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ACCA Applied Knowledge · Business and Technology · The relationship between accounting and other business functions

Karlov Co's payroll department calculates monthly gross pay of $200,000. The employer must also pay social security contributions of 10% of gross pay, and employees have deductions of $30,000 withheld for income tax. Which statement correctly describes the cost to the employer and cash paid to employees?

Employer cost is $220,000 and net pay is $170,000. The employer cost is gross pay of $200,000 plus $20,000 employer contributions, while employees receive gross pay less the $30,000 tax withheld. Employer contributions are an extra employer cost, not a deduction from pay.

  1. AEmployer cost is $220,000 and net pay to employees is $170,000Correct
  2. BEmployer cost is $200,000 and net pay to employees is $170,000
  3. CEmployer cost is $220,000 and net pay to employees is $190,000
  4. DEmployer cost is $230,000 and net pay to employees is $200,000

Explanation

Employer cost = gross pay $200,000 + employer contributions 10% × $200,000 = $20,000, giving $220,000. Net pay = gross $200,000 − tax withheld $30,000 = $170,000 (the employer's contributions do not reduce employees' pay). Option B omits employer contributions; option C wrongly deducts the employer contribution from net pay.

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