Weygandt Accounting Principles 10e PowerPoint Ch11

8/9/2019 Weygandt Accounting Principles 10e PowerPoint Ch11

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CHAPTER11Current Liabilitiesand Payroll

Accounting


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PreviewofCHAPTER11


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Current liability is debt with two key features:

1. Company expects to pay the debt from existing

current assets or through the creation of other

current liabilities.

2. Company will pay the debt within one year or the

operating cycle, whichever is longer.

SO 1 Explain a current liability, and identify theSO 1 Explain a current liability, and identify themajor types of current liabilities.major types of current liabilities.

Current liabilities include notes payable, accounts payable, unearnedrevenues, and accrued liabilities such as taxes payable, salaries

payable, and interest payable.

Accounting for Current Liabilities


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To be classified as a current liability, a debt must be

expected to be paid:

a. out of existing current assets.

b. by creating other current liabilities.

c. within 2 years.

d. both a! and b!.

Question

SO 1 Explain a current liability, and identify theSO 1 Explain a current liability, and identify themajor types of current liabilities.major types of current liabilities.



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11-6 SO 2 Describe the accounting for notes payable.SO 2 Describe the accounting for notes payable.

Notes ayable "ritten promissory note.

#e$uires the borrower to pay interest.

%ssued for varying periods.



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Illustration &irst 'ational (ank agrees to lend )1**,*** on+eptember 1, 2*12, if Cole "illiams Co. signs a )1**,***,

12, four-month note maturing on anuary 1.

Instructions

a! /repare the entry on +eptember 1st.

b! /repare the ad0usting entry on ec. 1st, assuming

monthly ad0usting entries have not been made.

c! /repare the entry at maturity an. 1, 2*1!.

SO 2 Describe the accounting for notes payable.SO 2 Describe the accounting for notes payable.



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11-!

'otes payable 1**,***

Cash 1**,***

%nterest payable 3,***

%nterest expense 3,***

)1**,*** x 12 x 3412 5 )3,***

b! /repare the ad0usting entry on ec. 1st.





a! /repare the entry on +ept. 1st.


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11-"

Cash 1*3,***





c! /repare the entry at maturity.

%nterest payable 3,***

'otes payable 1**,***


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11-1# SO ! Explain the accounting for other current liabilities.SO ! Explain the accounting for other current liabilities.

Sales "ax ayable +ales taxes are expressed as a stated percentage of

the sales price.

6ither rung up separately or included in totalreceipts.

#etailer collects tax from the customer.

#etailer remits the collections to the state7sdepartment of revenue.



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Illustration The 8arch 29 cash register reading for Cooleyrocery shows sales of )1*,*** and sales taxes of );** sales

tax rate of ;!, the 0ournal entry is:

+ales revenue 1*,***Cash 1*,;**

+ales tax payable ;**

SO ! Explain the accounting for other current liabilities.SO ! Explain the accounting for other current liabilities.



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11-12 SO ! Explain the accounting for other current liabilities.SO ! Explain the accounting for other current liabilities.

#nearned $e%enue#evenues recei$ed beforethe company

delivers goods or

provides services.


Illustration 11-2


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Illustration +uperior


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&urrent 'aturities of (ong)"erm Debt /ortion of long-term debt that comes due in the

current year.

'o ad0usting entry re$uired.

SO ! Explain the accounting for other current liabilities.SO ! Explain the accounting for other current liabilities.



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Statement resentation and *nalysis Illustration 11-3


SO +SO +


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"orking capital is calculated as:

a. current assets minus current liabilities.

b. total assets minus total liabilities.

c. long-term liabilities minus current liabilities.

d. both b! and c!.

Question

SO + Explain the financial statement presentationSO + Explain the financial statement presentationand analysis of current liabilities.and analysis of current liabilities.



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11-17 SO + Explain the financial statement presentationand analysis of current liabilities.

Li%uidityrefers to theability to pay maturingobligations and meet

unexpected needs forcash.

Current ratiopermits usto compare the li$uidity ofdifferent-si?ed companiesand of a single company

at different times.

Illustration 11-5

Illustration 11-4


Statement resentation and *nalysis


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11-1! SO Describe the accounting and disclosurere-uirements for contingent liabilities.

/otential liability that may become an actual liability inthe future.

Three levels of probability:

/robable.

#easonably possible.

#emote.

Contingent Liabilities


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AccountingProbability

Accrue

&ootnote

Ignore

Probable

'easonably

Possible

'e(ote

SO Describe the accounting and disclosurere-uirements for contingent liabilities.



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Product )arranties

/romise made by a seller to a buyer to make good on

a deficiency of $uantity, $uality, or performance in aproduct.

$ecording a &ontingent (iability

6stimated cost of honoring product warranty contracts

should be recogni?ed as an e*+ense in t,e +eriodinwhich the sale occurs.




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Illustration enson 8anufacturing Company sells 1*,***washers and dryers at an average price of );** each. The

selling price includes a one-year warranty on parts. enson

expects that 9** units 9! will be defective and that warranty

repair costs will average )@* per unit. %n 2*12, the company

honors warranty contracts on ** units, at a total cost of

)23,***. =t ecember 1, compute the estimated warranty

liability.

SO

Illustration 11-6Computation of estimatedproduct warranty liability



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"arranty expense 3*,***


"arranty liability 3*,***


Illustration enson 8anufacturing Company sells 1*,***washers and dryers at an average price of );** each. The

selling price includes a one-year warranty on parts. enson

expects that 9** units 9! will be defective and that warranty

repair costs will average )@* per unit. %n 2*12, the company

honors warranty contracts on ** units, at a total cost of

)23,***. =t ecember 1, compute the estimated warranty

liability. a.e t,e re%uired ad/usting entry0


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Illustration /repare the entry to record the repair costsincurred in 2*12 to honor warranty contracts on 2*12 sales.

"arranty liability 23,***


#epair parts 23,***

=ssume that the company replaces 2* defective units in

anuary 2*1, at an average cost of )@* in parts and labor.

"arranty liability 1,;**

#epair parts 1,;**



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11-26 SO Describe the accounting and disclosurere-uirements for contingent liabilities.


Disclosure of &ontingent (iabilities


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Total compensation earned by an employee wages or

salaries, plus any bonuses and commissions!.

ross arnings

SO &ompute and record the payroll for a pay period.

Illustration 11-!

eter(ining t,e Payroll


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11-3# SO &ompute and record the payroll for a pay period.

ocial ecurity ta*es +upplemental retirement,

employment disability, and

medical benefits.

%n 2*1*, the rate was >.;9;.2 +ocial +ecurity plus

1.39 8edicare! on the first

)1*;,@** of gross earnings

for each employee. Forpurpose of illustration, assume a

rate of /0on the first $100,000

of gross earnings, maximum of

$8,000.


Payroll eductions

andatory

&%C= tax

&ederal income tax

+tate income tax


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11-31 SO &ompute and record the payroll for a pay period.

6mployers are re$uired to

withhold income taxes from

employees7 pay.

"ithholding amounts are

based on gross wages and

the number of allowances

claimed.


Payroll eductions

andatory

&%C= tax

&ederal income tax

+tate income tax


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11-32 SO &ompute and record the payroll for a pay period.

8ost states and some

cities! re$uire employers to

withhold income taxes

from employees7 earnings.


Payroll eductions

andatory

&%C= tax

&ederal income tax

+tate income tax


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ross earnings minus payroll deductions.

8et Pay


Illustration 11-11



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=n employer must keep a cumulative record of each employee7s

gross earnings, deductions, and net pay during the year.

aintaining Payroll e+art(ent 'ecords

'ecording t,e Payroll

Illustration 11-12

SO


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8any companies find it useful to prepare a payroll register.aintaining Payroll e+art(ent 'ecords


Illustration 11-13

SO


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Illustration /repare the entry =cademy Company would make to

record the payroll for the week ending anuary 13.

'ecogni9ing Payroll *+enses and Liabilities


+alaries and wages expense 1>,21*.**

&ederal income tax payable ,3A*.**

&%C= tax payable 1,>;.@*

+tate income tax payable 33.2*


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Illustration /repare the entry =cademy Company would make to

record the payment of the payroll.

'ecording Pay(ent of t,e Payroll


+alaries and wages payable 11,3;2.9*

Cash 11,3;2.9*



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11-3! SO &ompute and record the payroll for a pay period.

Illustration 11-14

/aycheck andstatement ofearnings



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/ayroll tax expense results from three taxes thatgovernmental agencies levy on e(+loyers.

SO Describe and record employer payroll taxes.

These taxes are:

&%C= tax &ederal

unemployment tax

+tate

unemployment tax

+ame rate and maximum

earnings as the employee7s.

%n 2*1*, the rate was >.;9

;.2 +ocial +ecurity plus

1.39 8edicare! on the first

)1*;,@** of gross earnings

for each employee.For purposeof illustration, assume a rate of 8%

on the first $100,000 of gross

earnings, maximum of $8,000.

(+loyer Payroll :a*es


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11-4# SO Describe and record employer payroll taxes.

&,*** of taxable wages.

6mployers who pay the state

unemployment tax on a timely

basis will receive an offset

credit of up to 9.3.

Therefore, the net federal tax

rate is generally *.@.



These taxes are:

&%C= tax &ederal

unemployment tax

+tate

unemployment tax


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11-41 SO Describe and record employer payroll taxes.

+,*** ofwages paid.



These taxes are:

&%C= tax &ederal

unemployment tax

+tate

unemployment tax


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Illustration=cademy records the payroll tax expense

associated with the anuary 13 payroll with the following entry.

;.@*

BB )1>,21*.** x 9.3 5 )A2A.3

B ) 1>,21*.** x @ 5 )1,>;.@*

&ederal unemployment tax payable 1>.;@

B

BBB )1>,21* x .@ 5 )1>.;@

BB

BBB




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6mployer payroll taxes do notinclude:

a. &ederal unemployment taxes.

b. +tate unemployment taxes.

c. &ederal income taxes.

d. &%C= taxes.

Question




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Companies must report &ICA ta*esand federal inco(eta*es ;it,,eldno later than one month following the close

of each $uarter.

Companies generally file and remit federal une(+loy(ent

ta*esannually on or before anuary 1 of the subse$uent

year. Companies usually file and pay state une(+loy(ent

ta*esby the end of the month following each $uarter.

6mployers must provide each employee with a )age and

:a* tate(ent


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=s applied to payroll, the ob0ectives of internal control are

1. to safeguard company assets against unauthori?ed

payments of payrolls, and

2. to ensure the accuracy and reliability of theaccounting records pertaining to payrolls.

SO / Discuss the objecti%es of internal control for payroll.

Internal Control for Payroll


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%n addition to the three payroll-tax fringe benefits,

employers incur other substantial fringe benefit costs.

Two important fringe benefits include: /aid absences

/ost-retirement benefits

SO 3dentify additional fringe benefits associated4ith employee compensation.

=//6'%APP8I>11A

Additional &ringe ?enefits


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6mployees often are given rights to receive compensation

for absence when they meet certain conditions of

employment.

The compensation may be for paid vacations, sick pay

benefits, and paid holidays. "hen the payment for such absences is +robableand the

amount can be reasonably esti(ated, the company

should accrue a liability for paid future absences.

"hen the amount cannot be reasonably esti(ated, the

company should instead disclosethe potential liability.

Paid Absences



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/ost-retirement benefits are benefits that employers provideto retired employees for

1. pensions and

2. health care and life insurance.

Companies account for post-retirement benefits on theaccrual basis.

=//6'%


Post-'etire(ent ?enefits


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= +ension +lanis an agreement whereby employers provide

benefits to employees after they retire.

:;o ty+esof pension plans:

1. %n a defined-contribution +lan, the plan defines the

contribution that an employer will make but not the benefit that

the employee will receive at retirement. This is often referred

to as a 4#1


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@ey Points :,e basic definition of a liability under AAP and I&' is $ery

si(ilar0 In a (ore tec,nical ;ay liabilities are defined by t,e

IA? as a +resent obligation of t,e entity arising fro( +ast

e$ents t,e settle(ent of ;,ic, is e*+ected to result in an outflo; fro( t,e entity of resources e(bodying econo(ic benefits0

Liabilities (ay be legally enforceable $ia a contract or la; but

need not beB t,at is t,ey can arise due to nor(al business

+ractice or custo(s0


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@ey Points I&' re%uires t,at co(+anies classify liabilities as current or

noncurrent on t,e face of t,e state(ent of financial +osition


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@ey Points nder I&' co(+anies so(eti(es ;ill net current liabilities

against current liabilities to s,o; ;or.ing ca+ital on t,e face of

t,e state(ent of financial +osition0


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@ey Points &or t,ose ite(s t,at AAP ;ould treat as recordable contingent

liabilities I&' instead uses t,e ter( +ro$isions0 Pro$isions are

defined as liabilities of uncertain ti(ing or a(ount0 *a(+les of

+ro$isions ;ould be +ro$isions for ;arranties e(+loyee

$acation +ay or antici+ated losses0 nder I&' t,e

(easure(ent of a +ro$ision related to a uncertain obligation is

based on t,e best esti(ate of t,e e*+enditure re%uired to settle

t,e obligation0

I&' and AAP se+arate +lans into defined benefit and defined

contribution0 :,e IA? and &A? are ;or.ing on a /oint +ro/ect

on +ensions t,at ;ill dra(atically c,ange t,e a++roac, used by

bot,0


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Loo.ing to t,e &uture:,e &A? and IA? are currently in$ol$ed in t;o +ro/ects eac, of

;,ic, ,as i(+lications for t,e accounting for liabilities0 Ene

+ro/ect is in$estigating a++roac,es to differentiate bet;een debt

and e%uity instru(ents0 :,e ot,er +ro/ect t,e ele(ents +,ase oft,e conce+tual fra(e;or. +ro/ect ;ill e$aluate t,e definitions of

t,e funda(ental building bloc.s of accounting0 :,e results of

t,ese +ro/ects could c,ange t,e classification of (any debt and

e%uity securities0


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),ic, of t,e follo;ing is falseF

a= nder I&' current liabilities (ust al;ays be +resented

before non-current liabilities0

b= nder I&' an ite( is a current liability if it ;ill be +aid

;it,in t,e ne*t 12 (ont,s0

c= nder I&' current liabilities are s,o;n in order of

li%uidity0

d= nder I&' a liability is only recogni9ed if it is a +resent

obligation0

I&' elf-:est Questions


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nder I&' obligations related to ;arranties are considered

a= contingent liabilities0

b= +ro$isions0

c= +ossible obligations0

d= 8one of t,ese0

I&' elf-:est Questions


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DCopyright E 2*11 ohn "iley F +ons, %nc. =ll rights reserved.#eproduction or translation of this work beyond that permitted in

+ection 11> of the 1A>;

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Weygandt Accounting Principles 10e PowerPoint Ch11

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