17-1Intermediate Accounting,17EStice | Stice | Skousen 2010 Cengage LearningPowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine UniversityEmployee Compensation Payroll, Pensions, and Other Compensation Issues17-2Payroll and Payroll TaxesFederal old-age, survivors, and disability (tax to both the employee and employer)Federal hospital insurance (tax to both employer and employee)Federal unemployment insurance (tax to employer only)Social security and income tax legislation impose five taxes based on payrolls:(continues)17-3Payroll and Payroll TaxesState unemployment insurance (tax to employer only) Individual income tax (tax to employee only but withheld and paid by employer)17-4Federal Insurance Contributions Act (FICA)The Federal Insurance Contributions Act (FICA) provides for FICA taxes from both employers and employees to provide funds for federal old-age, survivors, and disability benefits for certain individuals and members of their families. The employer is required to withhold FICA taxes from each employees wages. In 2007, annual wages up to $97,200 were subject to 6.20% of FICA tax.17-5FICA also includes a provision for Medicare tax. This tax differs from the tax previously discussed in that the tax is applied to all wages earned. For 2007, the rate was 1.45% for both employer and employee.Federal Hospital Insurance17-6Federal Unemployment InsuranceThe Federal Social Security Act and the Federal Unemployment Tax Act (FUTA) provide for the establishment of unemployment insurance plans. Employers with insured workers employed in each of 20 weeks during a calendar year or who pay $1,500 or more in wages during a calendar quarter are affected.(continues)17-7Federal Unemployment InsuranceTax rate on the first $7,000 of wages earned has been 6.2% since 1985. Employer can apply for a credit limited to 5.4% for taxes paid on state unemployment tax, effectively reducing the federal tax to 0.8% (6.2% 5.4%). No tax is levied on the employee.17-8State Unemployment InsuranceState unemployment compensation laws (SUTA) differ across states. Most states only tax employers, but a few tax both. Savings under state merit systems are also allowed as credits in the calculation of the federal contribution.17-9Income Tax Federal income taxes on the wages of individuals are collected in the period in which the wages are paid. The “pay-as-you-go” plan requires employers to withhold income tax from wages paid to their employees.(continues)17-10Income Tax Withholding is required not only of employers engaged in a trade or business but also of religious and charitable organizations, educational institutions, social organizations, and governments of the United States.17-11Salaries Expense16,000FICA Taxes Payable 1,224Employees Income Taxes Payable 1,600Cash13,176 To record payment of payroll and related employee withholdings.Salaries for the month of January for a retail store are $16,000. The SUTA tax rate is 5.4%. Withholdings are $1,600 and FICA tax rate is 7.65%. The employer records the payroll as follows:Accounting for Payroll Taxes(continues)17-12Accounting for Payroll TaxesPayroll Tax Expense2,216FICA Taxes Payable 1,224State Unemployment Taxes Payable 864Federal Unemployment TaxesPayable128 To record payment of payroll and related employee withholdings.The employers payroll tax entry is as follows:$16,000 .0765$16,000 0.054.008 (0.062 0.054) $16,00017-13Accounting for Payroll TaxesPayroll Tax Expense583 FICA Taxes Payable459 State Unemployment Taxes Payable 108 FUTA Payable 16To accrue the payroll tax liability of the employer.Assume accrued salaries at December 31 were $9,500. Of this amount, $2,000 was subject to unemployment taxes and $6,000 to FICA tax. The adjusting entry for the employers payroll taxes would be as follows:0.0765 0.0765 $6,000$6,0000.054 0.054 $2,000$2,0000.008 0.008 $2,000$2,00017-14Compensated Absences Vacations Holidays Illnesses Other personal activitiesCompensated absences include payments by employers for:(continues)17-15Compensated AbsencesAt the end of any given period, the firm has a liability for the earned but unused compensated absences. The estimated amounts earned must be charged against current revenue and a liability established for that amount. The difficult part comes when estimating how much should be accrued.(continues)17-16FASB Statement No. 43 requires a liability to be recognized for compensated absences that 1. have been earned through services already rendered2. vest or can be carried forward to subsequent years, and3. are estimable and probable.Compensated Absences17-17S benefit payments are shown in entry (d) on Slide 17-53 as a decrease in both the pension fund and the remaining PBO.(continues)17-5317-54Amortization of Prior Service Cost Prior serv