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Week 12 · Assignment: Traditional alternative (no AI)

Week 12 — Gross to Net: The Mechanic's Paycheck and What the Shop Owes — Traditional alternative (no AI)

Financial Accounting Free sample edition
Traditional alternative (no AI), unpublished. In the course this is a separate assignment that ships unpublished beside the adaptive assignment: same objective, no AI. An instructor who prefers it publishes it and unpublishes or deletes the adaptive one, as the note at its top says.

Instructors: publish this instead of the adaptive version if you prefer, and unpublish or delete the adaptive one.

Assignment 11 of the term — build the bicycle shop mechanic's paycheck from gross pay to net pay at the 2026 rates, record the payroll and the shop's own payroll taxes, apply the Social Security wage base, and explain to the mechanic why three different weekly figures are all correct.

This week you met the common current liabilities, notes payable, sales taxes payable, the current portion of long-term debt, gross pay and the overtime rule, the 2026 Social Security and Medicare withholdings and the wage base, net pay, the employer's own payroll taxes, and loss contingencies. In this assignment you work four short problems on the bicycle shop's payroll, interpret each one, and explain this week's ideas to someone who finds them puzzling. This week's lecture tutorial, quiz, discussion, and Accounting Workshop practise the same ideas from other angles. It builds on Week 4, where you recorded accrued expenses such as wages earned but not yet paid, and on Week 5, where you sorted the balance sheet into current and long-term items.

The task

This week's material is pinned. Under the Fair Labor Standards Act, the Department of Labor states: "Unless exempt, employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay." For wages paid in 2026, the Social Security Administration and IRS Publication 15 (2026) state the Social Security tax as 6.2 percent each for employees and employers on wages up to the $184,500 wage base, and the Medicare tax as 1.45 percent each with no wage base. Gross pay minus withholdings is net pay, and the employer also owes its own payroll taxes, including its matching Social Security and Medicare and federal and state unemployment taxes. Real federal income tax withholding comes from the IRS's tables; this course labels its income tax figures illustrative and never computes them.

The running case is an illustrative, unnamed bicycle repair and sales shop, organized as a corporation by two founders; it describes no real business. Its mechanic (an illustrative person) worked a 45-hour week at $24 an hour, and the payroll is recorded before the paychecks are handed out.

The mechanic sends you this message: "I worked $1,140 worth of hours, but my check says $957.79. Then a founder told me I cost the shop $1,227.21 this week. Somebody's math is off — which number is right?" Your job is to answer the way this course would, starting from four small calculations on the shop's payroll.

Work these four problems, showing your arithmetic:

  1. The bicycle shop's mechanic is paid $24 an hour and worked 45 hours in one workweek; under the Fair Labor Standards Act, the hours over 40 are paid at time and one-half. What is the mechanic's gross pay for the week?
  2. The mechanic's gross pay is $1,140, below the 2026 Social Security wage base. At the 2026 rates of 6.2 percent for Social Security and 1.45 percent for Medicare, how much Social Security and Medicare is withheld from the paycheck in total?
  3. The mechanic's gross pay is $1,140. The shop withholds $70.68 of Social Security, $16.53 of Medicare, and an illustrative $95.00 of federal income tax. What is the mechanic's net pay?
  4. A second employee at the shop has $184,000 of wages this year before a $1,140 paycheck. The 2026 Social Security wage base is $184,500 and the rate is 6.2 percent. How much Social Security tax is withheld from this paycheck?

Beside each answer, add one brief interpretation:

  • Problem 1: explain why the hours over 40 are paid at $24 × 1.5 under the overtime rule; then say why gross pay, not the paycheck, is what the week of work costs the shop in wages.
  • Problem 2: name the Social Security and Medicare amounts separately with their 2026 rates; write the shop's entry for its own matching Social Security and Medicare, with all debits before all credits and equal totals; and explain why that match is not taken from the mechanic's pay.
  • Problem 3: write the compound entry that records the payroll, with all debits before all credits and equal totals; then say why the $95.00 is labelled illustrative.
  • Problem 4: explain why only part of this paycheck is taxed for Social Security while Medicare still applies to all of it.

Explain it to a non-expert

The mechanic is not wrong to be puzzled, and every figure in the message is correct. Write a 3–5 sentence message to the mechanic that explains what $1,140, $957.79, and $1,227.21 each measure, where the withheld money goes, and why the shop's cost is higher than the mechanic's pay. Name one limit, such as that the $95.00 of income tax is illustrative, or that the shop's $1,227.21 still leaves out the unemployment taxes it also owes. Explain any technical term in everyday words. More than one good answer is possible.

For a different, ungraded example, imagine a friend who looks at a phone bill and says, "My plan's price and my bill's total don't match, so they overcharged me." Model answer: "The plan's price is what the phone company keeps for the service. The extra lines are taxes and fees it collects from you and passes on to the government, so the company is holding that money, not earning it. That is why the total is higher and nobody's math is off. One caveat: which taxes appear, and how large they are, depends on where you live."

Use that pattern for the mechanic, with your own wording and evidence.

Show your arithmetic. A reader should be able to reproduce every number you report from the figures in the problems without guessing which figures or steps you used.

Deliverables

Submit a single report containing:

  • the four results, each with the multiplications, additions, or subtractions shown and the brief interpretation the task names for that problem;
  • the two journal entries, the payroll entry and the shop's entry for its own matching taxes, each with all debits before all credits and equal totals;
  • your message to the mechanic, explaining what $1,140, $957.79, and $1,227.21 each measure, where the withheld money goes, and why the shop's cost is higher, with one limit; and
  • a one-line restatement of the figures and rates you used, so your results are reproducible.

Keep it to roughly one page. Clear and correct beats long.

Choose how you show it. Present your report as written text, or as a recorded audio or video explanation of about three minutes with a transcript, or as a labelled spreadsheet payroll register with a short explanation. Every form is graded by the same scoring criteria. Submit in any accessible file type or as a link; a recorded response may be submitted as audio or video with a transcript, or as text.

How you'll be graded

The full analytic rubric is attached to this assignment in Canvas.

Academic integrity and AI use

This version is designed to be completed without AI: do the arithmetic, the entries, the interpretations, and the writing yourself. You may use a calculator or a spreadsheet for the arithmetic. State the overtime rule and the 2026 rates only as this week's materials state them, check every entry so that its debits equal its credits, never compute income tax withholding, and give no tax, legal, or investment advice. Submitting work you did not write as your own, or copying another student's work, is an integrity violation under the course policy.

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