Louis Welch is general manager of United Tanning Salons. During 2012, Welch worked for the
company all year at a $6,200 monthly salary. He also earned a year-end bonus equal to 10% of
Welchs federal income tax withheld during 2012 was $850 per month, plus $974 on his bonus
check. State income tax withheld came to $70 per month, plus $40 on the bonus. The FICA tax
withheld was 7.65% of the first $106,800 in annual earnings. Welch authorized the following
payroll deductions: Charity Fund contribution of 1% of total (gross) earnings and life insurance
of $5 per month.
United incurred payroll tax expense on Welch for FICA tax of 7.65% of the first $106,800 in
annual earnings. The company also paid state unemployment tax of 5.4% and federal
unemployment tax of 0.8% on the first $7,000 in annual earnings. In addition, United provides
Welch with health insurance at a cost of $150 per month (to the company). During 2012, United
paid $4,000 into Welchs retirement plan.
1. Compute Welchs gross pay (including bonus), payroll deductions, and net pay for the
full year 2012. Round all amounts to the nearest dollar. (Example $21.43 will be $21.00
and $21.51 will be $22.00).
2. Compute Uniteds total 2012 payroll expense for Welch.
3. Make the journal entry to record Uniteds expense for Welchs total earnings for the year,
the payroll deductions, and net pay. The net pay was paid in cash to Welch, all other
withholdings are payable and have not yet been paid. (You need to make the employee
and employer entries).
On January 3, 2012, Trusty Delivery Service purchased a truck at a cost of $90,000. Before
placing the truck in service, Trusty spent $3,000 painting it, $1,500 replacing the tires, and
$4,500 overhauling the engine (the costs are all part of the purchase costs of the truck). The truck
should remain in service for five years and have a residual value of $9,000. The trucks annual
mileage is expected to be 22,500 miles in each of the first four years and 10,000 miles in the fifth
year- 100,000 miles in total. In deciding which depreciation method to use, Mikail Johnson, the
general manager, requests a depreciation schedule for each of the depreciation methods (straightline, units of production, and double-declining balance).
1. Prepare a depreciation schedule for each depreciation method, showing asset cost,
depreciation expense, accumulated depreciation, and asset book value.
2. Assume that Trusty prepares financial statements using the depreciation method that
reports the highest net income in the early years of asset use. Identify the depreciation
method that meets this objective and show the journal entry that Trusty would make in
the first year.
3. Assume that the tax authorities allow Trusty to use any depreciation method and that
Trusty uses the depreciation method that minimizes income taxes in the early years of
asset use. Identify the depreciation method that meets this objective and show the journal
entry that Trusty would make in the first year.
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