Section 3.) Warranties
Many companies offer guarantees to their customers that when they buy their product it will work defect free for a specified period of time. This is referred to as a warranty. If you are given two nearly identical companies where the only difference is that one offers a two-year warranty for their product and the other offers nothing, generally the company that offers the warranty will either have a higher sales price or will experience higher sales volume.
Although they may generate higher revenues, they will also generate an expense due to the fact that eventually some customers will likely have a warranty claim. The matching principle of accounting requires that we record the expenses in the same period as the revenues of the product that the warranty relates to. This is similar to the treatment of bad debts expenses discussed in earlier sections.
Returning to the example of the two-year warranty, you can see the problem with matching because we may not know when or how many of the products are going to be returned until the two-year period is up. Obviously, this is too far out to be able to record the expenses in the first year when the product is sold.
Due to this issue, we estimate how much warranty expense we expect to have when the product is sold. This estimate is often based on either on prior experience or some sort of industry standard. It is just an estimate and is not expected to be perfect. This estimate will be refined over time.
Assume that a product is sold in the amount of $40,000 and management estimates that warranty expense will be 5% of sales.
When the product is sold the journal entry to record the warranty expense would be as follows:
Note that throughout the period of sales, this estimated warranty liability would continue to be credited, which increases that account. This sets up a “fund” of sorts to later be used when a warranty claim comes through.
Let’s say on 2/15/xx, a customer that bought this product in last year returns it due to defect. In some cases, a company may pay the customer a set fee. In other cases, they may replace their product altogether. In other cases, they may simply repair it.
Let’s look at each of the three examples.
Cash Payment of $1,500
Replacement of inventory worth $1,500
Repair of product using up $400 of supplies and $1,100 of labor
Over time, more and more warranty expense would be credited to the liability account, setting up a “cushion” against future claims. Then, whenever an actual warranty claim comes through it would be debited. The company should strive to keep the warranty liability account to a minimal level, but on the credit side. That being said, there is the potential for a company to underestimate the expected warranties. This would cause them to end up with a debit balance (negative) for the estimated warranty liability. An example of this is shown below.
If the estimated warranty liability continues to increase over time, the company may need to reduce their estimated warranty percentage. If the estimated warranty liability is negative on a regular basis, then the company may need to increase their estimated warranty percentage. There is no need for them to close this account out or correct for any misestimates each year. The “adjustments” are just made on a go forward basis with revisions to the estimated warranty percentage.
In summary, the liability for product warranty claims is an example of a liability that has been calculated using estimates, for the purpose of better matching revenues and expenses. In the period of the estimate itself, an expense will be generated (even before any claims are submitted.) This expense will reduce net income in that period.
See the below YouTube video for a review of the warranty concepts discussed above.
Section 4.) Contingent Liabilities
Under Generally Accepted Accounting Principles, a liability is the “probable future sacrifices of economic benefits arising from present obligations of a particular entity arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.”
To record a liability, it must be probable, but that doesn’t have to be 100% guaranteed. In some situations, there are liabilities that are based on past events, but we are not sure whether it will lead to an actual liability in the future.
There are three classic situations:
1.) Lawsuits based on something that was done in the past
2.) Warranty Claims
3.) Guarantees of Debt (i.e., co-signing a note payable for another party)
In each of these situations, it is possible that the company may owe something in the future depending on the outcome of some event in the future. For example, how likely is it that we will lose the lawsuit and what amount will we owe? How likely is it that the person we cosigned for will not pay their debt, thus pushing the liability to pay to us?
In order to record an actual liability, we must be able to reasonably estimate the amount, and it must be “probable” that we will actually owe that amount. In any other situation, we will either not record it at all, or simply disclose it in the footnotes to the financial statements.
Possible Scenarios:
- If the likelihood is “probable” and the amount is “reasonably estimable”, we will record a liability AND disclose it in the footnotes.
- If the likelihood is “remote” (i.e., very unlikely to happen), it doesn’t matter whether we know the amount or not, we will not need to record a liability, or disclose it in the footnotes.
- If the likelihood is “probable”, but we cannot reasonably estimate the amount, we cannot record it as a liability, but should instead disclose whatever information we do have on it in the footnotes to the financial statements.
- If the likelihood is just “reasonably possible” we will just disclose what we do know about it in the footnotes to the financial statements.
See the below YouTube video for a review of the contingent liability concepts discussed above.
Section 5.) Bonds Payable
Noncurrent (Long-Term) Liabilities
In order to begin and/or expand operations, a company must obtain financing of some sort. The two typical ways of doing this are by borrowing money or by issuing stock in exchange for ownership interest in the company. For the purposes of this section, we will focus on borrowing money (by issuing debt such as a bond.)
Although at first glance it may appear that a company is better off without having any debt, this may not actually be the case.
When a company obtains equity financing (i.e., issues stock) for financing they must share any of the profits with the new owners. This is a downside. One of the upsides is that there is no set payment that must be made on a regular basis because dividends are generally only paid when there are earnings.
When a company obtains debt financing (i.e., borrows money by issuing/selling bonds), they do not have to share any of the profits with the lenders, however they do have a set amount of interest to pay each period. This creates risk because the payment is due regardless of whether they are doing well financially that period. If they fail to pay, the lenders could in extreme cases force them into bankruptcy.
Note that if a company is able to borrow money at a relatively low rate and then use it to run their business and generate a higher profit, this is a good use of debt financing. The difference between the company’s return on investment (ROI) (the return considering all money available to them, regardless of financing method) and the return on equity (ROE) (the return considering only the money that stockholders have invested) is known as leverage. These ratios will be discussed in later sections of the course.
Bonds Overview
Bonds are a common way for larger companies (or even governments) to obtain debt financing. With a Notes Payable, the company is borrowing a large amount from one investor. With Bonds Payables, the company is borrowing smaller amounts from several investors to ultimately receive the same total amount overall. There is less risk to each individual investor, thus the interest rates tend to be lower.
Individuals are willing to lend money to the company by purchasing their bonds because of the potential return they will receive from those bonds. The company attracts investors to purchase the bonds in return for a set interest payment and a promise to repay the face amount (par value) at a later time (called the maturity date.) Although there is a set face value for the bond, and a set interest rate, the amount that the investor pays to the company varies depending on the current market rate for similar bonds.
The stated interest rate on the bond often differs from the average market rate effective on that same date. This is in part because sometimes there may be a time delay between when the company prints the bonds and when they are actually purchased. Regardless of how the stated interest rate compared to the market rate, the bond will be equally valuable to the investor for reasons discussed below.
Three issuance options
-If the stated interest on the bond happens to match the current market rate the bond will be issued at the face value (known as par.)
-If the stated interest rate on the bond is less than the current market rate, this means that the investor would get less interest payments if they purchased the bond than they would otherwise get by investing in other bonds on the market. Because of this the bond must be issued at a discount, and the investor will pay less money to purchase the low interest bond. None of this changes the “face value” of the bond, which represents what they will be repaid in the future when the bond comes due. This means that the investor will pay less now than they will actually get repaid in the future. This lower price makes up for the fact that they will get less interest over time.
-If the stated interest rate on the bond is more than the current market rate, this means that the investor would get more money if they purchased the bond than they would otherwise get by investing in other bonds on the market. Because of this the bond will be issued at a premium, and the investor will pay more money up front to purchase the higher interest bond. None of this changes the “face value” of the bond, which represents what they will be repaid in the future when the bond comes due. This means that the investor will pay more now than they will actually get repaid in the future. This higher price makes up for the fact that they will receive more interest over time.
Bond Journal Entries – Initial Issuance
The entry that is made at the bond issuance and at the time of each interest payment will be determined by whether it was issued at a discount or premium. Depending on whether the bond is issued at par, discount, or premium, the entries will look like the ones below. Assume that this is a 5-year bond, with a 10% stated interest rate.
In the case of the issuance at par, note that the bonds payable amount exactly equals the cash amount received.
In the case of the issuance at discount, note that the bonds payable amount is still the full $100,000, but the cash debit only reflects the actual amount received ($95,000.) The remaining $5,000 is recorded as a debit to a “discount” account. This account is a contra-liability account, offsetting the carrying value of the bond on the balance sheet, as shown in the illustration below. A “discount” account (as a contra-liability account) has the opposite normal balance as the account it is contra to. As such, since the liability account has a normal credit balance, the contra-liability account (discount) has a normal debit balance. It is increased by debits and decreased by credits.
At the time of each subsequent interest journal entry, this discount debit balance must be offset by credits, until eventually the total amount of all of those credit entries will offset the original debit balance, thus zeroing out the account. This process is known as amortization and is similar to the calculations for straight line depreciation.
In the case of the issuance at premium, note that the bonds payable amount is still the full $100,000, but the cash debit reflects the higher amount actually received ($105,000.) The extra $5,000 is recorded as a credit to a “premium” account. This account is an “adjunct-liability” account, which adds to the carrying value of the bond on the balance sheet, as shown in the illustration below. Adjunct accounts work the exact opposite way from contra accounts. They add to the original account, thus they have the exact same normal balance.
At the time of each subsequent interest journal entry, this premium credit balance must be offset by debits. This process is known as amortization and is similar to the calculations for straight line depreciation.
The premium or the discount must be amortized over the life of the bond. Depending on whether it is a premium or a discount this will either reduce or increase the amount of interest expense accrued in a given period, as compared with the amount of cash actually paid out in interest. It is important to note that both bond premiums and discounts are amortized across all periods. They impact interest expense in opposite ways though as discussed in the next section.
Note: There are many other examples in accounting where contra and adjunct accounts are used, and they all follow the same rules. These two types of accounts are often referred to as “valuation” accounts, because they help to generate a net value of an account like bonds payables.
Bond Journal Entries – Interest Expense
When a company records bond interest expense each period, they will record a credit to cash for the amount actually paid. This is the par value of the bond multiplied by the “stated” interest rate. If the bond was issued at par, then the debit to interest expense will be the same amount as the credit to cash.
If the bond was issued at a discount or premium, the interest expense will be higher or lower than the cash interest payment.
Specifically, when a company issues a bond at a discount, the cash interest payment is less than what the investor would receive from a similar bond with a market average rate. However, the company will have to report an interest expense that is higher than that cash amount, because the discount itself is similar to prepaid interest, which gets expensed across the periods.
On the other hand, when a company issues a bond at a premium, the investor will get more cash interest than the market average, but the company will report a lower interest expense across the periods. This is because they are paying the same amount of interest, but on a higher borrowed amount.
See the below example journal entries for each scenario.
In this case, the debit to interest expense is the same amount as the credit to cash.
In this case, the debit to interest expense is more than the cash interest paid. This is because we also needed a credit to the discount account (amortizing and reducing the original debit balance to that discount account.) The debit to interest expense must match the sum of the two credits to balance out.
In this case, the debit to interest expense is less than the cash interest paid. This is because we also needed a debit to the premium account (amortizing and reducing the original credit balance to that premium account.) The debit to interest expense can’t be as high, since the total debits (to interest expense or premium) cannot exceed the total credit to cash.
Excerpt from Balance Sheet
Below is an excerpt of how a discounted bond would fit into the balance sheet. The net carrying value of the bond is similar to the idea of the net book value for a fixed asset. It is the amount that the bond is technically valued at this time.
Amortization Schedules
Companies generally keep track of an amortization schedule, which shows how the discount or premium is decreasing over time. This also tracks the entry that will be needed for interest expense and cash.
In the discount example below, you can see that the ending carrying value started below the par value of the bond, but it works its way up to a higher amount over time. At the end, it should exactly equal the par value (within a rounding variance.)
In the premium example below, you can see that the ending carrying value started above the par value of the bond, but it works its way down to a lower amount over time. At the end, it should exactly equal the par value (within a rounding variance.)
There are other important concepts related to bonds that are outside of the scope of this course. This would include how to calculate the price of a bond, and how to handle situations where bonds are sold/paid off prior to maturity. In that case, you may have a gain or loss to record upon sale/liquidation of the bond.
Although these are not discussed in this text, you can see videos for them below.
See the below YouTube video for a review of the bond concepts discussed above. Some of these videos go into more depth than what we normally do for this course, but I have included them here for your information if you are interested.
Bond Terminology - https://youtu.be/DjXAg2PBC2M
Bond Initial Journal Entries - https://youtu.be/GSGR5NcTmxI
Bond Interest Expense – Straight Line - https://youtu.be/H-wCBW2vhco
Bond Interest Expense – Effective Interest Method (not discussed in the text) – https://youtu.be/n6UySnKYGn4
Bond Amortization Practice Exercise – https://youtu.be/_lk1AqXvjHU
Bond Pricing – Not Discussed in Text - https://youtu.be/fowNLWw___w
Bond Pricing Practice Exercise – https://youtu.be/QbV_i2d8x9E
Bond Retirement – Gains/Losses – Not Discussed in Text - https://youtu.be/jqf8dlHH2Ow
Wrap-Up
The main topics for this week were accounts vs. notes payables, payroll, warranties, and bonds payable. It is important to be familiar with the terminology, concepts, warranty calculations and entries, and issuance/interest expense entries for bonds payable. There are several videos that have been included in this week’s materials. Some of them are beyond the normal coverage for this course, but I have included them for anyone that may be interested in learning more about the topics.
Section 1.) Accounts Payable vs. Notes Payables (and Misc. Liabilities)
What Are Liabilities?
Liabilities are the “probable future sacrifices of economic benefits arising from present obligations of a particular entity arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.”
In other words, some transaction we had in the past has caused us to owe another company something in the future. One thing to note about the above definition is that the future sacrifice of benefits may be us giving up an asset (i.e., cash or something else) or it may be us providing services to the other entity.
Liabilities can either be short term (aka current) or long term (aka non-current). This is determined by whether the debt is due within one year (current) or more than a year (long term.)
In some cases, a company may buy goods on credit from another vendor. In these cases, the amount due is recorded in an “accounts payable.” It is important to note that accounts payable generally arise from purchasing goods or services from suppliers or customers. Generally, accounts payables DO NOT arise from borrowing money or purchasing fixed assets (property, plant, and equipment.) Amounts borrowed are more commonly considered notes payables, due to the promissory note that is signed.
Short term debts that are more formal than accounts payable are known as “notes payable.” These generally have a legal contract backing them and they also accrue interest. They tend to be slightly longer periods of time as well, though still short term (less than one year.)
In summary, the main differences between Accounts Payable are that Notes Payable tend to be longer in term than accounts payable, notes payables tend to accrue interest, and notes payables are more formal.
Again, generally the accounts payable arises when you buy a product and the notes payable arises when you borrow money. However, there are some cases where you a buy a product and need a longer period of time to pay for it. That could indeed be considered as a notes payable if the seller asks you to sign a promissory note for the amount. That promissory note and the corresponding interest is what makes the notes payables more formal than the accounts payable.
An example of a journal entry might be the purchase of inventory on account (or on credit.) This would result in the debit to inventory to increase that asset, and a credit to accounts payable to increase that liability. Other common entries would include a debit to supplies, or debits to various expenses, for anything purchased on account.
Interest Accrual – Simple Interest
As discussed above, only the notes payables generally accrue interest. In the financial world, interest rates are always given in an Annual Percentage Rate (APR) form, even if the borrowing period itself isn’t for a full year. Interest is calculated by taking the principal of the loan (amount borrowed) multiplied by the annual interest rate percentage, multiplied by the percentage of the year in question. As such, for a $100,000 note with a 12% annual rate that we are borrowing for 9 months out of the 12 months in a year, we would take:
$100,000 X .12 X (9/12) = $9,000
Financial Statements
As a liability, both the Accounts Payable and Notes Payable will show up on the balance sheet. Liabilities have a normal credit balance, which means that they are increased with a credit and decreased with a debit. Furthermore, liabilities carry their balance forward from year to year, instead of being closed out and zeroed out automatically at the end of the period.
Unearned Revenues
Another liability that we have dealt with in the previous adjusting entries discussion is “unearned revenue.” As you may recall, this exists when a customer pays us in advance, before the services are rendered, or before the product is delivered. When the customer first prepaid, the unearned revenue account is increased with a credit for the amount paid. This liability represents the fact that we owe the customer something in the future (i.e., the product/service or their money back.) When services are provided or a product is actually delivered, the unearned revenue liability account is decreased with a debit.
Short Term Maturities of Long-Term Debt
An important issue for either assets or liabilities is the proper classification of current vs long-term. Debt that matures (becomes due) in more than a year is known as long term debt. However, there are commonly situations where a portion of the debt is due each year. Take a home mortgage for example. It is certainly a long-term debt (15 or 30 years), but a certain amount is due each and every month/year.
Any portion of that long term debt that becomes due within the next year is considered a “current portion of a long-term debt” and is recorded in the current asset section of the balance sheet. Each period, a new portion of the long debt will be carved off and moved into the current asset section.
Purchases and Purchase Discounts
Although accounts payables can be created anytime any purchase is made (supplies, etc.) it is frequently discussed in accounting courses in conjunction with the purchase of inventory.
When a purchase is made on account, the seller often gives a discount for early payments. This is known as a purchase discount. At the time of the purchase, it is not known for sure whether the discount will be taken (i.e., whether it will be paid early).
Discount terms (or credit terms) are often written in the format of 2/10, N/30. This means that there is a 2% discount available for any amounts paid within 10 days and the “net” amount (i.e., whatever is left) would be due within 30 days. Of course, any of these elements could be different from company to company.
Of course, you won’t know for sure whether the buyer receives the discount or not until they actually pay the bill. Even the purchaser themselves won’t know that, though they may have policies in place where they always try to pay early to get a discount.
Because of the unknown, there two different ways to record the purchase; the “Gross” method and the “Net” method
Gross Method: The “gross method” has the buying company recording the purchase at the full price initially and then later adjusting at the time of payment if the discount is indeed taken. This is often used when there are no policies in place to require the company to pay early, and as such there is a lot of risk that they won’t get the discount.
Example:
$10,000 worth of inventory is sold under credit terms of 2/10, N/30 indicating that if the amount is paid within 10 days a 2% discount will be available. On day one when the purchase is recorded, it is unknown whether the discount will be taken or not. If the gross method is used, the entry on day 1 would look like this.
If the discount was not taken, then it would simply require a debit to accounts payable for the full $100,000 to clear it from the books and a credit to cash for $100,000 to reflect payment as shown below:
On the other hand, if the discount was eventually taken by paying within 10 days, the journal entry to adjust for it would look like the one below.
-The debit to accounts payable represents the fact that a total of $100,000 is being removed from the accounts payable, since nothing will be left due after this payment.
-The credit to inventory reduces that account by the $2,000 discount. This is because inventory (as an asset) can only be recorded at cost. We thought that the cost was the full $100,000 on day 1, but when we realized we took the discount, we had to adjust the inventory down by $2,000 so it is ultimately reported at the cost ($98,000.)
-The credit to cash for $98,000 is to reduce cash because we are spending that amount in payment.
Net Method - The “net method” has the purchasing company recording the purchase at the discounted price and then later adjusting if the discount is not taken. This method is often used when the purchasing company expects all payments to be made early enough to take the discount, and as such wants to be able to track when their employees do not pay things soon enough (thus losing the discount.)
Example:
$10,000 worth of inventory is sold under credit terms of 2/10, N/30 indicating that if the amount is paid within 10 days a 2% discount will be available. On day one when the purchase is recorded, we are assuming that the discount will ultimately be taken, thus we are recording it at the discounted amount. If the net method is used, the entry on day 1 would look like this.
If the discount was eventually taken as assumed, the journal entry to adjust for it would look like the one below. This debits the accounts payable for the $98,000 to zero it out, and a credit to cash for the same $98,000 to reflect payment.
On the other hand, if the discount was NOT taken, then a special entry is needed to record the “lost discount”. Though different companies may use different titles for this account, it basically reflects the fact that the company wants to track any discounts that are lost. Their use of the net method implies that they plan to take advantage of discounts whenever possible. If they are not doing so, they want to track it for later follow-up.
The below entry shows a debit to accounts payable for the $98,000 that was originally recorded, a debit to the “discounts lost” account (which is essentially a type of miscellaneous expense.) There is also a credit to cash for the $100,000 total payment.
Cost of Lost Discounts?
Though a 2% discount may not seem like much, keep in mind that this is not an annual rate. Instead, it is a 20-day rate (i.e., they had to pay 20 days earlier than expected to get it.)
Annualized, this ends up being 36.73%
This is calculated as:
(Discount Rate/100%-Discount Rate) * 360/ (Full Credit Period – Discount Period.)
Loss of discounts can be expensive. You may ask, why does a selling company offer such a lucrative discount? First, it incentivized the company to pay them first, before other vendors that do not offer discounts. This significantly reduces the risk of non-payment. Second, it allows them to take that money and purchase more inventory to sell again. Receiving their money from the customer sooner means there is less money they have to borrow to keep their operations going.
See the below YouTube video for a review of the accounts payables and purchase discounts discussed above.
Section 2.) Payroll
Although some small firms operate with the owner as the only employee, most companies eventually have to start hiring employees. This requires the use of a certain area of accounting known as payroll accounting. It is not as easy as just paying your employees a certain amount of money. Instead, this requires the collection and payment of certain types of taxes, both on the employee side, as well as the employer side.
You may be familiar with these types of taxes from your own employment experience, but there are additional things that apply to employers that you may have not been aware of. Let’s discuss the various types of taxes below.
FICA – Social Security
First off, the acronym FICA stands for Federal Insurance Contributions Act. This is an act that has been around since the 1930’s, when Social Security itself was enacted. This requires the withholding of a certain percentage of an employee’s earnings, which will then be deposited into the Social Security fund. This is a retirement fund for the elderly, as well as a fund to aid with disability income. FICA covers both Social Security and Medicare, but each are treated differently.
Social Security is withheld at a certain percentage (currently 6.2%). The big difference with Social Security is that the amount of earnings that are taxed are capped at a level that increases each year. For 2020 it was $137,700 and for 2021 it is $142,800. Generally speaking, most accounting courses do not require that you memorize these percentages or caps, but rather that you know how to calculate them when the percent and cap is given to you in a problem.
FICA – Medicare
The Medicare program has been around since 1966 to provider a single payor for health insurance to the elderly or disabled. Medicare is also funded under the FICA contributions. The difference with Medicare is that the tax rate is much lower (currently 1.45%) and there is (currently) no capped level of earnings that are taxed.
Federal Income Taxes
While Social Security and Medicare are taxed at a specific percentage, the Federal Income Tax is a progressive tax, which means that the more money you earn the higher your tax rate will be for those extra dollars. For example, a single taxpayer in 2021 will have their first $9,950 of taxable income taxed at a rate of 10%. The next $30,575 of income is taxed at 15% and the next $45,850 is taxed at 25%. There are additional tax brackets for higher income individuals as well. A common misconception is that once you enter a new tax bracket your entire income is subject to that higher rate. That is incorrect. It is just the “incremental” amount of income subject to that higher tax rate.
Another thing to consider is that not all of your income is taxable. There are various deductions and exemptions from your total income before you arrive at the taxable income. This concept is covered further in classes on income tax.
Whatever the amount of Federal Income Tax that is due, the employer makes an estimate of that amount and withholds it from your paycheck and pays it to the Internal Revenue Service. This estimate is based in part on what the employer reports on their W-4 form, documenting the number of withholdings based on marriage status, number of dependents, etc.
State and Local Income Taxes
Not all States or Localities have income taxes, but for those that due they are treated largely the same as Federal Income Taxes. The main difference is what agency the money is sent to (i.e., State taxing authority versus Federal Internal Revenue Service.)
Other Voluntary Deductions
In some cases, employees may also voluntarily have funds withheld from their paycheck for a variety of reasons (e.g., health insurance, retirement 401k, gym membership, charities, etc.)
Employer Side Journal Entries
The employee themselves is likely most concerned with the net income they will receive in their direct deposit. In the example below, that net pay that they have earned is $68,550. This is reflected in a credit to the salaries payable liability, showing the amount the company owes directly to the employee.
However, as you can see there is quite a bit more to the entry for the employer. They have to reflect the overall salaries expense (gross pay), as well as the various entities they owe the money to. As discussed above, a large part of the money is owed directly to the employee, but there are also amounts that have been withheld from the employee’s paycheck to be paid to the various taxing authorities, insurance companies, retirement plans, etc.
Assume that the below is a journal entry for 10 employees making $1,000 per month.
Employer Side Deductions
In addition to withholding the appropriate percentages for the two FICA taxes (Social Security and Medicare), employers also must pay a matching amount to the government. In addition, the employers must pay an extra tax related to unemployment insurance. These are required by the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA). No amount of the State or Federal Unemployment tax is paid by the employees themselves or withheld from their paychecks. It all comes from the employer.
The FUTA tax is 6.2% of the first $7,000 of annual earnings, though the employer gets a credit for whatever the State tax rate is (up to 5.4%.) This would leave the FUTA rate at .08%.
See the below YouTube video for a review of the payroll taxes discounts discussed above. The second video is a practice exercise.
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