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Chapter Chapter 1010Current LiabilitiesCurrent Liabilities
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
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1. Define and give examples of current liabilities.2. Prepare journal entries for short-term notes
payable and disclosure for the current portion of long-term debt.
3. Describe the accounting treatment for contingent liabilities and journalize entries for product warranties.
4. Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
5. Describe payroll accounting systems that use a payroll register, employee earnings record, and a general journal.
6. Journalize entries for employee fringe benefits, including vacation pay and pensions.
7. Use the quick ratio to analyze the ability of a business to pay its current liabilities.
ObjectivesObjectivesObjectivesObjectives
The Nature of Current LiabilitiesThe Nature of Current LiabilitiesThe Nature of Current LiabilitiesThe Nature of 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.
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.
Examples:
Accounts payable Notes payable Unearned rent Taxes payable Wages payable Current portion of long
term debt
Short-Term Notes PayableShort-Term Notes PayableShort-Term Notes PayableShort-Term Notes Payable
Aug. 1 Accounts Payable—Murray Co. 1 000 00
Issued a 90-day, 12% note on
account.
Notes Payable 1 000 00
A firm issues a 90-day, 12% note for $1,000, dated August 1, 2006 to Murray
Co. for a $1,000 overdue account.
A firm issues a 90-day, 12% note for $1,000, dated August 1, 2006 to Murray
Co. for a $1,000 overdue account.
Oct. 30 Notes Payable 1 000 00
Interest Expense 30 00
Issued a 90-day, 12% note on
account.
Cash 1 030 00
On October 30, when the note matures, the firm pays the $1,000 principal plus $30
interest ($1,000 x .12 x 90/360).
On October 30, when the note matures, the firm pays the $1,000 principal plus $30
interest ($1,000 x .12 x 90/360).
Appears on the income statement as an “Other Expense.”
Appears on the income statement as an “Other Expense.”
Short-Term Notes PayableShort-Term Notes PayableShort-Term Notes PayableShort-Term Notes Payable
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
May 31. Bowden Co. purchased merchandise on account from Coker Co., $10,000, 2/10, n/30.
The merchandise cost Coker Co. $7,500.
May 31. Bowden Co. purchased merchandise on account from Coker Co., $10,000, 2/10, n/30.
The merchandise cost Coker Co. $7,500.
Short-Term Notes PayableShort-Term Notes PayableShort-Term Notes PayableShort-Term Notes Payable
Description Debit Credit
Accounts Receivable 10,000Sales 10,000
Cost of Mdse. Sold 7,500Mdse. Inventory 7,500
Bowden Co. (Borrower) Coker Co. (Creditor)
May 31. Bowden Co. issued a 60-day, 12% note for $10,000 to Coker on account.
May 31. Bowden Co. issued a 60-day, 12% note for $10,000 to Coker on account.
Accounts Payable 10,000Notes Payable 10,000
Notes Receivable 10,000Accounts Receivable 10,000
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
Short-Term Notes PayableShort-Term Notes PayableShort-Term Notes PayableShort-Term Notes Payable
Description Debit Credit
Mdse. Inventory 10,000Accounts Payable 10,000
Accounts Receivable 10,000Sales 10,000
Cost of Mdse. Sold 7,500Mdse. Inventory 7,500
Bowden Co. (Borrower) Coker Co. (Creditor)
Description Debit Credit
July 30. Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest:
$10,000 x 12% x 60/360 = $200.
July 30. Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest:
$10,000 x 12% x 60/360 = $200.
Accounts Payable 10,000Notes Payable 10,000
Notes Receivable 10,000Accounts Receivable 10,000
Notes Payable 10,000Interest Expense 200
Cash 10,200
Cash 10,200Interest Revenue 200Notes Receivable 10,000
Short-Term Notes PayableShort-Term Notes PayableShort-Term Notes PayableShort-Term Notes Payable
Discounted Notes PayableDiscounted Notes PayableDiscounted Notes PayableDiscounted Notes Payable
Aug.10 Merchandise Inventory 19 250 00
Interest Expense 750 00
Issued a 90-day, note to Rock
Co. discounted at 15%.
Notes Payable 20 000 00
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%.
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%.
Discount: $20,000 Discount: $20,000 x .15 x 90/360x .15 x 90/360
Discount: $20,000 Discount: $20,000 x .15 x 90/360x .15 x 90/360
ProceedsProceedsProceedsProceeds
Discount rateDiscount rateDiscount rateDiscount rate
Discounted Notes PayableDiscounted Notes PayableDiscounted Notes PayableDiscounted Notes Payable
Nov. 8 Notes Payable 20 000 00
Paid note due.
Cash 20 000 00
On November 8 the note is paid in full.On November 8 the note is paid in full.
Contingent Liabilities
Product LiabilityProduct LiabilityProduct LiabilityProduct Liability
On June 30, a company sells a product for $60,000 on which there is a 36-month warranty. Past
experience indicates that repairs of defects cost 5% of the sales price over the warranty period.
On June 30, a company sells a product for $60,000 on which there is a 36-month warranty. Past
experience indicates that repairs of defects cost 5% of the sales price over the warranty period.
June 30 Product Warranty Expense 3 000 00
Warranty expenses projected for
June, 5% of $60,000.
Product Warranty Liability 3 000 00
On August 16, a customer needed a defective part replaced. Cost to the
company was $200 for the part.
On August 16, a customer needed a defective part replaced. Cost to the
company was $200 for the part.
Aug.16 Product Warranty Payable 200 00
Replaced defective part under
warranty.
Supplies 200 00
Product LiabilityProduct LiabilityProduct LiabilityProduct Liability
Accounting Treatment of Accounting Treatment of Contingent LiabilitiesContingent Liabilities
Accounting Treatment of Accounting Treatment of Contingent LiabilitiesContingent Liabilities
Likelihood of
Occurring MeasurementAccounting Treatment
Probable Estimable Record Liability
Not Estimable
Disclose Liability
Disclose Liability
Contingency
Possible
Payroll and Payroll Taxes
Liability for Employee EarningsLiability for Employee EarningsLiability for Employee EarningsLiability for Employee Earnings
1. Good employee relations demand that payrolls be calculated
accurately and paid as scheduled.
2. Payroll expenditures are subject to a variety of federal, state, and
local taxes.
3. Total payroll expense (gross payroll plus payroll taxes) has a
major impact on net income.
Payroll is the amount paid to employees for services provided. Payrolls are important because--
Gross Pay CalculationGross Pay CalculationGross Pay CalculationGross Pay Calculation
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.
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 base rate (40 x $34) $1,360Earnings at overtime rate (2 x $51) 102Total earnings $1,462
FICA TaxFICA TaxFICA TaxFICA Tax
Employers are required to withhold a portion of the earnings of each of the
employees. The amount is matched by the employer and serves to provide the
employee with social security and Medicare benefits upon retirement.
Employers are required to withhold a portion of the earnings of each of the
employees. The amount is matched by the employer and serves to provide the
employee with social security and Medicare benefits upon retirement.
Earnings subject to 6% social security tax ($100,000 – $99,038) $962Social security tax rate x 6%
Social security tax $57.72
FICA Tax CalculationFICA Tax CalculationFICA Tax CalculationFICA Tax CalculationAssume that John T. McGrath’s annual earnings
prior to the current period total $99,038. His current period earnings are $1,462.
Earnings subject to 1.5% Medicare taxCurrent earnings $1,462Medicare tax rate x 1.5% Medicare tax 21.93
Total FICA tax $79.65
Withholding Taxes, Other DeductionsWithholding Taxes, Other DeductionsWithholding Taxes, Other DeductionsWithholding Taxes, Other Deductions
Employers are required to withhold federal income tax from each employee based on the withholding table and information provided by the employee’s W-4 form.
Federal income tax and FICA tax must be withheld from the pay of each employee.
Deductions for other purposes may be withheld by mutual agreement.
Gross earnings for the week $1,462.00Deductions:
Social security tax tax $ 57.72Medicare tax 21.93Federal income tax 279.51Retirement savings 20.00United Way 5.00
Total deductions 384.16Net pay $1,077.84
John T. McGrath is single, has declared one John T. McGrath is single, has declared one withholding allowance, and had gross pay of withholding allowance, and had gross pay of
$1,462 for the week ended December 27.$1,462 for the week ended December 27.
Employee Net Pay CalculationEmployee Net Pay Calculation
RESPONSIBILITY FOR RESPONSIBILITY FOR TAX PAYMENTSTAX PAYMENTS
RESPONSIBILITY FOR RESPONSIBILITY FOR TAX PAYMENTSTAX PAYMENTS
EMPLOYEE BUSINESS
GOVERNMENTGOVERNMENT
Social security tax Medicare tax
Federal withholding tax
Social security tax Medicare tax
Federal unemployment compensation tax
State unemployment compensation tax
FEDERAL INCOMEFEDERAL INCOME
Personal income tax
46%46%
Estate, gift, and other
8%
Corporate income tax
8%8%FICA and
FUTA38%38%
FEDERAL OUTLAYSFEDERAL OUTLAYS
Social security and
Medicare
33%
Interest on debt
8%
Physical, human, and community
development13%13%
Social programs
24%24%National defense
19%
Law enforcement and general government
3%3%
Payroll RegisterPayroll RegisterPayroll RegisterPayroll Register
What is the purpose of a
payroll register?
What is the purpose of a
payroll register?
It’s a multicolumn form used to help assemble and summarize the data needed for each payroll period.
It’s a multicolumn form used to help assemble and summarize the data needed for each payroll period.
Earnings:Regular $13,328.00Overtime 574.00
Total $13,902.00Deductions:
Social security tax $ 643.07Medicare tax 208.53Federal income tax 3,332.00Retirement savings 680.00United Way 470.00Accounts receivable 50.00
Total 5,383.60Net amount paid $ 8,518.40
Accounts debited:Sales Salaries Expense $11,122.00Office Salaries Expense 2,780.00
Total (as above) $13,902.00
Payroll Register SummaryPayroll Register Summary
Recording Employees’ EarningsRecording Employees’ EarningsRecording Employees’ EarningsRecording Employees’ Earnings
Dec. 27 Sales Salaries Expense 11 122 00
Office Salaries Expense 2 780 00
Payroll for week ended
December 27.
Social Security Tax Payable 643 07Medicare Tax Payable 208 53Employees Federal Inc. Tax Pay. 3 332 00Retirement Savings Ded. Payable 680 00United Way Deductions Payable 470 00Accounts Receivable—Fred Elrod 50 00Salaries Payable 8 518 40
Recording Employer’s Payroll TaxesRecording Employer’s Payroll TaxesRecording Employer’s Payroll TaxesRecording Employer’s Payroll Taxes
Employer Taxes for the Week Ended December 27Employer Taxes for the Week Ended December 27
Social security tax$ 643.07
Medicare tax208.53
State unemployment compensation tax(5.4% x $2,710)
146.34Federal unemployment compensation
tax (0.8% x $2,710) 21.68Total payroll tax expense$1,019.62
Social security tax$ 643.07
Medicare tax208.53
State unemployment compensation tax(5.4% x $2,710)
146.34Federal unemployment compensation
tax (0.8% x $2,710) 21.68Total payroll tax expense$1,019.62
RecordingRecording Employer’s Payroll Taxes Employer’s Payroll TaxesRecordingRecording Employer’s Payroll Taxes Employer’s Payroll Taxes
Dec. 27 Payroll Tax Expense 1 019 62
Payroll taxes for week ended
December 27.
Social Security Tax Payable 643 07Medicare Tax Payable 208 53State Unemployment Tax Payable 146 34Federal Unemployment Tax Pay. 21 68
Wage and TaxStatements
W-2 W-2
Flow of Data in a Payroll SystemFlow of Data in a Payroll System
Updated VariablesUpdated Variables(cumulative (cumulative
earnings, taxes)earnings, taxes)
Constant DataConstant Data(rates of pay,(rates of pay,
tax, etc.)tax, etc.)
Current Period’sCurrent Period’sVariablesVariables
(hours worked)(hours worked)
Payroll Checksand Statements
Payroll TaxReturns
FinancialStatements
PAYROLL PAYROLL REGISTER REGISTER
GENERALGENERALLEDGERLEDGER
EMPLOYEES’EMPLOYEES’EARNINGSEARNINGSRECORDSRECORDS
Employees’ Fringe BenefitsEmployees’ Fringe Benefits
Benefit Dollars as a Percent of TotalBenefit Dollars as a Percent of Total
26%
Vacation and sick pay29%29%
Medical
2%Other
18%18%
Retirement and savings
plans
25%25%Social security and Medicare
Employees’ Fringe BenefitsEmployees’ Fringe Benefits
Vacation pay Vacation pay becomes the employer’s liability as the employee earns vacation rights.
Pensions Cash payment to retired employees. Could be a defined contribution plan or a defined benefit plan
Postretirement Benefits In addition to pension benefits, employees may earn rights to other postretirement benefits such as dental care, eye care, life insurance, etc. Amount is recorded by debiting Postretirement Benefits Expense and crediting cash.
PensionsPensions
Defined contribution plan Under this plan, a fixed amount of money is invested on the employee’s behalf during the employee’s working years. Example: 401K
Defined benefit plan Under this plan, the pension benefits are based on a formula and the employer bears the investment risk in funding a future retirement income benefit.
Solvency Measures — Quick RatioSolvency Measures — Quick RatioNoble Co. Hart Co.
Quick assets:Cash $ 100,000 $ 55,000Cash equivalents 47,000 65,000Accounts receivable (net) 84,000 472,000 Total $231,000 $592,000
Current liabilities $220,000 $740,000
Quick assets
Current liabilities
Solvency Measures — Quick RatioSolvency Measures — Quick RatioNoble Co. Hart Co.
Quick assets:Cash $ 100,000 $ 55,000Cash equivalents 47,000 65,000Accounts receivable (net) 84,000 472,000 Total $231,000 $592,000
Current liabilities $220,000 $740,000
Quick assets
Current liabilitiesNoble Company
$231,000
$220,000 Quick ratio = 1.05
Solvency Measures — Quick RatioSolvency Measures — Quick RatioNoble Co. Hart Co.
Quick assets:Cash $ 100,000 $ 55,000Cash equivalents 47,000 65,000Accounts receivable (net) 84,000 472,000 Total $231,000 $592,000
Current liabilities $220,000 $740,000
Quick assets
Current liabilitiesHart Company
$592,000
$740,000 Quick ratio = 0.80
Use: To indicate instant debt-paying abilityUse: To indicate instant debt-paying ability
The EndThe End
Chapter 10Chapter 10