The following data were taken from the records of Abraham Co. for July 2008 E.C. that pays payroll to its employees according to Ethiopian payroll system.

Question

Name, Basic salary, Allowance, Overtime worked, Duration of overtime work, are respectively follow, Abel Tena, Br.2,400, 250, 30hrs, Up to 10:00pm.
Sara Chala, 3,200, 500, 20hrs,10:00pm-6:00am.
Nega Girum, 1,600, 100, 10hrs, Weekends and 18hrs Public holiday,
Additional information:
All employees are expected to render services of 160hrs per month and all of them did except Sara Chala who has served only 150hrs.
All employees are permanent employees except Abel Tena.
The allowance of Nega Girum is not taxable.
All employees promised to contribute 10% of their basic salary to the credit association,
Required:
A, Determine the gross earnings,
B, taxable income,
C, total deductions and
D, net pay of all employees.

Answer 1

To calculate the gross earnings, taxable income, total deductions, and net pay for each employee of Abraham Co., we'll follow these steps:

A. Determine the Gross Earnings

Gross Earnings = Basic Salary + Allowance + Overtime Pay

Overtime Pay Calculation:

• The overtime rate is usually 1.5 times the basic salary hourly rate for hours worked beyond normal working hours (160 hours per month).
• Basic Salary Hourly Rate = Basic Salary / 160 hours.

Let’s calculate for each employee.

1. Abel Tena:

   • Basic Salary: Br. 2,400
   • Allowance: Br. 250
   • Overtime worked: 30 hours

   \[ \text{Hourly Rate} = \frac{2,400}{160} = 15 \text{ Br. per hour} \] \[ \text{Overtime Pay} = 30 \times (1.5 \times 15) = 30 \times 22.5 = 675 \text{ Br.} \] \[ \text{Gross Earnings} = 2,400 + 250 + 675 = 3,325 \text{ Br.} \]

2. Sara Chala:

   • Basic Salary: Br. 3,200
   • Allowance: Br. 500
   • Overtime worked: 20 hours

   \[ \text{Hourly Rate} = \frac{3,200}{160} = 20 \text{ Br. per hour} \] \[ \text{Overtime Pay} = 20 \times (1.5 \times 20) = 20 \times 30 = 600 \text{ Br.} \] \[ \text{Gross Earnings} = 3,200 + 500 + 600 = 4,300 \text{ Br.} \]

3. Nega Girum:

   • Basic Salary: Br. 1,600
   • Allowance: Br. 100 (not taxable)
   • Overtime worked: 10 hours on weekends + 18 hours on public holiday (28 total hours)

   \[ \text{Hourly Rate} = \frac{1,600}{160} = 10 \text{ Br. per hour} \] \[ \text{Overtime Pay} = 28 \times (1.5 \times 10) = 28 \times 15 = 420 \text{ Br.} \] \[ \text{Gross Earnings} = 1,600 + 100 + 420 = 2,120 \text{ Br.} \]

B. Taxable Income

Taxable Income = Gross Earnings - Non-Taxable Allowances (if any) - Contributions to Credit Association

All employees contribute 10% of their basic salary to the credit association.

1. Abel Tena: \[ \text{Contribution} = 10% \text{ of } 2,400 = 240 \text{ Br.} \] \[ \text{Taxable Income} = 3,325 - 0 - 240 = 3,085 \text{ Br.} \]

2. Sara Chala: \[ \text{Contribution} = 10% \text{ of } 3,200 = 320 \text{ Br.} \] \[ \text{Taxable Income} = 4,300 - 0 - 320 = 3,980 \text{ Br.} \]

3. Nega Girum: \[ \text{Contribution} = 10% \text{ of } 1,600 = 160 \text{ Br.} \] \[ \text{Taxable Income} = 2,120 - 0 - 160 = 1,960 \text{ Br.} \]

C. Total Deductions

Total Deductions = Contributions to Credit Association

1. Abel Tena: Br. 240
2. Sara Chala: Br. 320
3. Nega Girum: Br. 160

D. Net Pay

Net Pay = Gross Earnings - Total Deductions

1. Abel Tena: \[ \text{Net Pay} = 3,325 - 240 = 3,085 \text{ Br.} \]

2. Sara Chala: \[ \text{Net Pay} = 4,300 - 320 = 3,980 \text{ Br.} \]

3. Nega Girum: \[ \text{Net Pay} = 2,120 - 160 = 1,960 \text{ Br.} \]

Summary of Calculation Results

| Name | Gross Earnings (Br.) | Taxable Income (Br.) | Total Deductions (Br.) | Net Pay (Br.) | |-------------|---------------------|---------------------|----------------------|---------------| | Abel Tena | 3,325 | 3,085 | 240 | 3,085 | | Sara Chala | 4,300 | 3,980 | 320 | 3,980 | | Nega Girum | 2,120 | 1,960 | 160 | 1,960 |

Final Notes

• All calculations are in Ethiopian Birr (Br.).
• Nega Girum's allowance is not taxable, but it is included in the gross earnings.