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Chapter 9

Current Liabilities,Contingencies, and Payroll

A

FEDERAL RESERVE NOTE

THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

L70744629F

12

1212

12

L70744629F

ONE DOLLARONE DOLLAR

WASHINGTON, D.C.

THIS NOTE IS LEGAL TENDER

FOR ALL DEBTS, PUBLIC AND PRIVATE

SERIES

1985

H 293

Financial Accounting 4e by Porter and Norton

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Liabilities and shareholders' equityCurrent liabilities:

Notes payable $ 184.9Accounts payable 689.5Income taxes 20.4Other taxes 180.4Accrued interest 170.6Other accrued liabilities 824.9Current maturities of long-term debt 177.6

Total current liabilities $ 2,248.3

McDonald's CorporationPartial Balance Sheet - 2001(in millions)

Require paymentwithin

one year

Listed in order of liquidity

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Accounts Payable

Purchase of inventory, goods or services on credit

2/10,n30

Discount payment terms offered to encourage early payment

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Promissory Note

S.J.Devona

I promise to pay $1,000 plus 12% annualinterest on December 31, 2004.

Date: January 1, 2004

Signed:_________Lamanski Co.

Total repayment = $1,120 $1,000 + ($1,000 x 12%)

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Current Maturities of Long-Term Debt

Principal repayment on borrowings due within one year of balance sheet date

Due in upcoming year

1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

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Taxes Payable

Record expense when incurred; not when paid

Record 2004 taxexpense

Taxes Paid

12/31/04 3/15/05

711

Contingent Liability

Obligation involving existing condition

Outcome not known with certainty

Dependent upon some future event

Actual amount is estimated

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Accrue estimated amount if: liability is probable amount can be reasonably estimated

Contingent Liability

In year criteria are met: Expense (loss) XXX

Liability XXX

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Warranties

Premium or coupon offers

Lawsuits

Typical Contingent Liabilities

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Recording Contingent Liabilities

Quickkey Computer sells a computer product for $5,000 with a one-year warranty. In 2004, 100 of these products were sold for a total sales revenue of $500,000.

Analyzing past records, Quickkey estimates that repairs will average 2% of total sales.

Example:

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Recording Contingent Liabilities

Probable liability has been incurred?

Amount reasonably estimable?

Warranty Expense 100,000 Estimated Liability 100,000

YES

YES

Record in 2004:

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Disclosing Contingent Liabilities

IF not probable

but reasonably possible

ORamount not estimable

Disclose in footnotes

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Contingent Assets

Contingent gains and assets are not recorded but may be disclosed in footnotes

Conservatism principle applies

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Appendix

Accounting Tools:

Payroll Accounting

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Calculation of Gross Wages

Hourly Multiply the number of

hours worked times employee’s hourly rate

Salaried Paid at a flat rate per

week, month, or year, regardless of hours

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Calculation of Net Pay

Gross wages- Income tax (federal, state, local)- FICA - Voluntary deductions

(includes health insurance, retirement contributions, savings plans, charitable contributions, union dues)

= Net pay

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Employer Payroll Taxes

Not deducted from paycheck – employer pays taxes per employee, in addition to salary FICA – employer’s share Unemployment tax

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Payroll Accounting

Example:

Gross wages for Kori Company for July are $100,000. The following amounts have been withheld from employees’ paychecks:

Kori Company’s unemployment tax rate is 3%. Make the appropriate payroll entries.

Income Tax $20,000FICA 7,650United Way contributions 5,000Union dues 3,000

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Payroll Accounting

Salary Expense 100,000

Salary Payable 64,350

Income Tax Payable 20,000

FICA Payable 7,650

United Way Payable 5,000

Union Dues Payable 3,000

To record July salary & deductions

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Payroll Accounting

Salary PayableCash

To record payment of employee salaries

Payroll Tax ExpenseFICA PayableUnemployment Tax Payable

To record employer’s payroll taxes

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Compensated Absences

Employee absences for which the employee will be paid Vacation, illness, holidays

Accrued as a liability if The services have been rendered The rights (days) accumulate Payment is probable and can be

reasonably estimated

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End of Chapter 9

A

FEDERAL RESERVE NOTE

THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

L70744629F

12

1212

12

L70744629F

ONE DOLLARONE DOLLAR

WASHINGTON, D.C.

THIS NOTE IS LEGAL TENDER

FOR ALL DEBTS, PUBLIC AND PRIVATE

SERIES

1985

H 293