10

Current Liabilities and Payroll

Student Version

10-2

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

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10-2

10-3

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

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Current Liabilities

10-4

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

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Current Liabilities

10-5

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

Short-Term Notes Payable

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10-6

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

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

Short-Term Notes Payable

10-7

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.

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Short-Term Notes Payable

10-8

Description Debit Credit

Bowden Co. (Borrower)

Mdse. Inventory 10,000Accounts Payable 10,000

Coker Co. (Creditor)

Description Debit Credit

Accounts Receivable 10,000Sales 10,000

Cost of Mdse. Sold 7,500Mdse. Inventory 7,500

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10-9

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

Accounts Payable 10,000Notes Payable 10,000

Description Debit Credit

Bowden Co. (Borrower)

Notes Receivable 10,000Accounts Receivable 10,000

Coker Co. (Creditor)

Description Debit Credit

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10-10

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

Notes Payable 10,000Interest Expense 200

Cash 10,200

Description Debit Credit

Bowden Co. (Borrower)

Cash 10,200Interest Revenue 200Notes Receivable 10,000

Coker Co. (Creditor)

Description Debit Credit

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10-11

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

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Short-Term Notes Payable

10-12

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

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Short-Term Notes Payable

10-13

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%.

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ProceedsDiscount: $20,000

× .15 × 90/360

Discount rate

Short-Term Notes Payable

10-14

On November 8 the note is paid in full.

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The amount paid is the face amount of the note.

Short-Term Notes Payable

10-15

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

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10-15

10-16

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:

1. Employees are sensitive to payroll errors and irregularities.

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

3. Payroll is subject to various federal and state regulations.

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

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10-17

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

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Payroll and Payroll Taxes

10-18

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.

2

10-19

John T. McGrath’s Net Pay

Gross earnings for the week $1,462.00 Deductions:

Social security tax $ 57.72Medicare tax 21.93Federal income tax 268.45Retirement savings 20.00United Way 5.00 Total deductions 373.10

Net pay $1,088.90

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10-20

Liability for Employer’s Payroll Taxes

Employers are subject to the following payroll taxes for amounts paid their employees:1. FICA tax

2. Federal Unemployment Compensation Tax (FUTA)

3. State Unemployment Compensation Tax (SUTA)

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10-21

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.

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10-22

A FUTA tax of 6.2% is levied on employers only to 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.

Employer’s Federal Unemployment Taxes

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10-23

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.

2

Employer’s State Unemployment Taxes

10-24

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

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10-24

10-25

Payroll systems should be designed to:

1. Pay employees accurately and timely.

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

3. Provide useful data for management decision-making needs.

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10-26

3

Payroll Register (left side)Exhibit 5

10-27

33

Payroll Register (right side)Exhibit 5

10-28

The entry based on the payroll register in Exhibit 5 is shown below.

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10-29

Recording and Paying Payroll TaxesEverson Company’s fiscal year ends on April 30. Assume the following payroll data on December 31, 2009:

Wages owed employees on Dec. 31 $26,000Wages subject to payroll taxes:

Social security tax (6.0%) $18,000Medicare taxes (1.5%) 26,000State (5.4%) and federal (0.8%) unemployment compensation tax 1,000

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10-30

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

6. A special payroll bank account should be used.

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

10-31

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

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10-31

10-32

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.

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Employees’ Fringe Benefits

10-33

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.

Vacation Pay

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325,000325,000

10-34

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.

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Pension

10-35

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

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Defined Contribution Plan

10-36

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.

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Heaven Scent Perfumes Co.

10-37

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

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Heaven Scent Perfumes Co.

10-38

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.

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10-39

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

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10-39

10-40

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

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Contingent Liabilities

10-41

The accounting for contingent liabilities depends on the following two factors:1. Likelihood of occurring: Probable,

reasonably possible, or remote.2. Measurement: Estimable or not

estimable.

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Contingent Liabilities

10-42

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.

Recording Contingent Liabilities

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10-43

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

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Recording Contingent Liabilities

10-44