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Liabilities

Liabilities . Chapter 10. Liabilities. Debt obligations to third parties Creditor – the lender who makes the loan Debtor – individuals or businesses that receive the credit

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Liabilities

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  1. Liabilities Chapter 10

  2. Liabilities • Debt obligations to third parties • Creditor – the lender who makes the loan • Debtor – individuals or businesses that receive the credit • Current liabilities – obligations that will be paid out of current assets and are due within a short time, usually within one year. • Long term liabilities – are obligations due for a period of time greater than one year.

  3. Current Liabilities • Accounts payable • Arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale. • Current portion of Long-term Debt • Long-term liabilities are often paid back in periodic payments, called installments • Long-term liability installments that are due within the coming year must be classified as a current liability.

  4. Current Liabilities • Short-term Notes Payable • Notes may be issued when merchandise or other assets are purchased. • Also issued to creditors to temporarily satisfy an account payable created earlier.

  5. Example 1: • Suppose that a business issues a 60 day, 10% note for $4,000 on an overdue payable dated May 1, 2007. Record the entry for the establishment of the note.

  6. Example

  7. Example • Now record the payment on the due date. • Interest computation Principal X Rate X Time = Interest $4,000 x 10% x 60/360 = $100 Maturity value = Principal + Interest = $4,000 + $100 = $4,100

  8. Example

  9. Payroll • Payroll refers to the amount paid to employees for the service they provide during a period.

  10. Liability for Employee Earnings • Salary – • Refers to payment for managerial, administrative, or similar services. • Expressed in terms of month or year. • Wages – • Refers to payment for manual labor. • Expressed in hours or weekly. • Basic salary can increase or decrease because of commissions, profit sharing, or cost of living adjustments.

  11. Earnings • Some businesses pay managers an annual bonus in addition to salary • Based on productivity • Fair Labor Standards Act • Requires businesses engaged in interstate commerce to follow the requirements • Minimum wage rate = $5.85

  12. Earnings • Overtime = 1 ½ for hours over 40 per week • Premium rates for overtime or for working at night, holidays, etc are fairly common but not required by law. • http://www.dol.gov/esa/regs/compliance/whd/whdfs22.htm • Overtime - over 40 hours per week are at 1/1/2 times the regular rate

  13. Computing Gross Pay • Gross pay - total earnings of an employee for a payroll period, including bonuses and overtime pay. • Wage employee = = (pay rate x hours worked up to 40) +(1.5 x pay rate)x(hours over 40)

  14. Example 2: • Suppose that Sally Money earns a rate of $10 per hour. During the past week, she worked 48 hours. Compute her gross pay. • (pay rate x hrs up to 40) + (1.5x pay rate)(actual hrs – 40) • ($10 x 40) + (1.5 x10)(48-40) • $400 + $120 = $520 • Base wage Overtime pay Total earnings (GROSS PAY)

  15. Example 2 = pay rate x hrs up to 40) + (1.5x pay rate)(actual hrs – 40) = ($10 x 40) + (1.5 x10)(48-40) = $400 + $120 = $520 Base wage Overtime pay Total earnings (GROSS PAY)

  16. Deductions from Employee’s Pay • Gross pay is total earnings of an employee for the payroll period • Deductions are subtracted from the gross pay to arrive at the NET PAY of the employee (Take home pay)

  17. Federal Withholding Tax • Must be withheld on all employees • Determined by the W-4 completed by the employee ( see below) • http://www.irs.gov/pub/irs-pdf/fw4.pdf?portlet=3

  18. Federal Withholding Tax • Once the W-4 is completed, the amount withheld is computed based on the tables. Please note that must payroll programs have the tables imbedded in the software and compute the tax based on W-4 information. • Tax tables are found in IRS Publication 15 : Employer’s Tax Guide or at: http://www.irs.gov/pub/irs-pdf/p15_06.pdf • Some states also charge state income taxes that must be withheld on employee’s income.

  19. Federal Withholding TaxExample 3 • Suppose that Sally Money earns a rate of $10 per hour. During the past week, she worked 48 hours. Her gross pay $520. Compute her federal withholding if she is a single person.

  20. Example 3 • Table shows

  21. Example 3 • $520 – 192 = $328 this is the excess • Federal withholding: • $14.10 • $328 x 25% 82.00 $96.10

  22. FICA TAX • Federal Insurance Contributions Act • Withholds a portion of the earnings of each of the employees. • Actually covers two taxes • Social security for retirement or disability • Medicare for health insurance for seniors • Social security and Medicare taxes have different rates and only the social security tax has a wage base limit.

  23. Social Security Tax • The wage base limit is the maximum wage that is subject to the tax for the year. • The Social Security tax rate is 6.2%. • Thus the maximum Social Security tax withheld in 2007 is $6,045. • Maximum $97,500

  24. Medicare Tax • The Medicare tax rate is 1.45% for each year shown above. • NO limit on the income taxes

  25. Example 4: • Suppose that Sally Money earns a rate of $10 per hour. During the past week, she worked 48 hours. Her gross pay $520. Compute her FICA taxes

  26. Example 4 Social Security Tax = Gross pay x Social security rate $520 x 6.2% = $32.20 Medicare Tax = Gross pay x Medicare rate = $520 X 1.45% = $7.54

  27. Example 5 • What happens when an employee reaches the ceiling for social security. Suppose that John has earned to date $96,900 and this week’s gross pay is $1000. Compute his FICA taxes.

  28. Example 5 Amount available for social security tax = Social security ceiling – Earnings to date $97,500 – $96,900 = $600 Therefore, tax is calculated on the $600 and not the $1000 in gross pay. $600 X 6.2% = $37.20 Social security withheld $1,000 x 1.45% = $14.50 Medicare withheld

  29. Computing Net Pay Gross Pay -Federal Income Tax Withheld -Social Security Tax -Medicare Tax NET PAY

  30. Example 6 Using all the information on Sally, what is her net pay? Gross pay $520.00 Federal withholding 96.10 Social security 32.24 Medicare 7.54 NET PAY $384.12 the amount of her paycheck

  31. Liability for Employer’s Payroll Taxes • Matches the employee’s contribution • Most employers are also subject to federal and state payroll taxes. • These include • Social security tax • Medicare tax • Federal unemployment compensation tax • FUTA – Federal Unemployment Tax Act provides for temporary payments for those who become unemployed as a result of layoffs due to economic causes beyond their control. • Tax of 6.2% on the first $7,000 wages per employee. • State unemployment compensation tax • Varies by state • Florida rates as high as 5.4% of the first $7,000 of wages per employee. • In Florida, Form UCT-6 is filed quarterly to report the tax.

  32. Journal entries: • To record the salaries paid for the period:

  33. To record theemployer’s share of the payroll taxes for the period:

  34. Payment of Payroll taxes • Companies are required to deposit payroll taxes due weekly, monthly or quarterly based on the amount due each payroll period. • Companies are required to file quarterly reports on the payroll taxes • Form 941: Quarterly Federal Payroll Taxes • http://www.irs.gov/pub/irs-pdf/f941.pdf • Form 940: FUTA taxes – annually • http://www.irs.gov/pub/irs-pdf/f940.pdf • W-3: Report on total wages and taxes collected from employees • http://www.irs.gov/pub/irs-pdf/fw3.pdf • W-2: Wage and Tax Statement for individuals • http://www.irs.gov/pub/irs-pdf/fw2.pdf

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