Chapter 11Payroll Accounting

11-1 Gross Receipts MethodThe gross receipts method takes all the gross receipts for employees and The gross receipts method takes all the gross receipts for employees and multiplies that number by 8% to determine if there is a tip shortfall.multiplies that number by 8% to determine if there is a tip shortfall.

Problem DataProblem Data

Using the provided data, determine the amount of tips that should be Using the provided data, determine the amount of tips that should be allocated to each employee using the gross receipts method.allocated to each employee using the gross receipts method.

Backyard Grill Restaurant

Employees Gross Receipts Tips Reported

1 $ 26,000 $1,300

2 42,000 2,300

3 35,000 3,000

4 28,000 1,200

5 38,000 3,200

6 45,000 4,600

$214,000 $15,600

11-1 Gross Receipts Method (continued)

Step 1: Determine the amount of shortfall to be allocated.Step 1: Determine the amount of shortfall to be allocated.

Indirectly Tipped Employees 0

Total actual tips reported $15,600

Total tips according to 8% rule ($214,000 x 8%) $17,120.00

Total actual tips reported $15,600

Shortfall to be allocated $1,520

Total tips according to 8% rule ($214,000 x 8%) $17,120.00

Tips reported by indirectly tipped employees $ -

Tips that should have been reported by tipped employees $17,120

11-1 Gross Receipts Method (continued)

Step 2: Determining individual employee shortfall amounts.Step 2: Determining individual employee shortfall amounts.

Employee

Tips that Should Have

Been ReportedGross Receipts

RatiosEmployee’s

Share of the 8%Actual

Reported Shortfall portion

1 $17,120.00 X 26,000/214,000 = $2,080.00 - $1,300.00 = $780.00

2 $17,120.00 X 42,000/214,000 = $3,360.00 - $2,300.00 = $1,060.00

3 $17,120.00 X 39,000/214,000 = $2,800.00 - $3,000.00 = -reported more

4 $17,120.00 X 28,000/214,000 = $2,240.00 - $1,200.00 = $1,040.00

5 $17,120.00 X 38,000/214,000 = $3,040.00 - $3,200.00 = -reported more

6 $17,120.00 X 45,000/214,000 = $3,600.00 - $4,600.00 = -reported more

Total $17,120.00 $15,600.00 $2,880.00

11-1 Gross Receipts Method (continued)

Employee Shortfall RatioShortfall to be

AllocatedTip

Allocation

1 780.00 / 2,880.00 X 1,520.00 = $411.67

2 1,060.00 / 2,880.00 X 1,520.00 = $559.44

3 - X 1,520.00 -

4 1,040.00 / 2,880.00 X 1,520.00 = $548.89

5 - X 1,520.00 -

6 - X 1,520.00 -

Total $1,520.00

Step 3: Allocation of shortfall.Step 3: Allocation of shortfall.

11-2 Hours Worked MethodThe hours worked method takes the total hours worked and multiplies it by The hours worked method takes the total hours worked and multiplies it by 8% to determine if there is a shortfall.8% to determine if there is a shortfall.

Using the provided data, determine the amount of tips that should be Using the provided data, determine the amount of tips that should be allocated to each employee using the hours worked method.allocated to each employee using the hours worked method.

Problem DataProblem Data

Backyard Grill Restaurant

Employees Hours Worked Tips Reported

1 20 $1,300

2 38 2,300

3 30 3,000

4 25 1,200

5 35 3,200

6 40 4,600

188 $15,600

11-2 Hours Worked Method (continued)

Step 1: Determine the amount of shortfall to be allocated.Step 1: Determine the amount of shortfall to be allocated.

Indirectly Tipped Employees 0

Total actual tips reported $15,600

Total tips according to 8% rule ($214,000 x 8%) $17,120.00

Total actual tips reported $15,600

Shortfall to be allocated $1,520

Total tips according to 8% rule ($214,000 x 8%) $17,120.00

Tips reported by indirectly tipped employees $ -

Tips that should have been reported by tipped employees $17,120

11-2 Hours Worked Method (continued)

Step 2: Determining individual employee shortfall amounts.Step 2: Determining individual employee shortfall amounts.

Employee

Tips that Should Have

Been ReportedGross Receipts

RatiosEmployee’s

Share of the 8%Actual

Reported Shortfall portion

1 $17,120.00 X 20/188 = $1,821.28 - $1,300.00 = $521.28

2 $17,120.00 X 38/188 = $3,460.43 - $2,300.00 = $1,160.43

3 $17,120.00 X 30/188 = $2,731.91 - $3,000.00 = -reported more

4 $17,120.00 X 25/188 = $2,276.60 - $1,200.00 = $1,076.60

5 $17,120.00 X 35/188 = $3,187.23 - $3,200.00 = -reported more

6 $17,120.00 X 40/188 = $3,642.55 - $4,600.00 = -reported more

Total $17,120.00 $12,050.00 $2,758.30

11-2 Hours Worked Method (continued)

Step 3: Allocation of shortfall.Step 3: Allocation of shortfall.

Employee Shortfall RatioShortfall to be

AllocatedTip

Allocation

1 521.28 / 2758.30 X 1,520.00 = $287.26

2 1160.43 / 2758.30 X 1,520.00 = $639.47

3 - X 1,520.00 -

4 1076.60/2758.30 X 1,520.00 = $593.27

5 - X 1,520.00 -

6 - X 1,520.00 -

Total $1,520.00

11-3 Employer Payroll Taxes

EMPLOYER PAYROLL TAXES CONSISTS OF:

FICA TAX …7.65% of first $84,000 of wages each year (2002). Employee must also pay this tax (maximum of $6,494.85).

FEDERAL UNEMPLOYMENT TAX …

Normally 0.8% on the first $7,000 of wages each year. Federal rate is 6.2% but allows the employer a maximum credit of 5.4% on the federal rate for contributions to state unemployment taxes (6.2% - 5.4% = 0.8%).

STATE UNEMPLOYMENT TAX …

Basic rate of 5.4% on the first $7,000 of wages each year. State rates are adjusted according to the employer’s experience rating.

11-4 Employer Payroll EntriesGLEASON COMPANY

Payroll Register

For the Week Ending January 14, 2008

EmployeeTotal Hours

Earnings Deductions Paid

RegularOver-time

Gross Pay FICA

Federal Income

Tax

State Income

TaxUnited Fund

Union Dues

Total Deductions Net Pay

Check No.

Wages

Fisher, John

44 480.00 72.00 552.00 44.16 94.00 10.32 18.00 5.00 171.48 380.52 1025

Dunlop, Robert

42 480.00 36.00 516.00 41.28 94.00 10.32 15.00 5.00 165.60 350.40 1026

Hemander, Paul

43 480.00 54.00 534.00 42.72 88.00 10.68 20.00 5.00 166.40 367.60 1027

Bell, Bert 44 480.00 72.00 552.00 44.16 73.00 11.04 10.00 5.00 143.20 408.80 1028

Total 1,920.00 234.00 2,154.00 172.32 349.00 42.36 63.00 20.00 646.68 1,507.32

Record:Record:

a.a. Payroll entry for the week ending January 14.Payroll entry for the week ending January 14.

b.b. Payroll taxes associated with the January 14 payroll. FICA Payroll taxes associated with the January 14 payroll. FICA (8%); Fed. Unemp. (.8%); State Unemp. (5.4%).(8%); Fed. Unemp. (.8%); State Unemp. (5.4%).

c.c. Payment of the January 14 payroll on January 21.Payment of the January 14 payroll on January 21.

d.d. Payment of the January 14 payroll taxes on January 21.Payment of the January 14 payroll taxes on January 21.

11-4 Employer Payroll Entries (continued)Jan. 14 Wages Expense 2,154.00

FICA Taxes Payable 172.32

Federal Income Taxes Payable 349.00

State Income Taxes Payable 42.36

United Fund Payable 63.00

Union Dues Payable 20.00

Wages Payable 1,507.32

To record January 14 payroll

Jan. 14 Payroll Tax Expense 305.87

FICA Taxes Payable 172.32

Federal Unemployment Taxes Payable 17.32

State Unemployment Taxes Payable 116.32

To record January 14 payroll taxes

Jan. 21 Wages Payable 1,507.32

Cash 1,507.32

To record payment of January 14 payroll

Jan. 21 FICA Taxes Payable 172.32

Federal Unemployment Taxes Payable 17.23

State Unemployment Taxes Payable 116.32

Cash 305.87

To record payment of January 14 payroll taxes