Chapter 10 (Weygandt)

Question 1

Accounting for employee payroll costs involves calculating what three components?

Answer 1

(1) gross pay,

(2) payroll deductions, and

(3) net pay

Question 2

What is gross pay?

Answer 2

> Gross pay, or earnings, is the total compensation earned by an employee. It consists of salaries or wages, plus any bonuses and commissions.

> The terms “salaries” and “wages” are often used interchangeably and the total amount of salaries or wages earned by the employee is called gross pay, or gross earnings.

Question 3

In addition to the hourly pay rate, most companies are required by law to pay hourly workers for what?

Answer 3

> overtime work at the rate of at least one and one-half times the government-regulated minimum hourly wage.

Question 4

As anyone who has received a paycheque knows, the actual cash received is almost always what?

Answer 4

> is almost always less than the gross pay for the hours worked.

Question 5

The difference in gross pay for the hours worked is known as what? What is this difference also known as?

Answer 5

> The difference is caused by payroll deductions. Payroll deductions are also frequently called “withholdings” because these are the amounts that the employer withholds or holds back from the employee.

Question 6

Are payroll deductions mandatory or voluntary?

Answer 6

> Payroll deductions may be mandatory or voluntary.

Question 7

What are mandatory payroll deductions?

Answer 7

> CPP
EI
Income Tax

Question 8

What are voluntary deductions?

Answer 8

> Insurance, pensions, and/or union dues
Charity (i.e. Christams cheer fund)

Question 9

Are payroll deductions an expense to an employer?

Answer 9

> Payroll deductions are not an expense to the employer.

> The employer only collects the amounts and forwards the collected amounts to the government at a later date.

Question 10

What is the collection agency for payroll deductions?

Answer 10

> The designated collection agency for the federal government is the Canada Revenue Agency (CRA), which collects money on behalf of the Receiver General for Canada, the cabinet minister responsible for accepting payments to the Government of Canada.

Question 11

What is a CPP? Do all provinces have CPP?

Answer 11

> All employees between the ages of 18 and 69, except those employed in the province of Quebec, must contribute to the Canada Pension Plan (CPP). Quebec has its own similar program, the Quebec Pension Plan (QPP). These mandatory plans give disability, retirement, and death benefits to qualifying Canadians.

Question 12

Do rates for CPP contributions increase?

Answer 12

> Contribution rates are set by the federal government and are adjusted every January if there are increases in the cost of living.

Question 13

What requires EI deductions?

Answer 13

> The Employment Insurance Act requires all Canadian workers who are not self-employed to pay Employment Insurance (EI) premiums.

Question 14

What is EI meant to do?

Answer 14

> Employment insurance is designed to give income protection (in the form of payments representing a portion of one’s earnings) for a limited period of time to employees who are temporarily laid off, who are on parental leave or compassionate leave, or who lose their jobs.

Question 15

Can self employed people qualify for EI?

Answer 15

> Self-employed individuals may choose to pay EI to qualify for special benefits such as maternity or parental and compassionate care benefits. But this will not qualify them for EI if they are not able to work.

Question 16

Do EI contribution rates vary?

Answer 16

> Each year, the federal government determines the contribution rate and the maximum amount of premiums for the year.

Question 17

Under the Income Tax Act, employers are required to withhold what from each pay period?

Answer 17

> Under the Income Tax Act, employers are required to withhold income tax from employees for each pay period.

Question 18

How is income tax withheld (What 3 components need to be considered?)

Answer 18

> The amount to be withheld is determined by three variables: (1) the employee’s gross pay, (2) the number of credits claimed by the employee, and (3) the length of the pay period.

Question 19

Is there a limit on the amount of gross pay to be withheld?

Answer 19

> The amount of provincial income taxes also depends on the province in which the employee works. There is no limit on the amount of gross pay that is subject to income tax withholdings. The higher the pay or earnings, the higher the amount of taxes withheld.

Question 20

The calculation of personal income tax withholdings is complicated and is best done using what?

Answer 20

> is best done using payroll deduction tables supplied by the CRA.

Question 21

Unlike mandatory payroll deductions, which are required by law, voluntary payroll deductions are chosen by who? What needs to be done to affirm this?

Answer 21

> the employee

> Employees may choose to authorize withholdings for charitable, retirement, and other purposes. All voluntary deductions from gross pay should be authorized in writing by the employee.

> The authorization may be made individually or as part of a group plan.

Question 22

What voluntary deductions are determined by the employee?

Answer 22

> Deductions for charitable organizations, such as the United Way, or for financial arrangements, such as the repayment of loans from company credit unions, are determined by each employee.

Question 23

What voluntary deductions are determined on a group basis?

Answer 23

> deductions for union dues, extended health insurance, life insurance, and pension plans are often determined on a group basis.

Question 24

What is net pay?

Answer 24

> The difference between an employee’s gross pay, or total earnings, less any employee payroll deductions withheld from the earnings, is known as net pay. This is the amount that the employer must pay to the employee.

Question 25

How is net pay determined?

Answer 25

> Net pay is determined by subtracting payroll deductions from gross pay.

Question 26

What are employer payroll costs?

Answer 26

> Employer payroll costs are amounts that the federal and provincial governments require employers to pay. > The federal government requires CPP and EI contributions from employers. The provincial governments require employers to fund a workplace health, safety, and compensation plan.

Question 27

What are employee benefits?

Answer 27

> These contributions (employer payroll costs), plus such items as paid vacations and pensions, are referred to as employee benefits.

Question 28

What account are employer payroll costs debited to?

Answer 28

> Employer payroll costs are not debited to the Salaries Expense account, but rather to a separate Employee Benefits Expense account.

Question 29

Employers must also contribute to the CPP. How is this done?

Answer 29

> Employers must also contribute to the CPP. For each dollar withheld from the employee’s gross pay, the employer must contribute an equal amount. > The CPP Payable account is credited for both the employees’ and employer’s CPP contributions.

Question 30

How much do employers have to contribute to employee EI programs?

Answer 30

> Employers must also contribute to the CPP. For each dollar withheld from the employee’s gross pay, the employer must contribute an equal amount. The CPP Payable account is credited for both the employees’ and employer’s CPP contributions.

Question 31

What plans do employees not pay for?

Answer 31

> Each provincial workplace health, safety, and compensation plan gives benefits to workers who are injured or disabled on the job. The cost of this program is paid entirely by the employer; employees do not make contributions to these plans.

Question 32

Employees have the right to receive compensation for absences under certain conditions. The compensation may be for what?

Answer 32

> Employees have the right to receive compensation for absences under certain conditions. The compensation may be for paid vacations, sick pay benefits, and paid statutory holidays.

Question 33

What should be done for future paid absences?

Answer 33

> A liability should be estimated and accrued for future paid absences.

Question 34

What are Post-employment benefits?

Answer 34

> Post-employment benefits are payments by employers to retired or terminated employees. > These payments are for (1) pensions, and (2) supplemental health care, dental care, and life insurance.

Question 35

Recording the payroll involves what?

Answer 35

> Recording the payroll involves maintaining payroll records, recording payroll expenses and liabilities, paying the payroll, and filing and remitting payroll deductions.

Question 36

What is an employees earning record?

Answer 36

> A separate record of an employee’s gross pay, payroll deductions, and net pay for the calendar year is kept for each employee and updated after each pay period.

Question 37

An employees earning record is used by the employer in three ways, what are they?

Answer 37

> It is called the employee earnings record and its cumulative payroll data are used by the employer to: (1) determine when an employee has reached the maximum earnings subject to CPP and EI premiums, (2) file information returns with the CRA (as explained later in this section), and (3) give each employee a statement of gross pay and withholdings for the year.

Question 38

In addition to employee earnings records, many companies find it useful to prepare what? Describe that record.

Answer 38

> In addition to employee earnings records, many companies find it useful to prepare a payroll register. This record accumulates the gross pay, deductions, and net pay per employee for each pay period and becomes the documentation for preparing paycheques for each employee. > In some companies, the payroll register is a special journal. Postings are made directly to ledger accounts. In other companies, the payroll register is a supplementary record that gives the data for a general journal entry and later posting to the ledger accounts.

Question 39

Employer payroll expenses are made up of two components: what are they and what recording method is required?

Answer 39

(1) employees’ gross salaries and wages and (2) employer’s payroll costs > (1) employees’ gross salaries and wages and (2) employer’s payroll costs

Question 40

What is the formula for total payroll expenses?

Answer 40

Total Payroll Expense = Gross Salaries and Wages + Employer’s Portion of Payroll Costs

Question 41

What is involved in the first journal entry for employee payroll costs?

Answer 41

> Total Payroll Expense = Gross Salaries and Wages + Employer’s Portion of Payroll Costs

Question 42

Employer payroll costs are also usually recorded when what happens?

Answer 42

> Employer payroll costs are also usually recorded when the payroll is journalized.

Question 43

Payment of the payroll by cheque or electronic funds transfer (EFT) is made from what?

Answer 43

> is made from either the employer’s regular bank account or a payroll bank account. > Each paycheque or EFT is usually accompanied by a statement of earnings document. This shows the employee’s gross pay, payroll deductions, and net pay for the period and for the year to date.

Question 44

How many accounts are used for payroll?

Answer 44

> Many companies use a separate bank account for payroll. Only the total amount of each period’s payroll is transferred, or deposited, into that account before it is distributed. This helps the company determine if there are any unclaimed amounts.

Question 45

When companies report and remit their payroll deductions, they combine what?

Answer 45

> they combine withholdings of CPP, EI, and income tax.

Question 46

What is required for the withholdings that must be reported and remitted monthly?

Answer 46

> Generally, the withholdings must be reported and remitted monthly on a Statement of Account for Current Source Deductions (known by the CRA as the PD7A remittance form), and no later than the 15th day of the month following the month’s pay period. Depending on the size of the payroll deductions, however, the employer’s payment deadline could be different.

Question 47

When are workplace health, safety and compensation costs remitted?

Answer 47

> Workplace health, safety, and compensation costs are remitted quarterly to the provincial workers’ compensation commission or board. > Remittances can be made by mail or through deposits at any Canadian financial institution. When payroll deductions are remitted, payroll liability accounts are debited and Cash is credited.

Question 48

As applied to payrolls, the objectives of internal control are to:

Answer 48

1) Safeguard company assets against unauthorized payments of payrolls. 2) Ensure the accuracy and reliability of the accounting records pertaining to payrolls.

Question 49

Irregularities often result if internal control is what in respect to payroll?

Answer 49

> internal control is lax.

Question 50

Frauds involving payroll include:

Answer 50

> overstating hours, using unauthorized pay rates, adding fictitious employees to the payroll, continuing terminated employees on the payroll, and distributing duplicate payroll cheques. > Moreover, inaccurate records will result in incorrect paycheques, financial statements, and payroll tax returns.

Question 51

Payroll activities involve four functions:

Answer 51

> hiring employees, timekeeping, preparing the payroll, and paying the payroll.

Question 52

For effective internal control, companies should assign these four functions to different departments or individuals. Describe the four departments and their role in preventing fraud:

Answer 52

1) HR: Hiring Employees > hiring employees, documents, and authorizes employment Fraud prevented: fictitious employees are not hired and not added to payroll 2) Payroll: Preparing the payroll > 2/2+ employees verify payroll amounts > supervisor approves Fraud prevented: payroll calculations are accurate and relevant 3) Managers/Supervisors: Timekeeping > Supervisors monitor hours worked through time cards and time reports Fraud prevented: employees are not paid for hours not worked 4) Treasurer: Paying the payroll > Cheques are not lost, misappropriated, or unavailable for proof of payment; endorsed cheque provides proof of payment

Question 53

How are current liabilities listed in the balance sheet?

Answer 53

> Current liabilities are generally reported as the first category in the liabilities section of the balance sheet. > Each of the main types of current liabilities is listed separately. > In addition, the terms of operating lines of credit and notes payable and other information about the individual items are disclosed in the notes to the financial statements. > Similar to current assets, current liabilities are generally listed in order of liquidity (by maturity date).

Question 54

Companies must carefully monitor the relationship of current liabilities to current assets. Why?

Answer 54

> This relationship is critical in evaluating a company’s short-term ability to pay debt. > There is usually concern when a company has more current liabilities than current assets, because it may not be able to make its payments when they become due.

Question 55

CPP contributions are based on what?

Answer 55

> are based on a maximum ceiling or limit (called the maximum pensionable earnings) less a basic yearly exemption, and on the contribution rate set each year by the federal government. > Pensionable earnings are gross earnings less the basic yearly exemption.

Question 56

What are the three steps to calculating CPP contributions?

Answer 56

STEP 1) - Take basic yearly exemption / number of pay periods in a year = basic pay-period exemption STEP 2) Employees pensionable earnings = employees' gross pay / basic pay period exemption STEP 3) Employees CPP Contribution = employee's pensionable earnings (CPP Contribution rate)

Question 57

An employer stops deducting CPP contributions if and when what happens? What do self-employed individuals do?

Answer 57

> An employer stops deducting CPP contributions if and when the employee’s earnings are greater than the maximum pensionable earnings. > In this way, the employee’s CPP contributions will not be greater than the maximum annual CPP contribution. > Self-employed individuals pay both the employee and employer share of CPP.

Question 58

EI calculations are based on what? How does it differ from CPP?

Answer 58

> EI calculations are based on a maximum earnings ceiling (called the maximum annual insurable earnings) and the contribution rate set by the federal government each year. > Different from CPP, there is no basic yearly exemption.

Question 59

The required EI premium is calculated by:

Answer 59

> is calculated by multiplying the employee’s insurable earnings by the EI contribution rate.

Question 60

An employer stops deducting EI premiums if and when what happens? What happens for self-employed individuals?

Answer 60

> An employer stops deducting EI premiums if and when the employee’s earnings are greater than the maximum insurable earnings. In this way, the employee’s EI premiums will not be greater than the maximum annual EI premium. > Self-employed individuals who have chosen to pay EI pay only the employee’s share of EI.

Question 61

Income tax deductions are based on what?

Answer 61

> re based on income tax rates set by the federal and provincial governments. > The federal government uses a progressive tax scheme when calculating income taxes. > Basically, this means that the higher the pay or earnings, the higher the income tax percentage, and thus the higher the amount of taxes withheld.

Question 62

Taxable income is determined by what? How are personal tax credits involved?

Answer 62

> Taxable income is determined by the employee’s gross pay and the amount of personal tax credits claimed by the employee. > Personal tax credits are amounts deducted from an individual’s income taxes and they determine the amount of income taxes to be withheld. > To indicate to the Canada Revenue Agency (CRA) which credits he or she wants to claim, the employee must complete a Personal Tax Credits Return (known as a TD1 form).