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Chapter 11: Problem 8

An employee earns \(\$ 40\) per hour and \(1.75\) times that rate for all hours in excess of 40 hours per week. Assume that the employee worked 60 hours during the week, and that the gross pay prior to the current week totaled \(\$ 58,000\). Assume further that the social security tax rate was \(6.0 \%\) (on earnings up to \(\$ 100,000\) ), the Medicare tax rate was \(1.5 \%\), and federal income tax to be withheld was \(\$ 714\). a. Determine the gross pay for the week. b. Determine the net pay for the week.

Short Answer

Expert verified
a. Gross pay is \( \$3000 \). b. Net pay is \( \$2061 \).

Step by step solution

01

Calculate Regular and Overtime Hours

The employee worked a total of 60 hours in a week. According to the problem, regular hours are up to 40 hours, and anything beyond that is considered overtime. Hence, regular hours = 40 hours, and overtime hours = 60 - 40 = 20 hours.
02

Calculate Pay Rates

The regular pay rate is given as \( \\(40 \) per hour. The overtime pay rate is 1.75 times the regular pay rate. Thus, the overtime pay rate is \( 40 \times 1.75 = \\)70 \) per hour.
03

Determine Gross Pay for the Week

Regular pay is calculated as the regular pay rate multiplied by regular hours: \( 40 \times 40 = \\(1600 \). Overtime pay is calculated as the overtime pay rate multiplied by overtime hours: \( 70 \times 20 = \\)1400 \). Therefore, the gross pay for the week is \( 1600 + 1400 = \$3000 \).
04

Calculate Social Security and Medicare Taxes

Social Security Tax is 6.0% on earnings up to \( \\(100,000 \). Total earnings this week are \( 58000 + 3000 = \\)61000 \), still under the limit. Social Security Tax = 6% of \( 3000 = 0.06 \times 3000 = \\(180 \). Medicare Tax is 1.5% of gross pay = 0.015 脳 3000 = \\)45.
05

Deduct Taxes and Federal Withholding to Find Net Pay

To find the net pay, subtract the taxes and federal withholding from the gross pay: \( 180 + 45 + 714 = \\(939 \) total deductions. Therefore, the net pay for the week is \( 3000 - 939 = \\)2061 \).

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Gross Pay Calculation
Gross pay is the total amount of money earned by an employee before any deductions, like taxes or other withholdings, are taken out. For hourly workers, this calculation involves multiplying the number of hours worked by their hourly wage.
In our exercise, the employee earns \( \\(40 \) per hour. To calculate gross pay:
  • First, determine regular hours: it is up to 40 hours.
  • Next, calculate overtime hours, which are any hours worked beyond the regular 40 hours.
The employee worked 60 hours this week, so 20 of those hours are overtime. We calculate:
  • Regular pay: \( 40 \text{ hours} \times \\)40 = \\(1600 \).
  • Overtime pay, which uses an increased rate: \( 20 \text{ hours} \times 1.75 \times \\)40 = \\(1400 \).
Thus, the total gross pay for the week is \( \\)1600 + \\(1400 = \\)3000 \).
Overtime Pay
Overtime pay compensates employees for hours worked beyond their standard workweek, typically set at 40 hours. It offers a higher wage to incentivize additional work hours. In many cases, overtime pay is calculated by multiplying the regular hourly wage by a specified overtime rate.
In this situation, the overtime pay rate is \( 1.75 \) times more than the standard hourly wage. Thus, the overtime rate is:
  • \( 40 \times 1.75 = \\(70 \) per hour.
For the 20 overtime hours worked, the pay is:
  • \( 20 \times \\)70 = \$1400 \).
This approach ensures that employees are fairly compensated for the additional effort and time spent working beyond their usual obligations.
Tax Withholding
Tax withholding is the process of deducting taxes from an employee's earnings before they receive their paycheck. It includes various deductions mandated by law, such as Social Security and Medicare taxes, and often federal and state income taxes. This exercise breaks it down clearly:
Social Security tax is a percentage of earnings, with a threshold:
  • It is \( 6\% \) on earnings up to \( \\(100,000 \).
  • This week, the applicable earning is \( \\)3000 \), leading to a Social Security tax of \( 0.06 \times \\(3000 = \\)180 \).
Medicare tax is another federal withholding at a flat rate of \( 1.5\% \):
  • The deduction is \( 0.015 \times \\(3000 = \\)45 \).
Federal income tax withholding, a fixed amount in this case, is \( \$714 \). These deductions ensure employees meet their tax obligations over the year.
Net Pay Calculation
Net pay is what remains of an employee's earnings after all withholdings and deductions have been subtracted. It is the actual amount received by the employee in their paycheck. Calculating net pay involves subtracting all types of tax withholdings and deductions from the gross pay.
In this instance, we performed the following calculations:
  • Gross pay is \( \\(3000 \).
  • Taxes and federal withholding total \( \\)939 \), including \( \\(180 \) for Social Security, \( \\)45 \) for Medicare, and \( \\(714 \) for federal income.
To find the net pay, we subtract the total deductions from the gross pay:
  • \( \\)3000 - \\(939 = \\)2061 \).
This final amount represents the take-home pay for the employee, which they can use as they wish after all mandatory deductions.

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Most popular questions from this chapter

Several months ago, Welker Chemical Company experienced a hazardous materials spill at one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company \(\$ 410,000\). The company is contesting the fine. In addition, an employee is seeking \(\$ 400,000\) damages related to the spill. Lastly, a homeowner has sued the company for \(\$ 260,000\). The homeowner lives 30 miles from the plant, but believes that the incident has reduced the home's resale value by \(\$ 260,000\). Welker's legal counsel believes that it is probable that the EPA fine will stand. In addition, counsel indicates that an out-of-court settlement of \(\$ 170,000\) has recently been reached with the employee. The final papers will be signed next week. Counsel believes that the homeowner's case is much weaker and will be decided in favor of Welker. Other litigation related to the spill is possible, but the damage amounts are uncertain. a. Journalize the contingent liabilities associated with the hazardous materials spill. Use the account "Damage Awards and Fines" to recognize the expense for the period. b. Prepare a note disclosure relating to this incident.

U-Build It Warehouse issues a 45-day note for \(\$ 800,000\) to Thomson Home Furnishings Co. for merchandise inventory. Thomson Home Furnishings Co. discounts the note at \(7 \%\). a. Journalize U-Build It Warehouse's entries to record: 1\. the issuance of the note. 2\. the payment of the note at maturity. b. Journalize Thomson Home Furnishings Co.'s entries to record: 1 . the receipt of the note. 2\. the receipt of the payment of the note at maturity.

I-Generation Co. sold 14,000 annual subscriptions of Climber's World for \(\$ 60\) during December 2010. These new subscribers will receive monthly issues, beginning in January 2011. In addition, the business had taxable income of \(\$ 400,000\) during the first calendar quarter of 2011 . The federal tax rate is \(40 \%\). A quarterly tax payment will be made on April 7, \(2011 .\) Prepare the Current Liabilities section of the balance sheet for I-Generation Co. on March 31, \(2011 .\)

A business provides its employees with varying amounts of vacation per year, depending on the length of employment. The estimated amount of the current year's vacation pay is \(\$ 80,400\). Journalize the adjusting entry required on January 31 , the end of the first month of the current year, to record the accrued vacation pay.

P.F. Chang's China Bistro, Inc., the operator of P.F. Chang restaurants, reported the following information about its long-term debt in the notes to a recent financial statement: Long-term debt is comprised of the following: \begin{tabular}{lcc} & \multicolumn{2}{c}{ December 31, } \\ \cline { 2 - 3 } & \(\mathbf{2 0 0 6}\) & \(\mathbf{2 0 0 5}\) \\ \hline Notes payable & \(\$ 19,210,000\) & \(\$ 10,470,000\) \\ Less current portion & \(\frac{(5,487,000)}{(5,110,000)}\) \\ \multicolumn{1}{l}{ Long-term debt } & \(\underline{\$ 13,723,000}\) & \(\$ \$ 5,360,000\) \\ \hline \end{tabular} a. How much of the notes payable was disclosed as a current liability on the December 31, 2006, balance sheet? b. How much did the total current liabilities change between 2005 and 2006 as a result of the current portion of long-term debt? c. If P.F. Chang's did not issue additional notes payable during 2007 , what would be the total notes payable on December 31,2007 ?
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