Expenses and payroll: answer key
Answer key: the accepted entries with the amounts of the worksheet, and why.
Convention: United States (US textbooks)
Paying the monthly rent
On March 1 a store pays the rent of its premises for March, $1,200.00, by check.
Account Debit Credit Rent Expense $1,200.00 Cash $1,200.00 Why
The March rent is an expense of March, paid at once: debit Rent Expense and credit Cash for $1,200.00.
Paying six months’ rent in advance
On November 1 a company pays $9,000.00 by check for six months’ rent in advance (November through April).
Assumptions: The company records payments for future periods as an asset and expenses them month by month as they are used up.
Account Debit Credit Prepaid Rent $9,000.00 Cash $9,000.00 Why
The payment buys the use of the premises for six future months, so it is an asset, Prepaid Rent ($9,000.00); each month one sixth of it becomes Rent Expense in an adjusting entry.
Expensing one month of prepaid rent
On November 1 a company paid $9,000.00 for six months’ rent in advance (November through April) and debited Prepaid Rent. Record the adjusting entry on November 30.
Assumptions: The company prepares monthly financial statements and adjusts its accounts at the end of each month.
Account Debit Credit Rent Expense $1,500.00 Prepaid Rent $1,500.00 Why
One of the six months has been used: $9,000.00 / 6 = $1,500.00 moves from Prepaid Rent (an asset) to Rent Expense.
Receiving the electric bill
A store receives its electric bill for March, $460.00, payable on April 20.
Account Debit Credit Utilities Expense $460.00 Accounts Payable $460.00 Why
The electricity used in March is an expense of March (Utilities Expense); until the bill is paid the store owes it in Accounts Payable.
Paying the electric bill
On April 20 a store pays by check the electric bill for March, $520.00, that it recorded on account when it arrived.
Account Debit Credit Accounts Payable $520.00 Cash $520.00 Why
The expense was recorded when the bill arrived; paying it only settles the debt: debit Accounts Payable and credit Cash for $520.00.
Paying the month’s salaries
On March 31 a company pays its employees the salaries for March, $6,400.00, by check.
Assumptions: Payroll taxes and withholdings are ignored in this item.
Account Debit Credit Salaries Expense $6,400.00 Cash $6,400.00 Why
The salaries are earned and paid in the same month, so they go straight to Salaries Expense against Cash; no liability is needed. Passing them through Salaries Payable first is also accepted, since it nets to zero.
Accruing unpaid salaries at year end
The December salaries of $8,500.00 will be paid to the employees on January 5. Record the entry needed on December 31.
Assumptions: Payroll taxes and withholdings are ignored in this item.
Account Debit Credit Salaries Expense $8,500.00 Salaries Payable $8,500.00 Why
The salaries are an expense of December even though they are paid in January: debit Salaries Expense and credit Salaries Payable.
Paying salaries accrued at year end
On December 31 a company accrued the December salaries, $9,200.00, which were unpaid. On January 5 it pays them by check.
Assumptions: Payroll taxes and withholdings are ignored in this item. The company does not use reversing entries.
Account Debit Credit Salaries Payable $9,200.00 Cash $9,200.00 Why
The expense belongs to December and was recorded on December 31. The January payment only settles the liability: debit Salaries Payable and credit Cash. Debiting Salaries Expense again would count December’s salaries twice.
Monthly payroll with withholding and employer payroll taxes
Monthly payroll: gross salaries $3,000.00, federal income tax withheld $360.00, employees’ FICA taxes $229.50, employer’s FICA taxes $229.50. The net pay is paid by check today; the taxes withheld and all FICA taxes will be paid next month.
Assumptions: Unemployment taxes (FUTA, SUTA) are ignored.
Account Debit Credit Salaries Expense $3,000.00 Payroll Tax Expense $229.50 Employee Income Tax Payable $360.00 FICA Taxes Payable $459.00 Cash $2,410.50 Why
Salaries Expense is the gross pay ($3,000.00); the employer’s FICA taxes ($229.50) are Payroll Tax Expense. Employees receive $2,410.50; the income tax withheld ($360.00) and both shares of FICA ($459.00) are owed until paid. If you record the net pay in Salaries Payable and then pay it, Salaries Payable nets to zero and the entry is accepted.
Recording the employer’s payroll taxes
The January payroll, already recorded, has gross wages of $12,000.00. Record the employer’s payroll taxes on it: FICA 7.65%, federal unemployment tax (FUTA) 0.6% and state unemployment tax (SUTA) 5.4%.
Assumptions: No employee has yet earned more than the FICA, FUTA or SUTA wage base for the year.
Account Debit Credit Payroll Tax Expense $1,638.00 FICA Taxes Payable $918.00 Federal Unemployment Taxes Payable $72.00 State Unemployment Taxes Payable $648.00 Why
The employer’s payroll taxes are one expense, Payroll Tax Expense ($1,638.00), owed to three bodies: FICA $918.00 (7.65% of $12,000.00), FUTA $72.00 (0.6%) and SUTA $648.00 (5.4%). The employees’ own FICA and income tax were withheld in the payroll entry and are not part of this one.
Paying for advertising
A company pays a local newspaper $1,200.00 by check for advertisements published this month.
Assumptions: No sales tax applies to the advertising.
Account Debit Credit Advertising Expense $1,200.00 Cash $1,200.00 Why
The ads ran this month, so their cost is an expense now: debit Advertising Expense and credit Cash for $1,200.00.
Paying an annual insurance premium in advance
On January 2 a company pays $1,800.00 by check for a one-year insurance policy on its premises, covering January 1 to December 31 of this year.
Assumptions: The company records insurance paid in advance in Prepaid Insurance and moves it to Insurance Expense month by month as the coverage expires.
Account Debit Credit Prepaid Insurance $1,800.00 Cash $1,800.00 Why
Coverage paid for in advance is an asset: debit Prepaid Insurance and credit Cash for $1,800.00. Each month one twelfth will move to Insurance Expense in an adjusting entry.
Expensing one month of prepaid insurance
On March 1 a company paid $2,400.00 for a one-year insurance policy (coverage March 1 to February 28 of next year) and debited Prepaid Insurance. Record the adjusting entry on March 31.
Assumptions: The company prepares monthly financial statements and makes adjusting entries at the end of each month.
Account Debit Credit Insurance Expense $200.00 Prepaid Insurance $200.00 Why
One of the twelve months has expired: $2,400.00 / 12 = $200.00. Debit Insurance Expense and credit Prepaid Insurance for $200.00.
Recording office supplies used
During May a company used office supplies costing $360.00, according to its supply requisition records. Record the entry on May 31.
Assumptions: The company records supplies as an asset (Supplies) when it buys them and records the supplies used at the end of each month.
Account Debit Credit Supplies Expense $360.00 Supplies $360.00 Why
Supplies that have been used are no longer an asset: debit Supplies Expense and credit Supplies for $360.00.
Bank charges on a wire transfer to a supplier
A company pays a supplier of goods an invoice of $4,200.00, recorded earlier in Accounts Payable, by wire transfer. The bank charges a wire fee of $15.00, taken from the company’s account together with the transfer.
Assumptions: The bank fee bears no VAT.
Account Debit Credit Accounts Payable $4,200.00 Bank Service Charges $15.00 Cash $4,215.00 Why
Paying the invoice settles Accounts Payable ($4,200.00); the wire fee is a Bank Service Charges expense ($15.00). Cash goes down by both: $4,215.00.
Paying quarterly interest on a bank loan
A company has a bank loan of $60,000.00 at 5% a year, with interest paid every three months. Today it pays the interest for the last three months from its bank account; the loan principal does not change.
Assumptions: Interest is calculated on the principal for exactly three months (3/12 of a year). No interest had been accrued for these months before today.
Account Debit Credit Interest Expense $750.00 Cash $750.00 Why
Interest = principal × rate × time = $60,000.00 × 5% × 3/12 = $750.00. Debit Interest Expense and credit Cash; the loan itself (Notes Payable) does not change.
Accruing interest on a bank loan at year end
A company has a bank loan of $60,000.00 at 6% interest per year. Interest is paid every six months; the last payment was made 4 months before December 31. Record the interest accrued at December 31.
Assumptions: The principal has not changed since the last interest payment. Interest is computed in whole months: principal × rate × months / 12.
Account Debit Credit Interest Expense $1,200.00 Interest Payable $1,200.00 Why
Interest for 4 months is $60,000.00 × 6% × 4/12 = $1,200.00. It is an expense of this year even though it is paid later: debit Interest Expense and credit Interest Payable. The loan itself (Notes Payable) does not change.
Receiving a telephone bill to pay later
A company receives its monthly telephone and internet bill for $120.00, all taxes included, payable in 15 days. It will pay it later.
Assumptions: The company records telephone and internet costs in Telephone Expense.
Account Debit Credit Telephone Expense $120.00 Accounts Payable $120.00 Why
The expense is recorded when the bill arrives, before it is paid: debit Telephone Expense and credit Accounts Payable for $120.00.
Reimbursing the owner for a business trip
The owner of a sole proprietorship flew to a trade show in another state and paid the airfare and the hotel, $860.00 in total, with personal funds. Today the business reimburses the owner by check.
Assumptions: The trip was for business only.
Account Debit Credit Travel Expense $860.00 Cash $860.00 Why
A business trip is a business expense, not a withdrawal: debit Travel Expense and credit Cash for $860.00.
Paying income tax owed by a corporation
At last year’s year end a corporation recorded $7,600.00 of income tax still owed. Today it pays that amount to the IRS from its bank account.
Assumptions: The company is a corporation, so this is its own corporate income tax. (A sole trader’s personal income tax would be a private withdrawal, not a business expense or liability.)
Account Debit Credit Income Tax Payable $7,600.00 Cash $7,600.00 Why
The expense was recorded last year together with the liability; paying it settles the liability: debit Income Tax Payable and credit Cash for $7,600.00. Income Tax Expense is not touched again.
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