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10. Current Liabilities and Payroll. 1. Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. 10-2. 1. Current Liabilities.

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Current liabilities and payroll

10

Current Liabilities and Payroll


Current liabilities and payroll

1

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

10-2


Current liabilities and payroll

1

Current Liabilities

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


Current liabilities and payroll

1

Current Liabilities

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


Current liabilities and payroll

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.


Current liabilities and payroll

1

Long-Term Liabilities

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


Current liabilities and payroll

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.


Current liabilities and payroll

1

Short-Term Notes Payable

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

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


Current liabilities and payroll

1

Short-Term Notes Payable

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.


Current liabilities and payroll

Mdse. Inventory10,000

Accounts Payable10,000

Bowden Co. (Borrower)

DescriptionDebitCredit

1

Coker Co. (Creditor)

DescriptionDebitCredit

Accounts Receivable10,000

Sales10,000

Cost of Mdse. Sold7,500

Mdse. Inventory7,500


Current liabilities and payroll

Bowden Co. (Borrower)

DescriptionDebitCredit

Accounts Payable10,000

Notes Payable10,000

Coker Co. (Creditor)

DescriptionDebitCredit

Notes Receivable10,000

Accounts Receivable10,000

1

On May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.


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

1

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


Current liabilities and payroll

1

Short-Term Notes Payable

On September 19, Iceburg Company issues a $4,000, 90-day, 15% note to First National Bank.


Current liabilities and payroll

1

Short-Term Notes Payable

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


Current liabilities and payroll

1

Discounting a Note

A discounted note has the following characteristics:

  • The creditor (lender) requires an interest rate, called the discount rate.

  • Interest, called the discount, is computed on the face amount of the note.

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

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


Current liabilities and payroll

1

Short-Term Notes Payable

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 × .15 × 90/360

Discount rate


Current liabilities and payroll

The amount paid is the face amount of the note.

1

Short-Term Notes Payable

On November 8 the note is paid in full.


Current liabilities and payroll

Follow My Example 10-1

Follow My Example 6-1

a.$60,000

1

Example Exercise 10-1

Example Exercise 10-2

Proceeds from Notes Payable

On July 1, Bella Salon Company issued a 60-day note with a face amount of $60,000 to Delilah Hair Product 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%.

b.$59,400 [$60,000 – ($60,000 × 6% × 60/360)]

10-18

For Practice: PE 10-1A, PE 10-1B


Current liabilities and payroll

2

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

10-19


Current liabilities and payroll

2

Payroll refers to the amount paid to employees for the services they provide during a period. A company’s payroll is important for the following reasons:

  • Employees are sensitive to payroll errors and irregularities.

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

  • Payroll is subject to various federal and state regulations.

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


Current liabilities and payroll

2

Payroll and Payroll Taxes

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

2

Payroll and Payroll Taxes

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


Current liabilities and payroll

2

Payroll and Payroll Taxes

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.


Current liabilities and payroll

2

Computing Employee’s 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.

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

Earnings at overtime rate (2 × $51) 102

Total earnings$1,462


Current liabilities and payroll

Exhibit 2

2

Employee’s Withholding Allowance Certificate (W-4 Form)


Current liabilities and payroll

2

Deductions from Employee’s Earnings: McGrath Example

McGrath made $1,462 for the week ending December 27. Since McGrath’s W-4 (Slide28) claims one withholding allowance, $67 (the assumed standard withholding allowance) is deducted from his gross pay to arrive at $1,395 ($1,462 – $67).

(continued)


Current liabilities and payroll

Exhibit 3

2

Wage Bracket Withholding Table

Table for Percentage Method of Withholding WEEKLY Payroll Period

Source: Publication 15, Employer’s Tax Guide, Internal Revenue Service, 2008


Current liabilities and payroll

2

McGrath Example (continued)

Initial withholding (Slide 30)$ 82.95

Plus [25% × ($1,395 – $653)] 185.50

Total federal income taxes withheld$268.45


Current liabilities and payroll

2

Example Exercise 10-2

Federal Income Tax Withholding

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 (page 442 in your book) with a $67 standard withholding allowance for each exemption, what is Dunn’s federal income tax withholding?

10-29


Current liabilities and payroll

Follow My Example 10-2

For Practice: PE 10-2A, PE 10-2B

2

Example Exercise 10-2 (continued)

Total wage payment$2,250

One allowance (provided by IRS)$67

Multiplied by allowances claimed on W-4× 2 134

Amount subject to withholding$2,116

Initial withholding from wage bracket in Exh. 3$302.96

Plus additional withholding: 28% of excess over $1,533 163.24*

Federal income tax withholding$466.20

*28% × ($2,116 – $1,533)

10-30


Current liabilities and payroll

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, provides health insurance for senior citizens.


Current liabilities and payroll

2

John T. McGrath’s FICA Tax

John T. McGrath’s annual earnings prior to the payroll period ending on December 27 total $99,038.

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

Social security tax rate× 6%

Social security tax$57.72

Earnings subject to 1.5% Medicare tax$1,462

Medicare tax rate × 1.5%Medicare tax 21.93

Total FICA tax$79.65


Current liabilities and payroll

2

John T. McGrath’s Net Pay

Gross earnings for the week$1,462.00 Deductions:

Social security tax (Slide 35)$ 57.72

Medicare tax (Slide 35)21.93

Federal income tax (Slide 31)268.45

Retirement savings20.00

United Way 5.00

Total deductions 373.10

Net pay$1,088.90


Current liabilities and payroll

2

Example Exercise 10-3

Employee Net Pay

Karen Dunn’s weekly gross earnings for the week ending Dec. 3rd were $2,250, and her federal income tax withholding was $466.19. 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?

10-34


Current liabilities and payroll

For Practice: PE 10-3A, PE 10-3B

Follow My Example 10-3

2

Example Exercise 10-3 (continued)

Total wage payment$2,250.00

Less: Federal income tax withholding466.19

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

Social security tax rate× 6%

Social security tax120.00

Medicare tax ($2,250 × 1.5%) 33.75

Net pay$1,630.06

10-35


Current liabilities and payroll

2

Liability for Employer’s Payroll Taxes

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)


Current liabilities and payroll

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.


Current liabilities and payroll

2

Employer’s Federal Unemployment Taxes

A FUTA tax of 6.2% is levied on employers onlyto 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.


Current liabilities and payroll

2

Employer’s State Unemployment Taxes

This employer tax also provides temporary payments to those who become unemployed. The FUTA and SUTA programs are closely coordinated, with the states distributing the unemployment checks. SUTA tax rates and earnings subject to tax vary by state.


Current liabilities and payroll

Exhibit 4

2

Responsibility for Tax Payments


Current liabilities and payroll

3

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

10-41


Current liabilities and payroll

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.


Current liabilities and payroll

3

Payroll Register

The payroll register is a multicolumn report used for summarizing the data for each payroll period. The right hand columns of the payroll register indicate the accounts debited for the payroll expense. These columns are often referred to as the payroll distribution.


Current liabilities and payroll

Exhibit 5

3

Payroll Register (left side)


Current liabilities and payroll

Discuss Journal Entry!!!!!!!!!!!!!

Exhibit 5

3

3

Payroll Register (right side)


Current liabilities and payroll

3

The entry based on the payroll register in Exhibit 5 (Slides 47 and 48) is shown below.


Current liabilities and payroll

Follow My Example 10-4

Follow My Example 6-1

Salaries Expense………………………………15,000

Social Security Tax Payable………........900

Medicare Tax Payable…………………....225

Federal Withholding Tax Payable………2,925

Salaries Payable…………………………..10,950

3

Example Exercise 10-4

Example Exercise 10-2

Journalize Period Payroll

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.

10-47

For Practice: PE 10-4A, PE 10-4B


Current liabilities and payroll

3

Recording and Paying Payroll Taxes

Everson Company’s fiscal year ends on April 30. Assume the following payroll data on December 31, 2009:

Wages owed employees on Dec. 31$26,000

Wages subject to payroll taxes:

Social security tax (6.0%)$18,000

Medicare taxes (1.5%)26,000

State (5.4%) and federal (0.8%)

unemployment compensation tax1,000


Current liabilities and payroll

3

Recording and Paying Payroll Taxes

If the payroll is paid on December 31, the payroll taxes are computed as follows:

Social security$1,080($18,000 × 6.0%)

Medicare tax390($26,000 × 1.5%)

State unemployment

compensation tax (SUTA)54($1,000 × 5.4%)

Federal unemployment

compensation tax (FUTA) 8($1,000 × 0.8%)

Total payroll taxes$1,532


Current liabilities and payroll

3

Recording and Paying Payroll Taxes

If the payroll is paid on January 2, the entire $26,000 is subject to all payroll taxes, as computed as follows:

Social security$1,560($26,000 × 6.0%)

Medicare tax390($26,000 × 1.5%)

State unemployment

compensation tax (SUTA)1,404($26,000 × 5.4%)

Federal unemployment

compensation tax (FUTA) 208($26,000 × 0.8%)

Total payroll taxes$3,562


Current liabilities and payroll

3

Assume that in Exhibit 5 (Slides 47 and 48) the earnings subject to state and federal unemployment compensation taxes are $2,710. In addition, assume a SUTA rate of 5.4% and a FUTA rate of 0.8%. What is the amount for each of the following?

$ 643.07 (from Exhibit 5)

Social security?

Medicare tax?

State unemployment

compensation tax (SUTA)?

Federal unemployment

compensation tax (FUTA) ?

Total payroll taxes$?

208.53(from Exhibit 5)

146.34($2,710 × 5.4%)

21.68($2,710 × 0.8%)

$1,019.62

Click to go to Exhibit 5. To return to this slide, type “54” and press “Enter.”

Left click for answers


Current liabilities and payroll

3

Journal Entry to Record Weekly Payroll


Current liabilities and payroll

3

Example Exercise 10-5

Journalize Payroll Taxes

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.

10-53


Current liabilities and payroll

For Practice: PE 10-5A, PE10-5B

Follow My Example 10-5

3

Example Exercise 10-5 (continued)

Payroll Tax Expense…………………………..1,450.50

Social Security Tax Payable…………….900.00

Medicare Tax Payable……………………225.00

State Unemployment Tax Payable

($5,250 × 5.4%)…………………………..283.50

Federal Unemployment Tax Payable

($5,250 × 0.8%)…………………………..42.00

10-54


Current liabilities and payroll

3

Employee’s Earnings Record

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 checks are prepared. Each check includes a detachable statement showing the details of how the net pay was computed.


Current liabilities and payroll

Exhibit 6

3

Employee’s Earnings Record (left side)


Current liabilities and payroll

Exhibit 6

3

Employee’s Earnings Record (right side)


Current liabilities and payroll

3

W-2 Wage and Tax Statement


Current liabilities and payroll

Exhibit 7

3

Payroll Check


Current liabilities and payroll

Exhibit 8

3

Flow of Data in a Payroll System


Current liabilities and payroll

3

Internal Controls for Payroll Systems

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

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

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

(continued)


Current liabilities and payroll

3

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

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

  • A special payroll bank account should be used.


Current liabilities and payroll

4

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

10-63


Current liabilities and payroll

4

Employees’ Fringe Benefits

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 retirement benefits.


Current liabilities and payroll

4

Vacation Pay

Most employers grant vacation rights, sometimes called compensated absences, to their employees. The estimated vacation pay for the year ending December 31 is $325,000.

325,000

325,000


Current liabilities and payroll

4

Pension

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.


Current liabilities and payroll

4

Defined Contribution Plan

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


Current liabilities and payroll

4

Heaven Scent Perfumes Co.

The pension plan of Heaven Scent Perfumes Company requires an employer contribution of 10% of employee monthly salaries to an employee 401k plan. December salaries totaled $500,000, so $50,000 was sent to the employees’ plan administrator.


Current liabilities and payroll

4

Heaven Scent Perfumes Co.

The entry to record the payment to the plan administrator is shown below:


Current liabilities and payroll

4

Defined Benefit Plan

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


Current liabilities and payroll

4

Hinkle Company

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.


Current liabilities and payroll

4

Postretirement Benefits Other Than Pensions

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 and payroll

4

Example Exercise 10-2

Example Exercise 10-6

Vacation Pay and Pension Benefits

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.

10-73


Current liabilities and payroll

For Practice: PE 10-6A, PE 10-6B

Follow My Example 10-6

4

Example Exercise 10-6 (continued)

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.

10-74


Current liabilities and payroll

5

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

10-75


Current liabilities and payroll

5

Contingent Liabilities

Some liabilities may arise from past transactions if certain events occur in the future. These potential obligations are called contingent liabilities.


Current liabilities and payroll

5

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

5

Recording 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 period.


Current liabilities and payroll

5

Recording Contingent Liabilities

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


Current liabilities and payroll

Exhibit 10

5

Accounting Treatment of Contingent Liabilities


Current liabilities and payroll

5

Example Exercise 10-2

Example Exercise 10-7

Estimated Warranty Liability

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.

10-81


Current liabilities and payroll

For Practice: PE 10-7A, PE10-7B

Follow My Example 10-7

5

Example Exercise 10-7 (continued)

a. Product Warranty Expense…………………8,400

Product Warranty Payable……………..8,400

To record warranty expense

for August, 6% × $140,000.

b. Product Warranty Payable………………….290

Supplies……………………………………200

Wages Payable……………………………90

Replaced defective part under

warranty.

10-82


Current liabilities and payroll

Quick Ratio =

Quick assets

Current liabilities

5

Quick Ratio

Noble Co.Hart Co.

Quick assets:

Cash$147,000$120,000

Accounts receivable (net)84,000472,000

Total quick assets$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.


Current liabilities and payroll

Quick Ratio =

Quick assets

Current liabilities

$231,000

$220,000

= 1.05

Noble Company =

5

Quick Ratio

Noble Co.Hart Co.

Quick assets:

Cash$147,000$120,000

Accounts receivable (net)84,000472,000

Total quick assets$231,000$592,000

Current liabilities$220,000$740,000


Current liabilities and payroll

Quick Ratio =

Quick assets

Current liabilities

$592,000

$740,000

= 0.80

Hart Company =

5

Quick Ratio

Noble Co.Hart Co.

Quick assets:

Cash$147,000$120,000

Accounts receivable (net)84,000472,000

Total quick assets$231,000$592,000

Current liabilities$220,000$740,000


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