Download
1 / 84

Current Liabilities and Payroll - PowerPoint PPT Presentation


  • 122 Views
  • Uploaded on

0. 11. Current Liabilities and Payroll. 0. After studying this chapter, you should be able to:. Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' Current Liabilities and Payroll' - emiko


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

0

11

Current Liabilities and Payroll


0

After studying this chapter, you should be able to:

  • Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable.

  • Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings.


0

After studying this chapter, you should be able to:

  • Describe the payroll accounting systems that use a payroll register, employee earnings records, and a general journal.

  • Journalize entries for employee fringe benefits, including vacation pay and pensions.


0

After studying this chapter, you should be able to:

  • Describe the accounting treatment for contingent liabilities and journalize entries for product warranties.


0

11-1

Objective 1

Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable.


0

11-1

Liabilities that are to be paid out of current assets and are due within a short time, usually within one year, are called current liabilities.

  • Accounts payable

  • Current portion of long-term debt

  • Notes payable


0

11-1

Accounts Payable

Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale.


0

11-1

Current Portion of Long-Term Debt

Long-term liabilities are often paid back in periodic payments, called installments. Installmentsthat are due within the coming year must be classified as a current liability.


0

11-1

The total amount of the installments due after the coming year is classified as a long-term liability.


0

11-1

Short-Term Notes Payable

A firm issues a 90-day, 12% note for $1,000, dated August 1, 2008 to Murray Co. for a $1,000 overdue account.

Aug. 1 Accounts Payable—Murray Co. 1 000 00

Notes Payable 1 000 00

Issued a 90-day, 12% note on account.

10


Oct. 30 Notes Payable 1 000 00

Interest Expense 30 00

Cash 1 030 00

Paid principal and interest on note.

0

11-1

On October 30, when the note matures, the firm pays the $1,000 principal plus $30 interest ($1,000 x 12% x 90/360).

Appears on the income statement as an “Other Expense.”

11


0

11-1

On May 1, Bowden Co. (borrower) purchased merchandise on account from Coker Co. (creditor), $10,000, 2/10, n/30. The merchandise cost Coker Co. $7,500.


Bowden Co. (Borrower)

Description Debit Credit

Mdse. Inventory 10,000

Accounts Payable 10,000

Coker Co. (Creditor)

Description Debit Credit

Accounts Receivable 10,000

Sales 10,000

Cost of Mdse. Sold 7,500

Mdse. Inventory 7,500

0

11-1

13


Bowden Co. (Borrower)

Description Debit Credit

Accounts Payable 10,000

Notes Payable 10,000

Coker Co. (Creditor)

Description Debit Credit

Notes Receivable 10,000

Accounts Receivable 10,000

0

11-1

On May 3, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.

14


Bowden Co. (Borrower)

Description Debit Credit

Notes Payable 10,000

Interest Expense 200

Cash 10,200

Coker Co. (Creditor)

Description Debit Credit

Cash 10,200

Interest Revenue 200

Notes Receivable 10,000

0

11-1

On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest: $10,000 x 12% x 60/360.

15


0

11-1

On September 19, a firm borrows $4,000 from First National Bank by giving the bank a 90-day, 15% note.

Sept. 19 Cash 4 000 00

Notes Payable 4 000 00

Issued a 90-day, 15% note to the bank.

16


0

11-1

On the due date of the note (December 18), the borrower owes $4,000 plus interest of $150 ($4,000 x 15% x 90/360).

Dec. 18 Notes Payable 4 000 00

Interest Expense 150 00

Cash 4 150 00

Paid principal and interest due on note.

17


0

11-1

Discounting a Note

The interest set by the creditor when a note does not specify the rate is called the discount. The rate used in computing the discount is called the discount rate. The borrower is given the remainder (face – discount), called the proceeds.


0

11-1

On August 10, Cary Company issues a $20,000, 90-day note to Rock Company in exchange for inventory. Rock discounts the note at 15%.

Aug. 10 Merchandise Inventory 19 250 00

Interest Expense 750 00

Notes Payable 20 000 00

Issued a 90-day note to Rock Co., discounted at 15%.

19


Aug. 10 Merchandise Inventory 19 250 00

Interest Expense 750 00

Notes Payable 20 000 00

Issued a 90-day note to Rock Co., discounted at 15%.

0

11-1

On August 10, Cary Company issues a $20,000, 90-day note to Rock Company in exchange for inventory. Rock discounts the note at 15%.

Proceeds

Discount: $20,000 x .15 x 90/360

Discount rate

20


0

11-1

On November 8 the note is paid in full.

Nov. 8 Notes Payable 20 000 00

Cash 20 000 00

Paid note due.

21


Example Exercise 11-1

0

11-1

On July 1, Bella Salon Company issued a 60-day note with a face amount of $60,000 to Delilah Hair Products Company. for merchandise inventory.

  • Determine the proceeds of the note assuming the note carries an interest rate of 6%.

  • Determine the proceeds of the note assuming the note is discounted at 6%.

22


Follow My Example 11-1

0

11-1

  • $60,000

  • $59,400 [$60,000 – ($60,000 x 6% x 60/360)]

For Practice: PE 11-1A, PE 11-1B

23


0

11-2

Objective 2

Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings.


0

11-2

11-2

Payroll refers to the amount paid to employees for the services they provide during a period. It is usually significant for several reasons.

  • Employees are sensitive to payroll errors and irregularities.

  • The payroll is subject to various federal and state regulations.

  • The payroll and related payroll taxes have a significant effect on the net income of most businesses.


0

11-2

Wages usually refers to payment for manual labor, both skilled and unskilled. The rate of wages is normally stated on an hourly or weekly basis.


0

11-2

Salary usually refers to payment for managerial, administrative, or similar services, normally expressed in terms of a month or a year.


0

11-2

The total earnings of an employee for a payroll period are called gross pay. From this is subtracted one or more deductions to arrive at the net pay. Net pay is the amount that the employer must pay the employee.


0

11-2

McGrath Illustration

John T. McGrath is employed by McDermott Supply Co. at the rate of $34 per hour, plus 1.5 times the normal hourly rate for hours over 40 per week. For the week ended December 27, McGrath worked 42 hours.

Earnings at base rate (40 x $34) $1,360

Earnings at overtime rate (2 x $51) 102

Total earnings $1,462

29


0

11-2

For this illustration assume the standard withholding allowance of $63*. Thus, the wages used in determining McGrath’s withholding for the week are $1,399 ($1,462 – $63).

*The actual IRS standard withholding allowance changes every year and was $63.46 for 2006.


0

11-2

Wage Bracket Withholding Table

McGrath wage bracket

Source: Publication 15, Employer’s Tax Guide, Internal Revenue Service, 2006

31


0

11-2

McGrath Example (Continued)

Initial withholding $ 78.30

Plus ($1,399 – $620) x 25% 194.75

Total federal income taxes withheld $273.05

32


Example Exercise 11-2

0

11-2

Karen Dunn’s weekly gross earnings for the present week were $2,250. Dunn has two exemptions. Using the wage bracket withholding table in Exhibit 3 (Slide 31) with a $63 standard withholding allowance for each exemption, what is Dunn’s federal income tax withholding?

33


Follow My Example 11-2

Total wage payment $2,250

One allowance (provided by IRS) $63

Multiplied by allowances claimed on W-4 x 2 126

Amount subject to withholding $2,124

0

11-2

Initial withholding from wage bracket $275.55

Plus additional withholding: 28% of excess over $1,409 200.20*

Federal income tax withholding $475.75

*28% x ($2,124 – $1,409)

34

For Practice: PE 11-2A, PE 11-2B


0

11-2

FICA Tax

The amount of FICA tax withheld is the employees’ contribution to two federal programs. The first program, called social security, is for old age, survivors, and disability insurance (OASDI). The second program, called Medicare, is health insurance for senior citizens.


0

11-2

John T. McGrath’s FICA Tax

Earnings subject to 6% social security tax ($100,000 – $99,038) $ 962

Social security tax rate x 6%

Social security tax $57.72

Earnings subject to 1.5% Medicare tax $1,462

Medicare tax rate x 1.5% Medicare tax 21.93

Total FICA tax $79.65

36


0

11-2

11-2

Computing McGrath’s Net Pay

John T. McGrath’s net pay:

Gross earnings for the week $1,462.00 Deductions:

Social security tax (Slide 37) $ 57.72

Medicare tax (Slide 33) 21.93

Federal income tax (Slide 33) 273.05

Retirement savings 20.00

United Way 5.00

Total deductions 377.70

Net pay $1,084.30

37


Example Exercise 11-3

0

11-2

Karen Dunn’s weekly gross earnings for the week ending Dec. 3rd were $2,250, and her federal income tax withholding was $475.75. Prior to this week Dunn had earned $98,000 for the year. Assuming the social security rate is 6% on the first $100,000 of annual earnings and Medicare is 1.5% of all earnings, what is Dunn’s net pay?

38


Follow My Example 11-3

0

11-2

Total wage payment $2,250.00

Less: Federal income tax withholding 475.75

Earnings subject to social security tax ($100,000 – $98,000) $2,000

Social security tax rate x 6%

Social security tax 120.00

Medicare tax ($2,250 x 1.5%) 33.75

Net pay $1,620.50

For Practice: PE 11-3A, PE 11-3B

39


0

11-2

11-2

Employer’s Federal Payroll Taxes

Employers are required to contribute to the social security and Medicare programs for each employee. The employer must match the employee’s contribution to each program.


0

11-2

11-2

Employer’s Federal Unemployment Taxes

A FUTA tax of 6.2% is levied on employersonlyto provide for temporary unemployment to those who become unemployed as a result of layoffs due to economic causes beyond their control. This tax applies to only the first $7,000 of the earnings of each covered employee during a calendar year.


0

11-2

11-2

Employer’s State Unemployment Taxes

Employers in most states also must pay a state unemployment tax for unemployed workers. A few states require employee contributions. The state plan is designed to reward firms with stable employment, so the tax rate varies from state to state and employer to employer.


0

11-2

11-2

43


0

11-3

Objective 3

Describe payroll accounting systems that use a payroll register, employee earnings records, and a general journal.


0

11-3

Payroll Register

The payroll register is a multicolumn report used for summarizing the data for each payroll period. The last two columns of the payroll register are used to accumulate the total wages or salaries to be debited to various expense accounts. The process is usually called payroll distribution.


0

11-3

Payroll Register

46

(Continued)


0

11-3

(Concluded)

47


0

11-3

Recording Employees’ Earnings

Dec. 27 Sales Salaries Expense 11 122 00

Office Salaries Expense 2 780 00

Social Security Tax Payable 643 07

Medicare Tax Payable 208 53

Employees’ Federal Inc. Tax Pay. 3 332 00

Retirement Savings Ded. Payable 680 00

United Way Deductions Payable 470 00

Accounts Receivable—Fred Elrod 50 00

Salaries Payable 8 518 40

Payroll for week ended December 27.

48


Example Exercise 11-4

0

11-3

The payroll register of Chen Engineering Services indicates $900 of social security withheld and $225 of Medicare tax withheld on total salaries of $15,000 for the period. Federal withholding for the period totaled $2,925.

Provide the journal entry for the period’s payroll.

49


Follow My Example 11-4

0

11-3

Salaries Expense 15,000

Social Security Tax Payable 900

Medicare Tax Payable 225

Federal Withholding Tax Payable 2,925

Salaries Payable 10,950

For Practice: PE 11-4A, PE 11-4B

50


Earnings Subject to Payroll Taxes

Social Security Tax (6.0%) $18,000

Medicare Tax (1.5%) 26,000

State and Federal Unemployment Compensation Tax 1,000

0

11-3

Recording and Paying Payroll Taxes

Everson Company’s fiscal year ends on April 30. Everson Company owes it employees $26,000 of wages on December 31. The following portion of the $26,000 of wages are subject to payroll taxes on December 31:

51


0

11-3

Data for McDermott Supply Co. payroll for the week ending December 27:

Social security tax $ 643.07

Medicare tax 208.53

State unemployment compensation tax (5.4% x $2,710) 146.34

Federal unemployment compensation tax (0.8% x $2,710) 21.68

Total payroll tax expense $1,019.62

52


0

11-3

McDermott Supply Co.’s payroll entry on December 27 is recorded as follows:

Dec. 27 Payroll Tax Expense 1 019 62

Social Security Tax Payable 643 07

Medicare Tax Payable 208 53

State Unemployment Tax Payable 146 34

Federal Unemployment Tax Pay. 21 68

Payroll taxes for week ended December 27.

53


Example Exercise 11-5

0

11-3

The payroll register of Chen Engineering Services indicates $900 of social security withheld and $225 of Medicare tax withheld on total salaries of $15,000 for the period. Assume earnings subject to state and federal unemployment compensation taxes are $5,250, at the federal rate of 0.8% and state tax of 5.4%.

Provide the journal entry to record the payroll tax expense for the period.

54


Follow My Example 11-5

Payroll Tax Expense 1,450.50

Social Security Tax Payable 900.00

Medicare Tax Payable 225.00

State Unemployment Tax Payable 283.50*

Federal Unemployment Tax Payable 42.00**

*$5,250 x 5.4% **$5,250 x 0.8%

0

11-3

For Practice: PE 11-5A, PE 11-5B

55


0

11-3

A detailed payroll record is maintained for each employee. This record is called an employee’s earnings record.

At the end of each pay period, payroll checksare prepared. Each check includes a detachable statement showing the details of how the net pay was computed.


0

11-3

Employee’s Earnings Record

(Continued)

57


0

11-3

(Concluded)

(Concluded)

58


0

11-3

Payroll Check

59


0

11-3

60


0

11-4

Objective 4

Journalize entries for employee fringe benefits, including vacation pay and pensions.


0

11-4

Many companies provide their employees a variety of benefits in addition to salary and wages earned. Such fringe benefits may take many forms, including vacations, medical, and postretirement benefits, such as a pension plan.


0

11-4

Benefit Dollars as a Percent of Payroll Costs

63


0

11-4

Vacation Pay

Most employers grant vacation rights, sometimes called compensated absences, to their employees. The estimated vacation pay for the payroll period ending May 5 is $2,000.

May 5 Vacation Pay Expense 2 000 00

Vacation Pay Payable 2 000 00

Vacation pay for week ended May 5.

64


0

11-4

Pensions

A pension represents a cash payment to retired employees. Rights to pension payments are earned by employees during their working years, based on the pension plan established by the employer.


0

11-4

In a defined contribution plan, a fixed amount of money is invested on the employee’s behalf during the employee’s working years.


0

11-4

The pension plan of Heaven Scent Perfumes Company requires an employer contribution of 10% of employee monthly salaries. December salaries totaled $500,000, so $50,000 was sent to the employees’ plan administrator.


0

11-4

Defined Contribution Plan

The entry to record the payment to the plan administrator is—

Dec. 31 Pension Expense 50 000 00

Cash 50 000 00

Contributed 10% of monthly salaries to pension plan.

68


0

11-4

Pensions

In a defined benefit plan, employers promise employees a fixed annual pension benefit at retirement, based on years of service and compensation levels.


0

11-4

Defined Benefit Plan

Assume that Hinkle Co. requires an annual pension cost of $80,000 based on an estimate of the future benefit obligation. Hinkle pays $60,000 into the pension fund.

Dec. 31 Pension Expense 80 000 00

Cash 60 000 00

Unfunded Pension Liability 20 000 00

To record annual pension cost and contribution to pension plan.

70


0

11-4

Postretirement Benefits Other Than Pensions

Employees may earns rights to other postretirement benefits, such as dental care, eye care, medical care, life insurance, tuition assistance, tax services, and legal services.


Example Exercise 11-6

0

11-4

Manfield Service, Inc. provides their employees vacation benefits and a defined contribution pension plan. Employees earned vacation pay of $44,000 for the period. The pension plan requires a contribution to the plan administrator equal to 8% of employee salaries. Salaries were $450,000 during the period.

Provide the journal entry for (a) the vacation pay and (b) pension benefit.

72


Follow My Example 11-6

0

11-4

a. Vacation Pay Expense 44,000

Vacation Pay Payable 44,000

Vacation pay accrued for

the period.

b. Pension Expense 36,000

Cash 36,000

Pension contribution, 8% of

$450,000 salary.

For Practice: PE 11-6A, PE 11-6B

73


0

11-5

Objective 5

Describe the accounting treatment for contingent liabilities and journalize entries for product warranties.


0

11-5

Some past transactions will result in liabilities if certain events occur in the future. These potential obligations are called contingent liabilities.


0

11-5

Contingent Liabilities

During June, a company sells a product for $60,000 on which there is a 36-month warranty. Past experience indicates that the average cost to repair defects is 5% of the sales price over the warranty price.

June 30 Product Warranty Expense 3 000 00

Product Warranty Payable 3 000 00

Warranty expenses projected for June, 5% of $60,000.

76


0

11-5

If a customer required a $200 part replacement on August 16, the entry would be:

Aug. 16 Product Warranty Payable 200 00

Supplies 200 00

Replaced defective part under warranty.

77


Estimable

Not Estimable

Disclose Liability

Disclose Liability

0

11-5

Accounting Treatment of Contingent Liabilities

10

Accounting Treatment

Likelihood of Occurring

Measurement

Record and Disclose Liability

Probable

Contingency

Possible

78


Example Exercise 11-7

0

11-5

Cook-Rite Inc. sold $140,000 of kitchen appliances during August under a 6 month warranty. The cost to repair defects under the warranty is estimated at 6% of the sales price. On September 11, a customer required a $200 part replacement, plus $90 labor under the warranty.

Provide the journal entries for (a) the estimated warranty expense on August 31 and (b) the September 11 warranty work.

79


Follow My Example 11-7

0

11-5

a. Product Warranty Expense 8,400

Product Warranty Payable 8,400

To record warranty expense

for August, 6% x $140,000.

b. Product Warranty Payable 290

Supplies 200

Wages Payable 90

Replaced defective part under

warranty.

For Practice: PE 11-7A, PE 11-7B

80


Quick Ratio =

Quick assets

Current liabilities

0

11-5

Quick Ratio

Noble Co. Hart Co.

Quick assets:

Cash $147,000 $120,000

Accounts receivable (net) 84,000 472,000

Total $231,000 $592,000

Current liabilities $220,000 $740,000

The quick ratio or acid-test ratio can be used to evaluate a firm’s ability to pay its current liabilities within a short period of time.

81


Quick Ratio =

Quick assets

Current liabilities

$231,000

$220,000

= 1.05

Noble Company =

0

11-5

Quick Ratio

Noble Co. Hart Co.

Quick assets:

Cash $147,000 $120,000

Accounts receivable (net) 84,000 472,000

Total $231,000 $592,000

Current liabilities $220,000 $740,000

82


Quick Ratio =

Quick assets

Current liabilities

$592,000

$740,000

= 0.80

Hart Company =

0

11-5

Noble Co. Hart Co.

Quick assets:

Cash $147,000 $120,000

Accounts receivable (net) 84,000 472,000

Total $231,000 $592,000

Current liabilities $220,000 $740,000

83


0

11-5

Interpretation

Noble Company is in a better quick ratio position than Hart Company. By having a quick ratio in excess of 1, Noble Company has quick assets sufficient to cover the company’s current liabilities. This is not true for Hart Company.


ad