Presentation on theme: "Current Liabilities and Payroll"— Presentation transcript:
1 Current Liabilities and Payroll 11Current Liabilities and Payroll
2 Describe the nature of the adjusting process. Learning Objective 1Learning Objective 1Current Liabilities and Payroll3-13-1After studying this chapter, you should be able to:1Define and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable.Insert Chapter ObjectivesDescribe the nature of the adjusting process.Describe the nature of the adjusting process.2Determine employer liabilities for payroll, including liabilities arising from employer earnings and deductions from savings.9-211-2
3 Current Liabilities and Payroll (continued) 3Describe payroll accounting systems that use a payroll register, employee earnings records, and a general journal.4Journalize entries for employee fringe benefits, including vacation pay and pensions.5Describe the accounting treatment for contingent liabilities and journalize entries for product warranties.11-3
4 1Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable.11-4
5 Current portion of long-term debt Notes payable 1Liabilities 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 payableCurrent portion of long-term debtNotes payable
6 1Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale.
7 1Accounts Payable as a Percent of Total Current LiabilitiesExhibit 1
8 Current Portion of Long-Term Debt 1Current Portion of Long-Term DebtLong-term liabilities are often paid back in periodic payments, called installments. Installments that are due within the coming year must be classified as a current liability.
9 1The total amount of the installments due after the coming year is classified as a long-term liability.
10 1Short-Term Notes PayableA firm issues a 90-day, 12% note for $1,000, dated August 1, 2008 to Murray Co. for a $1,000 overdue account.
11 1On October 30, when the note matures, the firm pays the $1,000 principal plus $30 interest ($1,000 × 12% × 90/360).Interest Expense appears on the income statement as an “Other Expense.”
12 1On 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.
14 1Accounts Payable 10,000Notes Payable 10,000Description Debit CreditBowden Co. (Borrower)Notes Receivable 10,000Accounts Receivable 10,000Coker Co. (Creditor)Description Debit CreditOn May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.
15 1Notes Payable 10,000Interest Expense 200Cash 10,200Description Debit CreditBowden Co. (Borrower)Cash 10,200Interest Revenue 200Notes Receivable 10,000Coker Co. (Creditor)Description Debit CreditOn July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest: $10,000 × 12% × 60/360.
16 1On September 19, Iceburg Company issues a $4,000, 90-day, 15% note to First National Bank.
17 1On the due date of the note (December 18), Iceburg Company owes $4,000 plus interest of $150 ($4,000 × 15% × 90/360).
18 1Discounting a NoteA discounted note has the following characteristics:The creditor (lender) requires an interest rate, called the discount rate.Interest, called the discount, is computed on the face amount of the note.The debtor (borrower) receives the face amount of the note less the discount, called the proceeds.The debtor pays the face amount of the note on the due date.
19 1On August 10, Cary Company issues a $20,000, 90-day note to Rock Company in exchange for inventory. Rock discounts the note at 15%.ProceedsDiscount: $20,000 × .15 × 90/360Discount rate
20 The amount paid is the face amount of the note. 1On November 8 the note is paid in full.The amount paid is the face amount of the note.
21 1 Example Exercise 11-1 Example Exercise 10-2 Follow My Example 11-1 Proceeds from Notes PayableOn July 1, Bella Salon Company issued a 60-day note with a face amount of $60,000 to Delilah Hair Product Company for merchandise inventory.Determine the proceeds of the note, assuming the note carries an interest rate of 6%.Determine the proceeds of the note, assuming the note is discounted at 6%.Follow My Example 6-1Follow My Example 11-1a. $60,000b. $59,400 [$60,000 – ($60,000 × 6% × 60/360)]11-21For Practice: PE 11-1A, PE 11-1B
22 2Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings.11-22
23 2Payroll 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:Employees are sensitive to payroll errors and irregularities.Good employee morale requires payroll to be paid timely and accurately.Payroll is subject to various federal and state regulations.Payroll and related payroll taxes significantly affect the net income of most companies.
24 2Salary usually refers to payment for managerial and administrative services. Salary is normally expressed in terms of a month or a year.
25 2Wages usually refers to payment for employee manual labor. The rate of wages is normally stated on an hourly or weekly basis.
26 Computing Employee’s Earnings 2Computing Employee’s EarningsJohn 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 regular rate (40 × $34) $1,360Earnings at overtime rate (2 × $51)Total earnings $1,462
27 2The total earnings of an employee for a payroll period are called gross pay. From this is subtracted one or more deductions to arrive at the net pay. Net pay is the amount that the employer must pay the employee.
29 Deductions from Employee’s Earnings: McGrath Example 2Deductions from Employee’s Earnings: McGrath ExampleMcGrath made $1,462 for the week ending December 27. Since McGrath’s W-4 (Slide 28) claims one withholding allowance, $67 (the assumed standard withholding allowance) is deducted from his gross pay to arrive at $1,395 ($1,462 – $67).
31 McGrath Example (continued) 2McGrath Example (continued)Initial withholding (Slide 30) $Plus [25% × ($1,395 – $653)]Total federal income taxes withheld $268.45
32 2 Federal Income Tax Withholding Example Exercise 11-2Federal Income Tax WithholdingKaren Dunn’s weekly gross earnings for the present week were $2,250. Dunn has two exemptions. Using the wage bracket withholding table in Exhibit 3 (Slide 30) with a $67 standard withholding allowance for each exemption, what is Dunn’s federal income tax withholding?11-32
33 2 Follow My Example 11-2 Total wage payment $2,250 Example Exercise 11-2 (continued)2Follow My Example 11-2Total wage payment $2,250One allowance (provided by IRS) $67Multiplied by allowances claimed on W-4 ×Amount subject to withholding $2,116Initial withholding from wage bracket in Exh. 3 $302.96Plus additional withholding: 28% of excess over $1, *Federal income tax withholding $466.20*28% × ($2,116 – $1,533)For Practice: PE 11-2A, PE 11-2B11-33
34 2FICA TaxThe 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.
35 John T. McGrath’s FICA Tax 2John T. McGrath’s FICA TaxJohn T. Mcgrath’s annual earnings prior to the payroll period ending on December 27 total $99,038.Earnings subject to 6% social security tax ($100,000 – $99,038) $ 962Social security tax rate × 6%Social security tax $57.72Earnings subject to 1.5% Medicare tax $1,462Medicare tax rate × 1.5% Medicare taxTotal FICA tax $79.65
36 John T. McGrath’s Net Pay 2John T. McGrath’s Net PayGross earnings for the week $1, Deductions:Social security tax (Slide 35) $Medicare tax (Slide 35) 21.93Federal income tax (Slide 31)Retirement savings 20.00United WayTotal deductionsNet pay $1,088.90
37 2Example Exercise 11-3Employee Net PayKaren Dunn’s weekly gross earnings for the week ending Dec. 3rd were $2,250, and her federal income tax withholding was $ Prior to this week Dunn had earned $98,000 for the year. Assuming the social security rate is 6% on the first $100,000 of annual earnings and Medicare is 1.5% of all earnings, what is Dunn’s net pay?11-37
38 2 Follow My Example 11-3 Total wage payment $2,250.00 Example Exercise 11-3 (continued)2Follow My Example 11-3Total wage payment $2,250.00Less: Federal income tax withholdingEarnings subject to social security tax ($100,000 – $98,000) $2,000Social security tax rate × 6%Social security taxMedicare tax ($2,250 × 1.5%)Net pay $1,630.06For Practice: PE 11-3A, PE 11-3B11-38
39 Liability for Employer’s Payroll Taxes 2Liability for Employer’s Payroll TaxesEmployers are subject to the following payroll taxes for amounts paid their employees:FICA taxFederal Unemployment Compensation Tax (FUTA)State Unemployment Compensation Tax (SUTA)
40 Employer’s Federal Payroll Taxes 2Employer’s Federal Payroll TaxesEmployers 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.
41 Employer’s Federal Unemployment Taxes 2Employer’s Federal Unemployment TaxesA 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.
42 Employer’s State Unemployment Taxes 2Employer’s State Unemployment TaxesThis 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.
44 3Describe payroll accounting systems that use a payroll register, employee earnings records, and a general journal.11-44
45 3Payroll systems should be designed to:Pay employees accurately and timely.Meet regulatory requirements of federal, state, and local agencies.Provide useful data for management decision-making needs.
46 3Payroll RegisterThe payroll register is a multicolumn report used for summarizing the data for each payroll period. The right hand columns of the payroll register indicate the accounts debited for the payroll expense. These columns are often referred to as the payroll distribution.
49 3The entry based on the payroll register in Exhibit 5 (Slides 47 and 48) is shown below.
50 3 Example Exercise 11-4 Example Exercise 10-2 Follow My Example 11-4 Journalize Period PayrollThe payroll register of Chen Engineering Services indicates $900 of social security withheld and $225 of Medicare tax withheld on total salaries of $15,000 for the period. Federal withholding for the period totaled $2,925.Provide the journal entry for the period’s payroll.Follow My Example 6-1Follow My Example 11-4Salaries Expense……………………………… 15,000Social Security Tax Payable………Medicare Tax Payable…………………Federal Withholding Tax Payable……… 2,925Salaries Payable………………………….. 10,95011-50For Practice: PE 11-4A, PE 11-4B
51 Recording and Paying Payroll Taxes 3Recording 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
52 3If the payroll is paid on December 31, the payroll taxes are computed as follows:Social security $1,080 ($18,000 × 6.0%)Medicare tax 390 ($26,000 × 1.5%)State unemploymentcompensation tax (SUTA) 54 ($1,000 × 5.4%)Federal unemploymentcompensation tax (FUTA) ($1,000 × 0.8%)Total payroll taxes $1,532
53 3If the payroll is paid on January 2, the entire $26,000 is subject to all payroll taxes, as computed as follows:Social security $1,560 ($26,000 × 6.0%)Medicare tax 390 ($26,000 × 1.5%)State unemploymentcompensation tax (SUTA) 1,404 ($26,000 × 5.4%)Federal unemploymentcompensation tax (FUTA) ($26,000 × 0.8%)Total payroll taxes $3,562
54 3Assume that in Exhibit 5 (Slides 47 and 48) the earnings subject to state and federal unemployment compensation taxes are $2,710. In addition, assume a SUTA rate of 5.4% and a FUTA rate of 0.8%. What is the rate for each of the following?Social security ?Medicare tax ?State unemploymentcompensation tax (SUTA) ?Federal unemploymentcompensation tax (FUTA) ?Total payroll taxes $?$ (from Exhibit 5)(from Exhibit 5)($2,710 × 5.4%)21.68 ($2,710 × 0.8%)$1,019.62Click to go to Exhibit 5. To return to this slide, type “54” and press “Enter.”Left click for answers
55 Journal Entry to Record Weekly Payroll 3Journal Entry to Record Weekly Payroll
56 3 Example Exercise 11-5 Journalize Payroll Taxes The payroll register of Chen Engineering Services indicates $900 of social security withheld and $225 of Medicare tax withheld on total salaries of $15,000 for the period. Assume earnings subject to state and federal unemployment compensation taxes are $5,250, at the federal rate of 0.8% and state tax of 5.4%.Provide the journal entry to record the payroll tax expense for the period.11-56
57 3 Follow My Example 11-5 Payroll Tax Expense………………………….. 1,450.50 Example Exercise 11-5 (continued)3Follow My Example 11-5Payroll Tax Expense………………………….. 1,450.50Social Security Tax Payable……………Medicare Tax Payable……………………State Unemployment Tax Payable($5,250 × 5.4%)…………………………Federal Unemployment Tax Payable($5,250 × 0.8%)…………………………For Practice: PE 11-5A, PE11-5B11-57
58 Employee’s Earnings Record 3Employee’s Earnings RecordA detailed payroll record is maintained for each employee. This record is called an employee’s earnings record.At the end of each pay period, payroll checks are prepared. Each check includes a detachable statement showing the details of how the net pay was computed.
59 3Exhibit 6Employee’s Earnings Record (left side)
60 3Exhibit 6Employee’s Earnings Record (right side)
61 W-2 Wage and Tax Statement 3W-2 Wage and Tax Statement
64 Internal Controls for Payroll Systems 3Internal Controls for Payroll SystemsIf a check-signing machine is used, blank payroll checks and access to the machine should be restricted to prevent their theft.The hiring and firing of employees should be properly authorized and approved in writing.All changes in pay rates should be properly authorized and approved in writing.(continued)
65 3Employees should be observed when arriving for work to verify they are “checking in” for work only once and only for themselves.Payroll checks should be distributed by someone other than employee supervisors.A special payroll bank account should be used.
66 4Journalize entries for employee fringe benefits, including vacation pay, and pensions.11-66
67 4Many 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.
68 4Exhibit 9Benefit Dollars as a Percent of Payroll Costs
69 4Vacation PayMost employers grant vacation rights, sometimes called compensated absences, to their employees. The estimated vacation pay for the year ending December 31 is $325,000.325,000325,000
70 4PensionA 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.
71 Defined Contribution Plan 4Defined Contribution PlanIn a defined contribution plan, a fixed amount of money is invested on the employee’s behalf during the employee’s working years.
72 4The 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.
73 4The entry to record the payment to the plan administrator is shown below:
74 4Defined Benefit PlanIn a defined benefit plan, employers promise employees a fixed annual pension benefit at retirement, based on years of service and compensation levels.
75 4Assume that Hinkle Co. requires an annual pension cost of $80,000 based on an estimate of the future benefit obligation. Hinkle pays $60,000 into the pension fund.
76 Postretirement Benefits Other Than Pensions 4Postretirement Benefits Other Than PensionsEmployees may earn rights to other postretirement benefits, such as dental care, eye care, medical care, life insurance, tuition assistance, tax services, and legal services.
77 4 Example Exercise 11-6 Example Exercise 10-2 Vacation Pay and Pension BenefitsManfield Service, Inc. provides their employees vacation benefits and a defined contribution pension plan. Employees earned vacation pay of $44,000 for the period. The pension plan requires a contribution to the plan administrator equal to 8% of employee salaries. Salaries were $450,000 during the period.Provide the journal entry for (a) the vacation pay and (b) pension benefit.11-77
78 4 Follow My Example 11-6 a. Vacation Pay Expense…………. 44,000 Example Exercise 11-6 (continued)4Follow My Example 11-6a. Vacation Pay Expense…………. 44,000Vacation Pay Payable……….. 44,000Vacation pay accruedfor the period.b. Pension Expense………………. 36,000Cash……………………………. 36,000Pension contribution, 8%of $450,000 salary.For Practice: PE 11-6A, PE 11-6B11-78
79 5Describe the accounting treatment for contingent liabilities and journalize entries for product warranties.11-79
80 Contingent Liabilities 5Contingent LiabilitiesSome liabilities may arise from past transactions if certain events occur in the future. These potential obligations are called contingent liabilities.
81 Likelihood of occurring: Probable, reasonably possible, or remote. 5The accounting for contingent liabilities depends on the following two factors:Likelihood of occurring: Probable, reasonably possible, or remote.Measurement: Estimable or not estimable.
82 Recording Contingent Liabilities 5Recording Contingent LiabilitiesDuring 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.
83 5If a customer required a $200 part replacement on August 16, the entry would be:
84 5Exhibit 10Accounting Treatment of Contingent Liabilities
85 5 Example Exercise 10-2 Example Exercise 11-7 Estimated Warranty LiabilityCook-Rite Inc. sold $140,000 of kitchen appliances during August under a 6 month warranty. The cost to repair defects under the warranty is estimated at 6% of the sales price. On September 11, a customer required a $200 part replacement, plus $90 labor under the warranty.Provide the journal entries for (a) the estimated warranty expense on August 31 and (b) the September 11 warranty work.11-85
86 5 Follow My Example 11-7 a. Product Warranty Expense………………… 8,400 Example Exercise 11-7 (continued)5Follow My Example 11-7a. Product Warranty Expense………………… 8,400Product Warranty Payable…………….. 8,400To record warranty expensefor August, 6% × $140,000.b. Product Warranty Payable…………………. 290Supplies…………………………………… 200Wages Payable…………………………… 90Replaced defective part underwarranty.For Practice: PE 11-7A, PE11-7B11-86
87 5Quick RatioNoble Co. Hart Co.Quick assets:Cash $147,000 $120,000Accounts receivable (net) 84, ,000Total quick assets $231,000 $592,000Current liabilities $220,000 $740,000Quick assetsCurrent liabilitiesQuick Ratio =The quick ratio or acid-test ratio can be used to evaluate a firm’s ability to pay its current liabilities within a short period of time.