Zerbe Consulting Inc’s gross salaries for the biweekly period ended August 24 were $16,000. Deductions included $845 for CPP, $253 for E1, and $3,000 for income tax. The employer’s payroll costs were $848 for CPP and $354 for E1. Prepare journal entries to record (a) the pay owing to employees on August 24; (b) the employer payroll costs on August 24, assuming they will not be remitted to the government until September 15; (c) the payment of net pay to employees on August 31; and (d) the payment to the government on September 15 of all amounts owed.
The correct answer and explanation is :
To accurately record Zerbe Consulting Inc’s payroll transactions for the biweekly period ending August 24, we need to prepare a series of journal entries that reflect employee earnings, deductions, employer payroll costs, and subsequent payments.
a) Recording the Pay Owing to Employees on August 24:
First, we record the gross salaries and the various deductions to determine the net pay owed to employees.
| Date | Account | Debit ($) | Credit ($) |
|---|---|---|---|
| Aug 24 | Salaries Expense | 16,000 | |
| CPP Payable | 845 | ||
| EI Payable | 253 | ||
| Income Tax Payable | 3,000 | ||
| Salaries Payable | 11,902 |
Explanation: The Salaries Expense account is debited for the total gross wages of $16,000. The deductions—CPP ($845), EI ($253), and Income Tax ($3,000)—are credited to their respective payable accounts, representing liabilities to be remitted. The remaining balance of $11,902 is credited to Salaries Payable, indicating the net amount owed to employees.
b) Recording the Employer Payroll Costs on August 24:
Next, we account for the employer’s obligations, which include matching the CPP contributions and contributing 1.4 times the employee’s EI deductions.
| Date | Account | Debit ($) | Credit ($) |
|---|---|---|---|
| Aug 24 | Payroll Tax Expense | 1,202 | |
| CPP Payable | 845 | ||
| EI Payable | 354 |
Explanation: The Payroll Tax Expense account is debited for the total employer contributions: CPP ($845) and EI ($354). These amounts are also credited to the respective payable accounts, reflecting the company’s liability to remit these amounts.
c) Payment of Net Pay to Employees on August 31:
When the company disburses the net salaries to employees, the following entry is made:
| Date | Account | Debit ($) | Credit ($) |
|---|---|---|---|
| Aug 31 | Salaries Payable | 11,902 | |
| Cash | 11,902 |
Explanation: This entry clears the Salaries Payable liability by debiting it and credits Cash to reflect the outflow of funds to employees.
d) Payment to the Government on September 15 of All Amounts Owed:
Finally, when the company remits all withheld and employer-matched contributions to the government, the following entry is recorded:
| Date | Account | Debit ($) | Credit ($) |
|---|---|---|---|
| Sep 15 | CPP Payable | 1,690 | |
| EI Payable | 607 | ||
| Income Tax Payable | 3,000 | ||
| Cash | 5,297 |
Explanation: This entry debits the payable accounts (CPP, EI, and Income Tax) to eliminate the liabilities and credits Cash to reflect the payment made to the government.
Summary:
These journal entries ensure that Zerbe Consulting Inc accurately records all payroll-related expenses, liabilities, and cash outflows. Initially, the company recognizes the gross salaries and corresponding deductions, establishing liabilities for amounts owed to both employees and government agencies. Subsequently, the employer’s payroll costs are recorded, reflecting additional obligations for CPP and EI contributions. Upon disbursing net pay to employees, the company reduces its liabilities and cash accordingly. Finally, remitting the withheld amounts to the government clears the remaining liabilities, ensuring compliance with statutory requirements.
Accurate recording of these transactions is crucial for financial reporting and compliance purposes. It ensures that all expenses are properly accounted for in the period they are incurred and that liabilities are recognized until they are settled. This process provides a clear audit trail and helps maintain the integrity of the company’s financial statements.