Current liabilities and payroll
This presentation is the property of its rightful owner.
Sponsored Links
1 / 85

Current Liabilities and Payroll PowerPoint PPT Presentation


  • 96 Views
  • Uploaded on
  • Presentation posted in: General

Current Liabilities and Payroll. Chapter 11. Learning Objectives. Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable.

Download Presentation

Current Liabilities and Payroll

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


Current liabilities and payroll

Current Liabilities and Payroll

Chapter 11


Learning objectives

Learning Objectives

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.

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


Current liabilities and payroll

Learning Objectives

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


Current liabilities and payroll

Learning Objectives

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

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


Current liabilities and payroll

Learning Objectives

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

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

Describe and illustrate the use of the quick ratio in analyzing a company’s ability to pay its current liabilities.


Current liabilities and payroll

Learning Objectives

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


Current liabilities

Current Liabilities

LO 1

When a company or a bank advances credit, it is making a loan.

The company or bank is called a creditor (or lender).

The individuals or companies receiving the loans are called debtors(or borrowers).


Current liabilities and payroll

LO 1

Current Liabilities

  • Long-term liabilities are debts due beyond one year.

  • Current Liabilities are debts that will be paid out of current assets and are due within one year.


Accounts payable

Accounts Payable

LO 1

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


Accounts payable1

Accounts Payable

LO 1


Current portion of long term debt

Current Portion of Long-Term Debt

LO 1

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. The installments due after the coming year are classified as a long-term liability.


Short term notes payable

Short-Term Notes Payable

LO 1

Nature’s Sunshine Company issues a 90-day, 12% note for $1,000, dated August 1, 2011 to Murray Co. for a $1,000 overdue account.


Current liabilities and payroll

LO 1

Short-Term Notes Payable

When the note matures, the entry to record the payment of $1,000 plus $30 interest ($1,000 x 12% x 90/360) is as follows:

Interest Expense appears on the income statement as an “Other Expense.”


Current liabilities and payroll

LO 1

Short-Term Notes Payable

On May1, Bowden Co. (borrower) purchased merchandise on account from Coker Co. (creditor), $10,000, 2/10, n/30. The merchandise cost Coker Co. $7,500.


Current liabilities and payroll

Bowden Co. (Borrower)

DescriptionDebitCredit

LO 1

Short-Term Notes Payable

Mdse. Inventory10,000

Accounts Payable10,000

Coker Co. (Creditor)

DescriptionDebitCredit

Accounts Receivable10,000

Sales10,000

Cost of Mdse. Sold7,500

Mdse. Inventory7,500


Current liabilities and payroll

LO 1

Short-Term Notes Payable

On May31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.


Current liabilities and payroll

Bowden Co. (Borrower)

DescriptionDebitCredit

Accounts Payable10,000

Notes Payable10,000

Coker Co. (Creditor)

DescriptionDebitCredit

Notes Receivable10,000

Accounts Receivable10,000

LO 1

Short-Term Notes Payable


Current liabilities and payroll

LO 1

Short-Term Notes Payable

On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31, the face amount of $10,000 plus interest of $200 ($10,000 x 12% x 60/360).


Current liabilities and payroll

Bowden Co. (Borrower)

DescriptionDebitCredit

Notes Payable10,000

Interest Expense200

Cash10,200

Coker Co. (Creditor)

DescriptionDebitCredit

Cash10,200

Interest Revenue 200

Notes Receivable10,000

LO 1

Short-Term Notes Payable


Current liabilities and payroll

LO 1

Short-Term Notes Payable

On September 19, Iceburg Company borrowed cash from First National Bank by issuing a $4,000, 90-day, 15% note to the bank.


Current liabilities and payroll

LO 1

Short-Term Notes Payable

On December 18, Iceburg Company paid First National Bank $4,000 plus interest of $150 ($4,000 x 15% x 90/360).


Short term notes payable1

Short-Term Notes Payable

LO 1

(continued)

  • A discounted note has the following characteristics:

    • The interest rate on the note is called the discount rate.

    • The amount of interest on the note, called the discount, is computed by multiplying the discount rate times the face amount of the note.


Current liabilities and payroll

LO 1

Short-Term Notes Payable

  • The debtor (borrower) receives the face amount of the note less the discount, called theproceeds.

  • The debtor must repay the face amount of the note on the due date.

(concluded)


Current liabilities and payroll

LO 1

Short-Term Notes Payable

On August 10, Cary Company issues a $20,000, 90-day discounted note to Western National Bank. The discount rate is 15%, and the amount of the discount is $750 ($20,000 x 15% x 90/360).

proceeds


Current liabilities and payroll

LO 1

Short-Term Notes Payable

The entry when Cary Company pays the discounted note on November 8 is as follows:


Current liabilities and payroll

EE 11-1


Current liabilities and payroll

Learning Objectives

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.


Payroll and payroll taxes

Payroll and Payroll Taxes

LO 2

  • In accounting, payroll refers to the amount paid to employees for services they provided during the period. A company’s payroll is important for the following reasons:

    • Payroll and related payroll taxes significantly affect the net income of most companies.

    • Payroll is subject to federal and state regulations.

    • Good employee morale requires payroll to be paid timely and accurately.


Liability for employee earnings

Liability for Employee Earnings

LO 2

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


Current liabilities and payroll

LO 2

Liability for Employee Earnings

  • Wagesusually refers to payment for employee manual labor. The rate of wages is normally stated on an hourly or weekly basis.

(concluded)


Current liabilities and payroll

LO 2

Liability for Employee Earnings

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. His earnings are computed as follows:

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

Earnings at overtime rate (2 x $51) 102

Total earnings$1,462


Deductions from employee earnings

Deductions from Employee Earnings

LO 2

The total earnings of an employee for a payroll period, including any overtime pay, are called gross pay.

From this amount is subtracted one or more deductionsto arrive at the net pay.


Deductions from employee earnings1

Deductions from Employee Earnings

LO 2


Current liabilities and payroll

LO 2

Deductions from Employee Earnings

John T. McGrath made $1,462 for the week ending December 27. McGrath’s W-4 (previous slide) claims one withholding allowance of $70. Thus, the wages used to determine McGrath’s withholding bracket in Exhibit 3 (next slide) are $1,392 ($1,462 – $70).


Current liabilities and payroll

LO 2

Deductions from Employee Earnings


Current liabilities and payroll

EE 11-2


Deductions from employee earnings2

Deductions from Employee Earnings

LO 2

  • The Federal Insurance Contributions Act(FICA) tax withheld contributes to the following two federal programs.

    • Social security, which provides payments for retirees, survivors, and disability insurance. (Assume 6% on all earnings.)

    • Medicare, which provides health insurance benefits for senior citizens. (Assume 1.5% on all earnings.)


Deductions from employee earnings3

Deductions from Employee Earnings

LO 2

John T. McGrath’s earnings for the week ending December 27 are $1,462. Total FICA tax to be withheld is calculated as follows:

Earnings subject to 6% social security tax $1,462

Social security tax ratex 6%

Social security tax$ 87.72

Earnings subject to 1.5% Medicare tax$1,462

Medicare tax rate x 1.5%Medicare tax 21.93

Total FICA tax$109.65


Computing employee net pay

Computing Employee Net Pay

LO 2

John T. McGrath’s Net Pay

Gross earnings for the week$1,462.00 Deductions:

Social security tax $ 87.72

Medicare tax 21.93

Federal income tax 258.90

Retirement savings20.00

United Fund 5.00

Total deductions 393.55

Net pay$1,068.45


Current liabilities and payroll

EE 11-3


Liability for employer s payroll taxes

Liability for Employer’s Payroll Taxes

LO 2

  • Employers are subject to the following payroll taxes for amounts paid their employees:

    • FICA Tax

    • Federal Unemployment Compensation Tax (FUTA)

    • State Unemployment Compensation Tax (SUTA)


Liability for employer s payroll taxes1

Liability for Employer’s Payroll Taxes

LO 2


Learning objective 3

Learning Objective 3

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.

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


Accounting systems for payroll and payroll taxes

Accounting Systems for Payroll and Payroll Taxes

LO 3

  • Payroll systems should be designed to:

    • Pay employees accurately and timely.

    • Meet regulatory requirements of federal, state, and local agencies.

    • Provide useful data for management decision-making needs.


Payroll register

Payroll Register

LO 3

The payroll register is a multicolumn report used for summarizing the data for each payroll period. Exhibit 5 illustrates a payroll register for McDermott Supply Co.


Current liabilities and payroll

LO 3

Payroll Register

(left side, continued)


Current liabilities and payroll

LO 3

Payroll Register

(right side)


Recording employees earnings

Recording Employees’ Earnings

LO 3


Current liabilities and payroll

EE 11-4


Current liabilities and payroll

LO 3

Recording and Paying Payroll Taxes

Employers must match the employee’s social security and Medicare tax contributions. In addition, the employer must pay SUTA tax of 5.4% and FUTA tax of 0.8% (assume on $2,710). For McDermott Supply’s payroll of December 27, these payroll taxes are computed as follows:

Social security tax$ 834.12($13,902 x 6%)

Medicare tax208.53($13,902 x 1.5%)

SUTA146.34($2,710 x 5.4%)

FUTA 21.68($2,710 x 0.8%)

Total payroll taxes$1,210.67


Current liabilities and payroll

LO 3

Recording and Paying Payroll Taxes

The entry to journalize the payroll tax expense for Exhibit 5 is shown below.


Current liabilities and payroll

EE 11-5


Employee s earnings record

Employee’s Earnings Record

A detailed payroll record must be kept for each employee. This record is called an employee’s earnings record. Exhibit 6 (next two slides) shows a portion of John T. McGrath’s employee’s earnings record.

LO 3


Current liabilities and payroll

LO 3

(continued)


Current liabilities and payroll

LO 3


Employee s earnings record1

Employee’s Earnings Record

LO 3


Payroll checks

Payroll Checks

LO 3

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


Current liabilities and payroll

LO 3


Payroll system design

Payroll System Design

LO 3

  • The inputs into a payroll system may be classified as:

    • Constants, which are data that remain unchanged from payroll to payroll.

      • Employee names

      • Social security numbers

    • Variables, which are data that change from payroll to payroll.

      • Number of hours or days worked

      • Accrued sick leave


Internal controls for payroll systems

Internal Controls for Payroll Systems

LO 3

(continued)

  • Some examples of payroll controls include the following:

    • If a check-signing machine is used, blank payroll checks and access to the machine should be restricted to prevent their theft or misuse.

    • The hiring and firing of employees should be properly authorized and approved in writing.


Current liabilities and payroll

LO 3

Internal Controls for Payroll Systems

  • All changes in pay rates should be properly authorized and approved in writing.

  • Employees should be observed when arriving for work to verify that employees are “checking in” for work only once and only for themselves.

  • Payroll checks should be distributed by someone other than employee supervisors.

(continued)


Current liabilities and payroll

LO 3

Internal Controls for Payroll Systems

  • A special payroll bank account should be used.

(concluded)


Current liabilities and payroll

Learning Objective 4

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


Employees fringe benefits

Employees’ Fringe Benefits

LO 4

  • Many companies provide their employees benefits in addition to salary and wages earned. Such fringe benefits may include:

    • Vacation pay (sometimes called compensated absences)

    • Medical benefits

    • Retirement benefits


Vacation pay

Vacation Pay

LO 4

Assume that employees earn one day of vacation for each month worked. The estimated vacation pay for the year ending December 31 is $325,000. The adjusting entry for the accrued vacation is shown below.


Pensions

Pensions

LO 4

  • A pension is a cash payment to retired employees. Pension rights are accrued by employees as they work, based on the employer’s pension plan. Two types of pension plans are:

    • Defined contribution plan

    • Defined benefit plan


Current liabilities and payroll

LO 4

Pensions

  • In a defined contribution plan, the company invests contributions on behalf of the employee during the employee’s working years.

    • Normally, the employee and employer contribute to the plan.

    • The employee’s pension depends on the total contributions and the investment returns earned on those contributions.


Pensions1

Pensions

LO 4

Heaven Scent Perfumes Company contributes 10% of employee monthly salaries to an employee 401K plan. Assuming $500,000 of monthly salaries, the journal entry to record the monthly contribution is shown below.


Current liabilities and payroll

LO 4

Pensions

  • In a defined benefit plan, the employer is obligated to pay for (fund) the employee’s future pension benefits.

    • Many companies are replacing their defined benefit plans with defined contribution plans.

    • A retired employee receives a specific amount based on his or her salary history and years of service.


Current liabilities and payroll

LO 4

Pensions

The defined benefit plan of Hinkle Co. requires an annual pension cost of $80,000. The annual contribution is based on estimates of Hinkle’s future pension liability. On December 31, Hinkle Co. pays $60,000 to the pension fund. The entry to record the payment and unfunded liability is shown below.


Current liabilities and payroll

EE 11-6


Postretirement benefits other than pensions

Postretirement Benefits Other than Pensions

LO 4

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


Current liabilities on the balance sheet

Current Liabilities on the Balance Sheet

LO 4


Current liabilities and payroll

Learning Objective 5

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

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


Contingent liabilities

Contingent Liabilities

LO 5

  • Some liabilities may arise from past transactions if certain events occur in the future. These potential obligations are called contingent liabilities. The accounting for contingent liabilities depends on the following two factors:

    • Likelihood of occurring: Probable, reasonably possible, or remote

    • Measurement: Estimable or not estimable


Current liabilities and payroll

LO 5

Contingent Liabilities

During June, a company sold a product for $60,000 that includes a 36-month warranty for repairs. The average cost of repairs over the warranty period is 5% of the sales price. The entry to record the estimated product warranty expense for June is shown below.


Current liabilities and payroll

LO 5

Contingent Liabilities

If a $200 part is replaced under warranty on August 16, the entry is as follows:


Current liabilities and payroll

EE 11-7


Contingent liabilities1

Contingent Liabilities

LO 5


Current liabilities and payroll

Learning Objective 6

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

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

Describe and illustrate the use of the quick ratio in analyzing a company’s ability to pay its current liabilities.


Quick ratio

Quick Ratio

LO 6

  • Current position analysis helps creditors evaluate a company’s ability to pay its current liabilities. It is based on:

    • Working capital, the excess of current assets over current liabilities

    • Current ratio, determined by dividing the current assets by the current liabilities

    • Quick ratio, an indicator of a company’s short-term liquidity


Quick ratio1

Quick Ratio

Quick Assets

Current Liabilities

Quick Ratio =

  • Quick assets are cash and other current assets that can be easily converted to cash.

The quick ratio measures the “instant” debt-paying ability of a company and is computed as follows:


Current liabilities and payroll

EE 11-8

(continued)


Current liabilities and payroll

EE 11-8


Current liabilities and payroll1

Current Liabilities and Payroll

The End


  • Login