Ethiopian Payroll System

The following information are given for Tokuma Company for September, 2013

S.N Name Position Basic Salary Allowance Overtime

Earnings
01 Robera Tola Manager 4,500 500 1200
02 Kena Fufa Accountant 3,570 500 1500
03 Sifen Tura Secretary 2,750 200 700
04 Bontu Taresa Cashier 5,300 700 700
05 Kanrabbi Chala Cleaner 1,540 350 750

Additional Information

 Each employees allowance is non taxable.

 Pension is charged at 7% from employee and 9% from employer.
 The employer paid Br. 20 each for service charges to bank.

Solution:

1. Gross Earnings = Basic Salary + Allowance + OT Earnings

i. 4,500 + 500 + 1,200 = 6,200
ii. 3,570 + 500 + 1,500 = 5,570
iii. 2,750 + 200 + 700 = 3,650
iv. 5,300 + 700 + 700 = 6,700
v. 1,540 + 700 + 700 = 2,640
2. Gross Taxable Income (Gross Earnings – Non Taxable Earnings)
i. 6,200 – 500 = 5,700
ii. 5,570 – 500 = 5,070
iii. 3,650 – 200 = 3,450
iv. 6,700 – 700 = 6,000
v. 2,640 – 350 = 2,290
3. Income Tax Calculations (Gross Taxable Income x Income Tax Rates)
i. 5,700 x 35% - 662.50 = 1,332.50
ii. 5,070 x 35% -662.50 = 1,112.00
iii. 3,450 x 25% -235 = 627.50
iv. 6,000 x 35% -662.50 = 1,437.50
v. 2,290 x 20% -117.50 = 340.50
4. Pension Contribution (Basic Salary x 7%)
i. 4,500 x 7% = 315.00
ii. 3,570 x 7% = 249.90
iii. 2,750 x 7% = 192.50
iv. 5,300 x 7% = 371.00
v. 1,540 x 7% = 107.80
5. Total Deduction (Income Tax + Pension Contribution)
i. 1,332.50 + 315 = 1,647.50
ii. 1,112 + 249.90 = 1,361.90
iii. 627.50 + 192.50 = 820
iv. 1,437.50 + 371 = 1,808.50
v. 340.50 + 107.80 = 448.30
6. Net Pay (Gross Earnings – Total Deduction)
i. 6,200 – 1,647.50 = 4,552.50
ii. 5,570 – 1,361.90 = 4,208.10
iii. 3,650 – 820 = 2,830
iv. 6,700 – 1,808.50 = 4,891.50
v. 2,640 – 448.30 = 2,191.70
7. Journal Entries

i. To record the salary expenses:

Salary Expense………………24,760
Employee Income Tax Payable……………….4, 850
Pension Contribution Payable………………..1,236.20
Cash…………………………………………..18,673.80

ii. To record the Payroll Tax Expense

Payroll Tax Expenses………..1,589.40
Pension Contribution…………….1, 589.40
(Basic Salary of all permanent employees x 11%)

iii. To record the service charge expenses

Miscellaneous Administrative Expenses……100
Cash…………………………………………..100

iv. To record withholding and payroll tax expenses to Inland Revenue Authority
Employee Income Tax Payable……4,850
Pension Contribution Payable……..2,825.60
Cash……………………………………7,675.60
Preparation of Income Tax for the Tax Purpose

The following information is given for Tikur Abay Construction (S.C) for the month ended June
30, 2013:

Sales……………………………..………..200,000
Sales Return and Allowances……………..2,000
Sales discounts……………………….…..1,500
Cost of Goods Sold………………….….110, 600
Operating Expense………………..…….26, 100
Interest Expense…………………....……3,000
The operating expenses includes entertainment expenses and uncollectible accounts expenses of
birr 6,000 and 2,700 respectively. Assume that the company is expected to pay 30% of business
profit tax. It is decided to distribute 60% of net income after tax to the shareholders as
Dividends.

Instruction:
1. Prepare income Statements for tax purposes
2. Calculate Business Profit Liability.
3. Calculate dividend liability for the year
4. Calculate dividend pay out.