Question

The two employees of Red Co. receive various fringe benefits. Red Co. provides vacation at the rate of $315 per day. Each employee earns one day of vacation per month worked. In addition, Red Co. pays a total amount of $650 per month in medical insurance premiums. Red also contributes a total amount of $400 per month into an employee retirement plan. The federal unemployment tax rate is 6%, while the state tax rate is 4%. Unemployment taxes apply to the first $7,000 of earnings per employee. Assume a Social Security tax rate of 6% and a Medicare tax rate of 1.5%.

Required:
a. Prepare the monthly journal entry for the accrued fringe benefits.
b. Show the effect of the preceding transaction on a horizontal statements model.
c. If the two employees each worked 250 days, what is Red Co.’s total payroll cost (salary, payroll taxes, and fringe benefits) for the year? (Assume that each employee earns $315 per day.)

Answer 1

All amounts are in $

(a) Journal Entry

Vacation pay Expense $630 (315x2)

Medical Insurance Premium expense $650

Employer contribution to retirement plan $400

Vacation pay payable $630

Medical insurance premium payable $650

Employer contribution payable $400

(b)

No effect on Cashflow Statement

(c) Total Payroll Costs

Salary = 157,500 (315 x 2 x 250)

Unemployment tax = 1,400 (7,000 x 2 x 10%)

Social Security = 9,450 (157,500 x 6%)

Medicare taxes = 2,362.5 (157,500 x 1.5%)

Vacation pay = 7,560 (315 x 2 x 12)

Medical insurance = 7,800 (650 x 12)

Employer Contribution = 4,800 (400 x 12)

Total Payroll Costs = 190,872.5