Intermediate accounting 17e stice skousen cengage chapter 17

Stice | Stice | Skousen Intermediate Accounting,17E Employee Compensation— Payroll, Pensions, and Other Compensation Issues PowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine University 17-1 © 2010 Cengage Learning Payroll and Payroll Taxes Social security and income tax legislation impose five taxes based on payrolls: Federal 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) (continues) 17-2 Payroll and Payroll Taxes State unemployment insurance (tax to employer only) Individual income tax (tax to employee only but withheld and paid by employer) 17-3 Federal 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 employee’s wages • In 2007, annual wages up to $97,200 were subject to 6.20% of FICA tax 17-4 Federal Hospital Insurance • FICA 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 17-5 Federal Unemployment Insurance • The 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) 17-6 Federal Unemployment Insurance • Tax 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 17-7 State Unemployment Insurance • State 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 17-8 Income 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) 17-9 Income 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 17-10 Plan Contributions • Under the Pension Protection Act of 2006, companies are required to contribute an amount equal to their service cost and interest cost each year plus an additional contribution designed to eliminate any remaining shortfall within seven years • Thornton made a cash contribution to the pension fund of $115,000 This is reflected on the worksheet as item (f) on Slide 17-58 (continues) 17-57 17-58 Summary Journal Entries Pension Expense 115,136 Pension-Related Asset/Liability 101,500 Accumulated Other Comprehensive Income 13,636 Summary journal entry to recognize pension expense for 2011 (continues) 17-59 Summary Journal Entries Pension-Related Asset/Liability Cash 115,000 115,000 Summary journal entry to record pension fund contribution 17-60 Thornton Electronics—2012 • • • • • • • Service cost as reported by actuaries$87,000 Contributions to pension plan $75,000 Benefits paid to retirees $132,000 Actual return on pension fund $26,350 Actuarial change increasing PBO $80,000 Obligation discount rate 11.0% Long-term expected rate of return on pension fund 10.0% (continues) 17-61 Thornton Electronics—2013 • Service cost as reported by actuaries $115,000 • Contributions to pension plan $80,000 • Benefits paid to retirees $140,000 • Actual return on pension fund $175,500 • Obligation discount rate 11.0% • Long-term expected rate of return 10.0% • Accumulated benefit obligation, December 31, 2013 $1,795,150 (continues) 17-62 Amortization of Deferred Net Pension Gain or Loss from Prior Years • The deferred pension gain or loss from prior years is amortized over future years if it accumulates to more than an amount defined by the FASB as a corridor amount • Amortization is required only on that portion of the unrecognized net gain or loss that exceeds 10% of the greater of:  PBO or  the market-related value of plan assets at the beginning of the year 17-63 Corridor Amortization May use any amortization method that:  equals or exceeds straight-line amortization over remaining expected service years of covered employees, and  is consistently applied 17-64 Disclosure of Pension Plans FASB Statement No 132 requires the following major disclosure requirements for most publicly traded companies: A reconciliation between the beginning and ending balances for the projected benefit obligation A reconciliation between the beginning and ending balances in the fair value of the pension fund (continues) 17-65 Disclosure of Pension Plans disclosure of the accumulated benefit obligation The funded status of the plans and the amounts recognized in the balance sheet The components of pension expense for the period Any effects on the other comprehensive income for the period and the details of the existing balances in accumulated other comprehensive income A (continues) 17-66 Disclosure of Pension Plans The assumptions used relating to (a) discount rate, (b) rate of compensation increase, and (c) expected long-term rate of return on the pension fund Disclosure of the percentage of the different types of investments held in the pension fund along with a narrative description of the investment strategy (continues) 17-67 Disclosure of Pension Plans For each of the next years, disclose an estimate of the amount of cash to be paid in benefits and the amount of cash to be contributed by the company to the pension fund 10 For postretirement benefits: assumed heath care cost trend rates and their effect on service and interest costs and the ABO if the assumed health care cost trend rates were one percentage point higher 17-68 Pension Settlements and Curtailments • Settlement of a pension plan occurs when an employer takes an irrevocable action that relieves the employer of primary responsibility for all or part of the obligation • Curtailment of a pension plan arises from an event that significantly reduces the benefits that will be provided for present employees’ future services  Termination of an employee earlier than expected  Termination or suspension of a pension plan (continues) 17-69 Pension Settlements and Curtailments FASB Statement No 88 requires that a settlement be recognized in the current period if it― Was an irrevocable action, Relieved the employer of primary responsibility for the pension benefit obligation, and Eliminated significant risks related to the obligation and the assets used to effect the settlement 17-70 Nonpay-Related Rather than Pay-Related Benefits • The date when employees become eligible for postretirement benefits is known as the full eligibility date • After that date is reached, the employee is eligible to receive 100% of the postretirement benefits regardless of any future service or pay level reached 17-71 ... Employees Income Taxes Payable Cash 16,000 1,224 1,600 13 ,176 To record payment of payroll and related employee withholdings (continues) 17- 11 Accounting for Payroll Taxes The employer’s payroll tax... sheet Accounting for pension settlements, curtailments, and terminations Disclosures needed to supplement the amounts reported in the financial statements 17- 28 Simple Illustration of Pension Accounting. .. only) (continues) 17- 2 Payroll and Payroll Taxes State unemployment insurance (tax to employer only) Individual income tax (tax to employee only but withheld and paid by employer) 17- 3 Federal Insurance