CHAPTER 11 CURRENT LIABILITIES AND PAYROLL DISCUSSION QUESTIONS No A discounted note payable has no stated interest rate, but provides interest by discounting the note proceeds The discount, which is the difference between the proceeds and the face of the note, is the interest and is accounted for as such a Employee’s federal income taxes, social security, and Medicare b Employees Federal Income Tax Payable, Social Security Tax Payable, and Medicare Tax Payable The deductions from employees’ earnings are for amounts owed (liabilities) to others for such items as federal taxes, state and local income taxes, and contributions to pension plans a c c b b An advantage of using a separate payroll bank account is that reconciling the bank statements is simplified In addition, a payroll bank account establishes control over payroll checks and, thus, prevents their theft or misuse a b Constants are data that remain unchanged from payroll to payroll These include employee names, social security numbers, marital status, number of income tax withholding allowances, rates of pay, tax rates, and withholding tables Variables are data that change from payroll to payroll These include number of hours or days worked for each employee, accrued days of sick leave, vacation credits, total earnings to date, and total taxes withheld The vacation pay expense should be recorded during the period in which the vacation privilege is earned In a defined contribution plan, the company invests contributions on behalf of the employee during the employee’s working years Normally, the employee and employer contribute to the plan The employee’s pension depends on the total contributions and the investment returns earned on those contributions 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 recorded 10 When the defective product is repaired, the repair costs would be recorded by debiting Product Warranty Payable and crediting Cash, Supplies, or another appropriate account 11-1 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 11 Current Liabilities and Payroll PRACTICE EXERCISES PE 11–1A a $70,000 b $69,650 [$70,000 – ($70,000 × 30/360 × 6%)] PE 11–1B a $150,000 b $148,125 [$150,000 – ($150,000 × 45/360 × 10%)] PE 11–2A Total wage payment……………………………………………………………… One allowance (provided by IRS)…………………………………………… $70.00 Multiplied by allowances claimed on Form W-4…………………………… × Amount subject to withholding……………………………………………… Initial withholding from wage bracket in Exhibit 3……………………… Plus additional withholding: 28% of excess over $1,648*……………… Federal income tax withholding……………………………………………… $2,600.00 140.00 $2,460.00 $ 327.40 227.36 $ 554.76 *($2,460 – $1,648) × 28% PE 11–2B Total wage payment…………………………………………………………… One allowance (provided by IRS)……………………………………………… $70.00 Multiplied by allowances claimed on Form W-4…………………………… × Amount subject to withholding……………………………………………… Initial withholding from wage bracket in Exhibit 3……………………… Plus additional withholding: 25% of excess over $704*………………… Federal income tax withholding……………………………………………… *($1,330 – $704) × 25% $1,400.00 70.00 $1,330.00 $ 91.40 156.50 $ 247.90 PE 11–3A Total wage payment…………………………………………… Less: Federal income tax withholding………………… Social security tax ($2,600 × 6%)………………… Medicare tax ($2,600 × 1.5%)…………………… Net pay………………………………………………………… $2,600.00 $554.76 156.00 39.00 749.76 $1,850.24 PE 11–3B Total wage payment………………………………………… Less: Federal income tax withholding………………… Social security tax ($1,400 × 6%)……………… Medicare tax ($1,400 × 1.5%)……………………… Net pay…………………………………………………………… $1,400.00 $247.90 84.00 21.00 352.90 $1,047.10 PE 11–4A Salaries Expense Social Security Tax Payable Medicare Tax Payable Employees Federal Income Tax Payable Salaries Payable 220,000 13,200 3,300 43,560 159,940 PE 11–4B Salaries Expense Social Security Tax Payable Medicare Tax Payable Employees Federal Income Tax Payable Retirement Savings Deductions Payable Salaries Payable 90,000 5,400 1,350 17,820 5,400 60,030 PE 11–5A Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable* Federal Unemployment Tax Payable** 18,670 13,200 3,300 1,890 280 * $35,000 × 5.4% ** $35,000 × 0.8% PE 11–5B Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable* Federal Unemployment Tax Payable** 7,370 5,400 1,350 540 80 * $10,000 × 5.4% ** $10,000 × 0.8% PE 11–6A a b Vacation Pay Expense Vacation Pay Payable Vacation pay accrued for the period 19,500 Pension Expense Cash To record pension contribution, 6% × $260,000 15,600 19,500 15,600 PE 11–6B a b Vacation Pay Expense Vacation Pay Payable Vacation pay accrued for the period 35,000 Pension Expense Cash Unfunded Pension Liability To record pension cost and funding 201,250 35,000 175,000 26,250 PE 11–7A a b Feb July 28 Product Warranty Expense Product Warranty Payable To record warranty expense for February, 6% × $200,000 24 Product Warranty Payable Supplies Wages Payable 12,000 12,000 92 60 32 PE 11–7B a b July Nov 31 Product Warranty Expense Product Warranty Payable To record warranty expense for July, 4.5% × $325,000 11 Product Warranty Payable Cash 14,625 14,625 220 220 PE 11–8A a December 31, 2014 Quick Ratio = Quick Assets ÷ Current Liabilities Quick Ratio = ($650 + $1,500 + $700) ÷ $2,375 Quick Ratio = 1.2 December 31, 2013 Quick Ratio = Quick Assets ÷ Current Liabilities Quick Ratio = ($680 + $1,550 + $770) ÷ $2,000 Quick Ratio = 1.5 b The quick ratio of Nabors Company has declined from 1.5 in 2013 to 1.2 in 2014 This decrease is the result of a large increase in accounts payable compared to decreases in the three types of quick assets (cash, temporary investments, and accounts receivable) PE 11–8B a December 31, 2014 Quick Ratio = Quick Assets ÷ Current Liabilities Quick Ratio = ($1,000 + $1,200 + $800) ÷ $1,875 Quick Ratio = 1.6 December 31, 2013 Quick Ratio = Quick Assets ÷ Current Liabilities Quick Ratio = ($1,140 + $1,400 + $910) ÷ $2,300 Quick Ratio = 1.5 b The quick ratio of Adieu Company has improved from 1.5 in 2013 to 1.6 in 2014 This increase is the result of a small decrease in the three types of quick assets (cash, temporary investments, and accounts receivable) compared to the larger decrease in the current liability, accounts payable EXERCISES Ex 11–1 Current liabilities: Federal income taxes payable*……………………………………………………… Advances on magazine subscriptions**…………………………………………… Total current liabilities……………………………………………………………… $ 336,000 1,593,750 $1,929,750 * $840,000 × 40% ** 25,000 × $85 × 9/12 = $1,593,750 The nine months of unfilled subscriptions are a current liability because Bon Nebo received payment prior to providing the magazines Ex 11–2 a b Merchandise Inventory Interest Expense* Notes Payable 792,000 8,000 Notes Payable Cash 800,000 Notes Receivable Sales Interest Revenue* 800,000 Cash Notes Receivable 800,000 * $800,000 × 6% × 60/360 800,000 800,000 792,000 8,000 800,000 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 proceeds c Alternative (1) is more favorable to the borrower This can be verified by comparing the effective interest rates for each loan as follows: Situation (1): 8% effective interest rate ($3,200 ì 360/60) ữ $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 discounted note because the creditor lent only $236,800 in return for $3,200 interest over 60 days In the undiscounted note, the creditor must lend $240,000 for 60 days to earn the same $3,200 interest Ex 11–4 a b Accounts Payable Notes Payable 150,000 Notes Payable Interest Expense* Cash 150,000 875 150,000 150,875 * $150,000 × 7% × 30/360 Ex 11–5 a b Accounts Payable Interest Expense* Notes Payable 89,100 900 Notes Payable Cash 90,000 * $90,000 × 8% × 45/360 90,000 90,000 Ex 11–6 a b c June Dec June 30 Building Land Note Payable Cash 450,000 350,000 400,000 400,000 31 Note Payable Interest Expense ($400,000 × 6% × 1/2) Cash 20,000 12,000 30 Note Payable Interest Expense ($380,000 × 6% × 1/2) Cash 20,000 11,400 32,000 31,400 Ex 11–7 a $1,276 is the amount disclosed as the current portion of long-term debt b The current liabilities increased by $1,225 ($1,276 – $51) c $14,041 ($15,317 – $1,276) Ex 11–8 a Regular pay (40 hrs × $50)…………………………………………… Overtime pay (10 hrs × $100)………………………………………… Gross pay……………………………………………………………… $2,000 1,000 $3,000 b Gross pay……………………………………………………………… Less: Social security tax (6% × $3,000)…………………………… Medicare tax (1.5% × $3,000)……………………………… Federal withholding………………………………………… Net pay…………………………………………………………………… $3,000 $180 45 686 911 $2,089 Ex 11–9 Consultant Regular earnings……………………………… Overtime earnings……………………………… Gross pay………………………………………… $3,800.00 Less: Social security tax…………………… Medicare tax…………………………… $ 228.001 57.004 $3,800.00 Computer Programmer Administrator $1,600.00 1,200.00 $2,800.00 $ 168.00 42.00 $1,760.00 880.00 $2,640.00 $ 158.40 39.60 CHAPTER 11 Current Liabilities and Payroll Prob 11–1B (Concluded) b a Product Warranty Expense Product Warranty Payable Warranty expense for the current year Interest Expense Interest Payable Interest on notes, $20,000 × 9% × 45/360 × 19 26,800 26,800 4,275 4,275 CHAPTER 11 Current Liabilities and Payroll Prob 11–2B Dec a Dec b 2 232,260 71,100 17,775 35,500 53,325 775,040 90,735 71,100 17,775 1,620 240 $30,000 × 0.8% 30 Sales Salaries Expense Warehouse Salaries Expense Office Salaries Expense Employees Income Tax Payable Social Security Tax Payable Medicare Tax Payable Bond Deductions Payable Group Insurance Payable Salaries Payable 625,000 240,000 320,000 232,260 71,100 17,775 35,500 53,325 775,040 $1,185,000 × 6% $1,185,000 × 1.5% Jan b 30 Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable 625,000 240,000 320,000 $30,000 × 5.4% Dec a 30 Sales Salaries Expense Warehouse Salaries Expense Office Salaries Expense Employees Income Tax Payable Social Security Tax Payable Medicare Tax Payable Bond Deductions Payable Group Insurance Payable Salaries Payable Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable $1,185,000 × 5.4% $1,185,000 × 0.8% 162,345 71,100 17,775 63,990 9,480 CHAPTER 11 Current Liabilities and Payroll Gross Federal Income Social Security Medicare Tax Withheld $ 9,372 Tax Withheld $ 2,692.80 Tax Withheld $ 673.20 1,512.00 4,044.60 3,312.00 270.00 292.50 5,040.00 $17,163.90 378.00 1,011.15 828.00 67.50 73.13 1,260.00 $4,290.98 Prob 11–3B Employee Earnings* $44,880 Addai…………………… Kasay………………… 25,200 McGahee……………… 67,410 Moss…………………… 55,200 Stewart……………… 4,500 Tolbert………………… 4,875 Wells………………… 84,000 3,731 12,999 9,396 758 669 18,872 * The gross earnings are determined by multiplying the monthly earnings by the number of months of employment based on the date of hire a Social security tax paid by employer……………………………………… $17,163.90 b Medicare tax paid by employer……………………………………………… 4,290.98 c Earnings subject to unemployment compensation tax, $10,000 for all employees except Stewart and Tolbert Thus, total earnings subject to SUTA and FUTA are $59,375 [(5 × $10,000) + $4,500 + $4,875] State unemployment compensation tax: $59,375 × 5.4%……………… 3,206.25 d Federal unemployment compensation tax: $59,375 × 0.8%…………… 475.00 e Total payroll tax expense…………………………………………………… $25,136.13 CHAPTER 11 Current Liabilities and Payroll PAYROLL FOR WEEK ENDING Prob 11–4B EARNINGS Employee Carlton Grove Johnson Koufax Maddux Seaver Spahn Winn Young Total Hours Regular Overtime 52 2,000.00 900.00 36 45 37 1,872.00 2,320.00 1,665.00 435.00 46 48 43 2,080.00 2,000.00 2,160.00 14,097.00 468.00 600.00 243.00 2,646.00 Social Security Tax Total 2,900.00 4,000.00 1,872.00 2,755.00 1,665.00 3,200.00 2,548.00 2,600.00 2,403.00 23,943.00 174.00 240.00 112.32 165.30 99.90 192.00 152.88 156.00 144.18 1,436.58 Medicare Tax December 7, 2014 DEDUCTIONS Federal Income Tax 43.50 60.00 28.08 41.33 24.98 48.00 38.22 39.00 36.05 359.16 667.00 860.00 355.68 578.55 349.65 768.00 382.20 572.00 480.60 5,013.68 PAID U.S Savings Bonds 60.00 100.00 44.00 62.00 120.00 75.00 80.00 541.00 Total 944.50 1,260.00 496.08 829.18 536.53 1,128.00 573.30 842.00 740.83 7,350.42 Net Pay Ck No 1,955.50 2,740.00 1,375.92 1,925.82 1,128.47 2,072.00 1,974.70 1,758.00 1,662.17 16,592.58 328 329 330 331 332 333 334 335 336 Sales Salaries Expense Office Salaries Expense Social Security Tax Payable Medicare Tax Payable Employees Federal Income Tax Payable Bond Deductions Payable Salaries Payable ACCOUNT DEBITED 16,743.00 7,200.00 1,436.58 359.16 5,013.68 541.00 16,592.58 11-29 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Sales Salaries Expense Office Salaries Expense 2,900.00 4,000.00 1,872.00 2,755.00 1,665.00 3,200.00 2,548.00 2,600.00 2,403.00 16,743.00 7,200.00 CHAPTER 11 Current Liabilities and Payroll Prob 11–5B Dec Medical Insurance Payable Cash 2,520 Social Security Tax Payable Medicare Tax Payable Employees Federal Income Tax Payable Cash 2,913 728 4,490 Bond Deductions Payable Cash 2,300 2,520 8,131 2,300 12 Sales Salaries Expense Officers Salaries Expense Office Salaries Expense Social Security Tax Payable Medicare Tax Payable Employees Federal Income Tax Payable Employees State Income Tax Payable Bond Deductions Payable Medical Insurance Payable Salaries Payable 14,500 7,100 2,600 12 Salaries Payable Cash 15,418 1,452 363 4,308 1,089 1,150 420 15,418 15,418 12 Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable 2,220 15 Social Security Tax Payable Medicare Tax Payable Employees Federal Income Tax Payable Cash 2,904 726 4,308 1,452 363 315 90 7,938 11-31 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 11 Current Liabilities and Payroll Prob 11–5B (Concluded) Dec 26 Sales Salaries Expense Officers Salaries Expense Office Salaries Expense Social Security Tax Payable Medicare Tax Payable Employees Federal Income Tax Payable Employees State Income Tax Payable Bond Deductions Payable Salaries Payable 14,250 7,250 2,750 26 Salaries Payable Cash 15,873 Dec 15,873 26 Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable 2,009 30 Employees State Income Tax Payable Cash 6,258 30 Bond Deductions Payable Cash 2,300 31 Pension Expense Cash Unfunded Pension Liability To record pension cost and unfunded liability 1,455 364 4,317 1,091 1,150 15,873 31 Sales Salaries Expense Officers Salaries Expense Office Salaries Expense Salaries Payable Accrued wages for the period 31 Vacation Pay Expense Vacation Pay Payable Vacation pay accrued for the period 1,455 364 150 40 6,258 2,300 65,500 55,400 10,100 4,275 2,175 825 7,275 13,350 13,350 CHAPTER 11 Current Liabilities and Payroll COMPREHENSIVE PROBLEM Jan Feb Apr May June Aug Sept Petty Cash Cash 26 Office Supplies Miscellaneous Selling Expense Miscellaneous Administrative Expense Cash 4,500 4,500 1,680 570 880 3,130 14 Merchandise Inventory Accounts Payable 31,300 13 Accounts Payable Cash 31,300 17 Cash Cash Short and Over Sales 21,200 40 31,300 31,300 21,240 Notes Receivable Accounts Receivable—Ryanair 180,000 Cash Notes Receivable Interest Revenue ($180,000 × 8% × 60/360 = $2,400) 182,400 180,000 180,000 2,400 24 Cash Allowance for Doubtful Accounts Accounts Receivable—Finley 7,600 1,400 15 Accounts Receivable—Finley Allowance for Doubtful Accounts 1,400 Cash Accounts Receivable—Finley 1,400 9,000 1,400 1,400 CHAPTER 11 Current Liabilities and Payroll Comp Prob (Continued) Sept Oct Nov 15 Land Interest Expense Notes Payable ($670,000 × 90/360 × 9%) 654,925 15,075 17 Cash Notes Receivable Accumulated Depreciation—Office Equipment Loss on Sale of Office Equipment Office Equipment 135,000 100,000 64,000 21,000 30 Sales Salaries Expense Office Salaries Expense Employees Federal Income Tax Payable Social Security Tax Payable Medicare Tax Payable Salaries Payable 135,000 77,250 30 Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable* Federal Unemployment Tax Payable** 670,000 320,000 39,266 12,735 3,184 157,065 16,229 12,735 3,184 270 40 *$5,000 × 5.4% **$5,000 × 0.8% Dec 14 Notes Payable Cash 670,000 31 Pension Expense Cash Unfunded Pension Liability Pension cost of $190,400 funded at $139,700 190,400 670,000 139,700 50,700 CHAPTER 11 Current Liabilities and Payroll Comp Prob (Continued) KORNETT COMPANY Bank Reconciliation December 31, 2014 Balance according to bank statement Add deposit in transit, not recorded by bank $283,000 29,500 $312,500 68,540 $243,960 Deduct outstanding checks Adjusted balance Balance according to company’s records Deduct: Bank service charges Error in recording check $245,410 750 700 $243,960 Adjusted balance b c d Miscellaneous Expense Accounts Payable Cash a Bad Debt Expense Allowance for Doubtful Accounts To record estimated uncollectible accounts, $16,000 + $2,000 Cost of Merchandise Sold Merchandise Inventory To record inventory shrinkage Insurance Expense Prepaid Insurance To record expired insurance Office Supplies Expense Office Supplies To record supplies used during the period 750 700 1,450 18,000 18,000 3,300 3,300 22,820 22,820 3,920 3,920 CHAPTER 11 Current Liabilities and Payroll Comp Prob (Continued) e Depreciation Expense—Buildings Depreciation Expense—Office Equipment Depreciation Expense—Store Equipment Accumulated Depreciation—Buildings Accumulated Depreciation—Office Equipment Accumulated Depreciation—Store Equipment To record depreciation for the period 36,000 44,000 5,000 36,000 44,000 5,000 Computations: Buildings ($900,000 × 4.0%)…………………… $36,000 Office Equipment [20% × ($246,000 – $26,000)]……………… Store Equipment [1/2 × 10% × ($112,000 – $12,000)]………… f g h i j 44,000 5,000 Amortization Expense—Patents Patents To record patent amortization, $48,000 ÷ years 6,000 6,000 Depletion Expense Accumulated Depletion To record depletion, ($546,000 ÷ 910,000 tons) × 50,000 tons 30,000 Vacation Pay Expense Vacation Pay Payable To record vacation pay for the period 10,500 Product Warranty Expense Product Warranty Payable To record product warranty for the period, $1,900,000 × 4.0% 76,000 Interest Receivable Interest Revenue To record interest earned on note receivable, $100,000 × 75/360 × 9% 30,000 10,500 76,000 1,875 1,875 KORNETT COMPANY Balance Sheet December 31, 2014 Assets Current assets: Petty cash Cash Notes receivable Accounts receivable Less allowance for doubtful accounts $ $470,000 16,000 Merchandise inventory—at cost Interest receivable Prepaid insurance Office supplies 4,500 243,960 100,000 454,000 320,000 1,875 45,640 13,400 Total current assets Property, plant, and equipment: Land Buildings Less accumulated depreciation $900,000 36,000 864,000 Office equipment Less accumulated depreciation $246,000 44,000 202,000 Store equipment Less accumulated depreciation $112,000 5,000 107,000 Mineral rights Less accumulated depletion $546,000 30,000 516,000 Total property, plant, and equipment Intangible assets: Patents Total assets $1,183,375 $654,925 2,343,925 42,000 $3,569,300 CHAPTER 11 Current Liabilities and Payroll Comp Prob (Concluded) Liabilities Current liabilities: Social security tax payable Medicare tax payable Employees federal income tax payable State unemployment tax payable Federal unemployment tax payable Salaries payable Accounts payable Interest payable Product warranty payable Vacation pay payable (current portion) Notes payable (current portion) Total current liabilities Long-term liabilities: Vacation pay payable Unfunded pension liability Notes payable Total long-term liabilities Total liabilities $ 25,470 4,710 40,000 270 40 157,000 131,600 28,000 76,000 7,140 70,000 $ 540,230 $ 3,360 50,700 630,000 684,060 $1,224,290 Owner’s Equity J Kornett, capital Total liabilities and owner’s equity 2,345,010 $3,569,300 CASES & PROJECTS CP 11–1 The firm has no implicit or explicit contract to pay any bonus The bonus is discretionary, 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 Tonya Latirno, 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 Tonya is actually present on the job during the overtime hours The point is that the overtime is not required by the firm Tonya 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 justified 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 CP 11–2 Sumana’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 compensation that is deferred until retirement Thus, Felton 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 pension expense Francie indicates that the complexity of this calculation makes determining the annual pension expense impossible This is not so There are a number 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, Francie’s perspective can be summarized as “pay as you go.” In her 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 accounting CP 11–3 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 illegally However, just because a transaction is in cash does not exempt it from taxation Tina Song 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 government for the taxes evaded, plus interest and penalties b Marvin 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 not include deductions 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 deductions by the employer In addition, if Marvin followed Tina’s advice, Marvin not only would be avoiding payroll deductions, but would also be underreporting income This would subject Marvin to potential fines and possible criminal prosecution for underreporting income CP 11–4 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 download 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 income 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 federal 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 CP 11–5 This activity does not require the student to research the contingency notes for 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 distribution 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 statements include an extensive section describing the scope and status of these actions As of December 31, 2011, Altria had over 109 cases pending, including 18 class actions and health care recovery action (by state and federal governments) Altria’s Form 10-K provides a section describing some of these actions .. .CHAPTER 11 Current Liabilities and Payroll PRACTICE EXERCISES PE 11 1A a $70,000 b $69,650 [$70,000 – ($70,000 × 30/360 × 6%)] PE 11 1B a $150,000 b $148,125 [$150,000... on notes, $30,000 × 8.0% × 30/360 × 32,500 32,500 1,800 1,800 CHAPTER 11 Current Liabilities and Payroll Prob 11 2A Dec a Dec b 2 118 ,800 40,500 10,125 14,850 12,150 478,575 52,795 40,500 10,125... liability will occur and the amount of the liability is reasonably estimable CHAPTER 11 Current Liabilities and Payroll Ex 11 21 a Damage Awards and Fines EPA Fines Payable Litigation Claims Payable