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Paul McKunes, owner of M & M Equipment Services, in Ashland, Massachussets, pleaded guilty on January 15, 2010, to falsifying payroll records at his business so he could pay less in workers’ compensation insurance and taxes.  According to records, McKunes owed the state’s Unemployment Assistance program $21,180 in unpaid assessments and failed to withhold more than $38,322 in state income taxes.  Although McKunes was sentenced to 18 months in jail, the sentence was suspended for five years with supervised probation, so that he could continue to operate his business.


1.  Assume that McKunes’ actual annual payroll was approximately $2.0 million for the first year and increased by 3% for each for the next two years of the fraud.  If annual federal income tax withholding was 10%, state income taxes 5%, FICA and Medicare was 8.0% (rounded), Federal unemployment was 6.2% with a credit for amounts paid to the state unemployment of 3%, what actual journal entries should McKune have made for each of the three years?

2. Based on the fraud, spreading underpaid amounts evenly across the three years, what journal entries might he have fraudulently prepared?

3.  Based on your calculations in (1) and (2), what percentage of the payroll did he misappropriate?  


Riley, David. (2010). “Guilty Plea in Payroll Fraud Case.” (Retrievable online at