost of Merchandise Sold........................................ 1,480Merchandise Inventory....................................... 1,480

To record inventory shrinkage.

c. Insurance Expense................................................... 10,200Prepaid Insurance................................................ 10,200

To record expired insurance.

d. Office Supplies Expense.......................................... 1,760Office Supplies.................................................... 1,760

To record supplies used during the period.


e. Depreciation Expense—Buildings.......................... 10,000Depreciation Expense—Office Equipment............. 12,500Depreciation Expense—Store Equipment.............. 12,500

Accumulated Depreciation—Buildings............. 10,000Accumulated Depreciation—Office Equipment 12,500Accumulated Depreciation—Store Equipment. 12,500

To record depreciation for the period.

Computations:Buildings ($400,000 × 2.5%)............... $10,000Office Equipment [1/2 × 25% × ($110,000 – $10,000)]..... 12,500Store Equipment ($50,000 × 25%)...... 12,500

f. Amortization Expense—Patents ($22,500/5).......... 4,500Patents.................................................................. 4,500

To record patent amortization, $22,500/5 years.

g. Depletion Expense.................................................... 13,200Accumulated Depletion....................................... 13,200

To record depletion, ($220,000/400,000 tons) × 24,000 tons.

h. Vacation Pay Expense.............................................. 4,800Vacation Pay Payable.......................................... 4,800

To record vacation pay for the period.

i. Product Warranty Expense...................................... 21,000Product Warranty Payable.................................. 21,000

To record product warranty for the period,$840,000 × 2.5%.

j. Interest Receivable................................................... 600Interest Revenue.................................................. 600

To record interest earned on note receivable, $40,000 × 90/360 × 6%.


5.

BLACKWELL COMPANYBalance Sheet

December 31, 2010

AssetsCurrent assets:

Petty cash..................................................... $ 2,000Cash.............................................................. 109,000Notes receivable.......................................... 40,000Accounts receivable.................................... $210,000Less allowance for doubtful accounts...... 7,200 202,800Merchandise inventory—at cost

(last-in, first-out)..................................... 144,200Interest receivable....................................... 600Prepaid insurance....................................... 20,400Office supplies............................................. 6,000

Total current assets............................... $ 525,000

Property, plant, and equipment:Land.............................................................. $292,500Buildings...................................................... $400,000Less accumulated depreciation................. 10,000 390,000

Office equipment......................................... $110,000Less accumulated depreciation................. 12,500 97,500

Store equipment.......................................... $ 50,000Less accumulated depreciation................. 12,500 37,500

Mineral rights............................................... $220,000Less accumulated depletion...................... 13,200 206,800

Total property, plant, and equipment... $1,024,300


LiabilitiesCurrent liabilities:

Social security tax payable....................... $ 10,420Medicare tax payable................................. 2,550Employees federal income tax

payable................................................... 17,260State unemployment tax

payable................................................... 100Federal unemployment tax

payable................................................... 20Salaries payable......................................... 85,000Accounts payable...................................... 140,000Interest payable.......................................... 3,200Product warranty payable......................... 21,000Vacation pay payable................................. 3,200Notes payable (current portion)................ 25,000

Total current liabilities......................... $ 307,750

Long-term liabilities:Vacation pay payable................................. $ 1,600Unfunded pension liability........................ 22,600Notes payable............................................. 75,000

Total long-term liabilities..................... 99,200 Total liabilities.................................................. $ 406,950

Owner’s EquityJ. Crane, capital............................................... 1,160,350

Total liabilities and owner’s equity................ $1,567,300

Comp. Prob. 3 Concluded

6. The merchandise inventory destroyed was $142,200, determined as follows:

Merchandise inventory, January 1............................... $144,200Purchases, January 1–February 7................................ 40,000 Merchandise available for sale..................................... $184,200Sales, January 1–February 7......................................... $70,000Less estimated gross profit ($70,000 × 40%)............... 28,000 Estimated cost of merchandise sold............................ 42,000 Estimated merchandise inventory destroyed.............. $142,200

SPECIAL ACTIVITIES

Activity 11–1

The firm has no implicit or explicit contract to pay any bonus. The bonus is dis -cretionary, even if the firm paid a two-week bonus for 10 straight years. The firm is not behaving unethically for reducing the bonus to one week—regardless of the reason. Suzanne Thompson, on the other hand, has taken things into her own hands. Sensing that she is being cheated, she tries to rectify the situation to her own advantage by working overtime that isn’t required. This behavior could be considered fraudulent, even though Suzanne is actually present on the job during the overtime hours. The point is that the overtime is not required by the firm. Suzanne is incorrect in thinking that her behavior is justified because she did not receive the full two-week bonus. In fact, this behavior would not be justi-fied even if she had a legitimate claim against the company. If she had a claim or grievance against the firm, then it should be handled by other procedural or legal means.

Activity 11–2

Cara’s interpretation of the pension issue is correct. The employee earns the pension during the working years. The pension is part of the employee’s com-pensation that is deferred until retirement. Thus, Tidal should record an expense equal to the amount of pension benefit earned by the employee for the period. This gives rise to the rather complex issue of estimating the amount of the pen-sion expense. Jose indicates that the complexity of this calculation makes deter-mining the annual pension expense impossible. This is not so. There are a num-ber of mathematical and statistical approaches (termed “actuarial” approaches) that can reliably estimate the amount of benefits earned by the workforce for a given year.

As a side note, Jose’s perspective can be summarized as “pay as you go.” In his interpretation, there is no expense until a pension is paid to the retiree. Failing to account for pension promises when they are earned is not considered sound ac-counting.

Activity 11–3

The CEO may have requested the two changes because they would reduce the amount of depreciation expense and increase the amount of reported earnings recorded in a particular year. Thus, the CEO’s bonus would be higher due to the larger reported earnings. Straight-line depreciation recognizes lower deprecia-tion expense in the earlier years of a truck’s life. As long as the company is re-placing trucks, straight-line depreciation will result in a lower depreciation ex-pense and hence a higher income number. Adding 50% to the useful lives of trucks (such as increasing the life from six to nine years) would spread the recognition of depreciation expense over a longer life. Thus, depreciation ex-pense would be lower and income higher in any particular year.

The CEO may request a change from one generally accepted accounting princi-ple to another. Changing from double-declining-balance to straight-line deprecia-tion is such a change. Though the CEO may be suggesting the change in order to influence the bonus, the change is acceptable, if Sheile Trucking Company’s auditors agree with the change. The increase in the useful lives of the trucks is another matter. The useful lives of trucks should be based on objective analysis. An arbitrary increase in useful lives for all the trucks cannot be supported. Such a change could be viewed as a violation of generally accepted accounting princi-ples.

Activity 11–4

a. The so-called “underground economy” hides transactions from IRS scrutiny by conducting business with cash (not check or credit card, which leaves an audit trail). The intent in many such transactions is to evade income tax ille-gally. However, just because a transaction is in cash does not exempt it from taxation. Rida also appears to perform construction services on a cash basis to evade reporting income while paying employees with cash to avoid paying social security and Medicare payroll taxes. The IRS reports that nearly 86% of the persons convicted of evading employment taxes were sentenced to an average of 17 months in prison and ordered to make restitution to the gov-ernment for the taxes evaded, plus interest and penalties.

b. Fio should respond that he would rather receive a payroll check as a normal employee does. Receiving cash as an employee, rather than a payroll check, subverts the U.S. tax system. That is, such cash payments do not include de-ductions for payroll taxes, as required by law. That is why, for example, cash tips must be formally reported to the IRS and subjected to payroll tax deduc-tions by the employer. In addition, if Fio followed Sara’s advice, Fio not only would be avoiding payroll deductions, but would also be underreporting in-come. This would subject Fio to potential fines and possible criminal prose-cution for underreporting income.

Activity 11–5

The purpose of this activity is to familiarize students with retrieving and using IRS forms. Students should be able to find the three required forms without much difficulty. Encourage students to retrieve the forms from the IRS Web site, since this is a useful source for any IRS form or publication that they might need. IRS Web site forms come in .pdf format, which means an Adobe Acrobat Reader is necessary to open and print the file. This software is available as a free plug-in on most Internet browser software. However, some students may need to down-load a free version in order to open the forms. This is also a useful exercise, since many sophisticated forms on the Web require an Acrobat Reader.

The W-2 form is the Annual Wage and Tax Statement transmitted by the employer to the IRS. The IRS uses this information to reconcile the taxpayer’s reported in -come and withholding taxes with the taxpayer’s tax return. Copies of the W-2 are provided for the employee’s own records and for submitting with state and fed-eral tax returns.

Form 940 is the Employer’s Annual Federal Unemployment Tax Return. The FUTA tax is reported annually, while the 941 payroll taxes are reported quarterly to the IRS.

Form 941 is the Employer’s Quarterly Federal Tax Return. This return is used to report federal withholding payroll taxes collected from employees and FICA taxes (both employee and employer portions) for the quarter.

Activity 11–6

This activity does not require the student to research the contingency notes for the Altria Group. The contingency disclosure is extensive and complicated. Rather, the student should identify Altria Group’s main business, and from this information determine the likely cause of the contingency disclosures.

a. Altria Group is a holding company for a number of businesses including Philip Morris. Thus, Altria’s primary business is in the manufacture and dis-tribution of tobacco products.

b. The health concerns surrounding tobacco products give rise to numerous lawsuits and legal actions against Altria. The notes to the financial state-ments include an extensive section describing the scope and status of these actions. As of February 15, 2008, Altria had over 111 cases pending, includ-ing ten class actions and two health care recovery actions (by state and fed-eral governments). Altria’s Web site provides a section describing some of these actions.

Documents

Warren SM Ch.11 Final