1. Chapter 11-1

2. Chapter 11-2 Chapter 11 Current Liabilities and Payroll Accounting Accounting Principles, Ninth Edition

3. Chapter 11-3 1. 1.Explain a current liability, and identify the major types of current liabilities. 2. 2.Describe the accounting for notes payable. 3. 3.Explain the accounting for other current liabilities. 4. 4.Explain the financial statement presentation and analysis of current liabilities. 5. 5.Describe the accounting and disclosure requirements for contingent liabilities. 6. 6.Compute and record the payroll for a pay period. 7. 7.Describe and record employer payroll taxes. 8. 8.Discuss the objectives of internal control for payroll. Study Objectives

4. Chapter 11-4 Accounting for Current Liabilities Notes payable Sales taxes payable Unearned revenues Current maturities of long-term debt Statement presentation and analysis RecordingDisclosure Determining payroll Recording payroll Employer payroll taxes Filing and remitting payroll taxes Internal control for payroll Contingent Liabilities Payroll Accounting Current Liabilities and Payroll Accounting

5. Chapter 11-5 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. Accounting for Current Liabilities SO 1 Explain a current liability, and identify the major types of current liabilities. Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes payable, salaries payable, and interest payable.

6. Chapter 11-6 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 Accounting for Current Liabilities SO 1 Explain a current liability, and identify the major types of current liabilities.

7. Chapter 11-7 Accounting for Current Liabilities SO 2 Describe the accounting for notes payable. Notes Payable Written promissory note. Require the borrower to pay interest. Issued for varying periods.

8. Chapter 11-8 Illustration: On March 1, 2010, Cole Williams borrows $100,000 from First National Bank on a 4-month, 12% note. Instructions a)Prepare the entry on March 1. b)Prepare the adjusting entry on June 30, assuming monthly adjusting entries have not been made. c)Prepare the entry at maturity (July 1). Accounting for Current Liabilities SO 2 Describe the accounting for notes payable.

9. Chapter 11-9 Illustration: On March 1, 2010, Cole Williams borrows $100,000 from First National Bank on a 4-month, 12% note. a)Prepare the entry on March 1. Accounting for Current Liabilities Notes payable100,000 Cash100,000 Interest payable4,000 Interest expense4,000 $100,000 x 12% x 4/12 = $4,000 b)Prepare the adjusting entry on June 30. SO 2 Describe the accounting for notes payable.

10. Chapter 11-10 Illustration: On March 1, 2010, Cole Williams borrows $100,000 from First National Bank on a 4-month, 12% note. c) Prepare the entry at maturity (July 1). Accounting for Current Liabilities Interest payable4,000 Notes payable100,000 Cash104,000 SO 2 Describe the accounting for notes payable.

11. Chapter 11-11 Accounting for Current Liabilities SO 3 Explain the accounting for other current liabilities. Sales Tax Payable Sales taxes are expressed as a stated percentage of the sales price. Either rung up separately or included in total receipts. Retailer collects tax from the customer. Retailer remits the collections to the state’s department of revenue.

12. Chapter 11-12 Illustration: The March 25 cash register reading for Cooley Grocery shows sales of $10,000 and sales taxes of $600 (sales tax rate of 6%), the journal entry is: Accounting for Current Liabilities Sales10,000 Cash10,600 Sales tax payable600 SO 3 Explain the accounting for other current liabilities.

13. Chapter 11-13 Accounting for Current Liabilities SO 3 Explain the accounting for other current liabilities. Unearned Revenue Revenues that are received before the company delivers goods or provides services. 1.Company debits Cash, and credits a current liability account (unearned revenue). 2.When the company earns the revenue, it debits the Unearned Revenue account, and credits a revenue account.

14. Chapter 11-14 Illustration: Assume that Superior University sells 10,000 season football tickets at $50 each for its five-game home schedule. The university makes the following entry for the sale of season tickets: Accounting for Current Liabilities SO 3 Explain the accounting for other current liabilities. Unearned revenue50,000 Cash 50,000Aug. 6 Ticket revenue100,000 Unearned revenue 100,000Sept. 7 As the school completes each of the five home games, it would record the revenue earned.

15. Chapter 11-15 Accounting for Current Liabilities Current Maturities of Long-Term Debt Portion of long-term debt that comes due in the current year. No adjusting entry required. SO 3 Explain the accounting for other current liabilities.

16. Chapter 11-16 Accounting for Current Liabilities Statement Presentation and Analysis Illustration 11-3

17. Chapter 11-17 Working 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 Accounting for Current Liabilities SO 4 Explain the financial statement presentation and analysis of current liabilities.

18. Chapter 11-18 Accounting for Current Liabilities SO 4 Explain the financial statement presentation and analysis of current liabilities. Statement Presentation and Analysis Liquidity refers to the ability to pay maturing obligations and meet unexpected needs for cash. The current ratio permits us to compare the liquidity of different-sized companies and of a single company at different times. Illustration 11-5 Illustration 11-4

19. Chapter 11-19 Contingent Liabilities SO 5 Describe the accounting and disclosure requirements for contingent liabilities. The likelihood that the future event will confirm the incurrence of a liability can range from probable to remote. FASB uses three areas of probability: Probable. Reasonably possible. Remote.

20. Chapter 11-20 AccountingProbability Accrue Footnote Ignore Probable Reasonably Possible Remote Contingent Liabilities SO 5 Describe the accounting and disclosure requirements for contingent liabilities.

21. Chapter 11-21 A contingent liability should be recorded in the accounts when: a.it is probable the contingency will happen, but the amount cannot be reasonably estimated. b.it is reasonably possible the contingency will happen, and the amount can be reasonably estimated. c.it is probable the contingency will happen, and the amount can be reasonably estimated. d.it is reasonably possible the contingency will happen, but the amount cannot be reasonably estimated. Question Contingent Liabilities SO 5 Describe the accounting and disclosure requirements for contingent liabilities.

22. Chapter 11-22 Product Warranties Promise made by a seller to a buyer to make good on a deficiency of quantity, quality, or performance in a product. Recording a Contingent Liability Estimated cost of honoring product warranty contracts should be recognized as an expense in the period in which the sale occurs. Contingent Liabilities SO 5 Describe the accounting and disclosure requirements for contingent liabilities.

23. Chapter 11-23 Illustration: Denson Manufacturing Company sells 10,000 washers and dryers at an average price of $600 each. The selling price includes a one-year warranty on parts. Denson expects that 500 units (5%) will be defective and that warranty repair costs will average $80 per unit. In 2010, the company honors warranty contracts on 300 units, at a total cost of 24,000. At December 31, compute the estimated warranty liability. Contingent Liabilities SO 5 Describe the accounting and disclosure requirements for contingent liabilities. Illustration 11-6 Computation of estimated product warranty liability

24. Chapter 11-24 Illustration: Assume that in 2010 Denson Manufacturing Company sells 10,000 washers and dryers at an average price of $600 each. The selling price includes a one-year warranty on parts. Denson expects that 500 units (5%) will be defective and that warranty repair costs will average $80 per unit. In 2010, the company honors warranty contracts on 300 units, at a total cost of $24,000. At December 31, make the required adjusting entry. Warranty expense 40,000 Contingent Liabilities SO 5 Describe the accounting and disclosure requirements for contingent liabilities. Estimated warranty liability 40,000

25. Chapter 11-25 Illustration: Prepare the entry to record the repair costs incurred in 2010 to honor warranty contracts on 2010 sales. Estimated warranty liability24,000 Contingent Liabilities SO 5 Describe the accounting and disclosure requirements for contingent liabilities. Repair parts 24,000 Assume that the company replaces 20 defective units in January 2011, at an average cost of $80 in parts and labor. Estimated warranty liability1,600 Repair parts 1,600

26. Chapter 11-26

27. Chapter 11-27 The term “payroll” pertains to both: Salaries - managerial, administrative, and sales personnel (monthly or yearly rate). Wages - store clerks, factory employees, and manual laborers (rate per hour). Payroll Accounting Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay.

28. Chapter 11-28 Total compensation earned by an employee (wages or salaries, plus any bonuses and commissions). Gross Earnings SO 6 Compute and record the payroll for a pay period. Determining the Payroll Illustration 11-8

29. Chapter 11-29 Mandatory: FICA tax Federal income tax State income tax Payroll Deductions SO 6 Compute and record the payroll for a pay period. Determining the Payroll Voluntary: Charity Retirement Union dues Health and life insurance Pension plans

30. Chapter 11-30 Mandatory: FICA tax Federal income tax State income tax Payroll Deductions SO 6 Compute and record the payroll for a pay period. Determining the Payroll Social Security taxes  Supplemental retirement, employment disability, and medical benefits.  In 2008, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $102,000 of gross earnings for each employee. For purpose of illustration, assume a rate of 8% on the first $100,000 of gross earnings, maximum of $8,000.

31. Chapter 11-31 Mandatory: FICA tax Federal income tax State income tax Payroll Deductions SO 6 Compute and record the payroll for a pay period. Determining the Payroll  Employers are required to withhold income taxes from employees pay.  Withholding amounts are based on gross wages and the number of allowances claimed.

32. Chapter 11-32 Mandatory: FICA tax Federal income tax State income tax Payroll Deductions SO 6 Compute and record the payroll for a pay period. Determining the Payroll  Most states (and some cities) require employers to withhold income taxes from employees’ earnings.

33. Chapter 11-33 Gross earnings minus payroll deductions. Net Pay SO 6 Compute and record the payroll for a pay period. Determining the Payroll Illustration 11-11

34. Chapter 11-34 An employer must keep a cumulative record of each employee’s gross earnings, deductions, and net pay during the year. Maintaining Payroll Department Records Recording the Payroll Illustration 11-12 Employee earnings record

35. Chapter 11-35 Many companies find it useful to prepare a payroll register. Recording the Payroll Illustration 11-13 Payroll register Maintaining Payroll Department Records

36. Chapter 11-36 Illustration: Prepare the entry Academy Company would make to record the payroll for the week ending January 14. Recognizing Payroll Expenses and Liabilities SO 6 Compute and record the payroll for a pay period. Recording the Payroll Office salaries expense5,200.00 Federal income tax payable3,490.00 FICA tax payable1,376.80 State income tax payable344.20 United Way payable421.50 Union dues payable115.00 Wages expense12,010.00 Salaries and wages payable11,462.50

37. Chapter 11-37 Illustration: Prepare the entry Academy Company would make to record the payment of the payroll. Recognizing Payroll Expenses and Liabilities SO 6 Compute and record the payroll for a pay period. Recording the Payroll Salaries and wages payable 11,462.50 Cash11,462.50

38. Chapter 11-38 SO 6 Compute and record the payroll for a pay period. Recording the Payroll Illustration 11-14 Paycheck and statement of earnings

39. Chapter 11-39

40. Chapter 11-40 Payroll tax expense results from three taxes that governmental agencies levy on employers. SO 7 Describe and record employer payroll taxes. Employer Payroll Taxes These taxes are: FICA tax Federal unemployment tax State unemployment tax  Same rate and maximum earnings as the employee’s.  In 2008, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $102,000 of gross earnings for each employee.

41. Chapter 11-41 Payroll tax expense results from three taxes that governmental agencies levy on employers. SO 7 Describe and record employer payroll taxes. Employer Payroll Taxes These taxes are: FICA Federal unemployment tax State unemployment tax  FUTA tax rate is 6.2% of first $7,000 of taxable wages.  Employers who pay the state unemployment tax on a timely basis will receive an offset credit of up to 5.4%. Therefore, the net federal tax rate is generally 0.8%.

42. Chapter 11-42 Payroll tax expense results from three taxes that governmental agencies levy on employers. SO 7 Describe and record employer payroll taxes. Employer Payroll Taxes These taxes are: FICA Federal unemployment tax State unemployment tax  SUTA basic rate is usually 5.4% on the first $7,000 of wages paid.

43. Chapter 11-43 Illustration: Academy records the payroll tax expense associated with the January 14 payroll with the following entry. Use the following rates: FICA 8%, state unemployment 5.4%, federal unemployment 0.8%. Payroll tax expense2,443.82 State unemployment tax payable929.34 FICA tax payable1,376.80 ** $17,210.00 x 5.4% = $929.34 * $ 17,210.00 x 8% = $1,376.80 Federal unemployment tax payable 137.68 * *** $17,210 x.8% = $137.68 ** *** SO 7 Describe and record employer payroll taxes. Employer Payroll Taxes

44. Chapter 11-44 Employer payroll taxes do not include: a.Federal unemployment taxes. b.State unemployment taxes. c.Federal income taxes. d.FICA taxes. Question SO 7 Describe and record employer payroll taxes. Employer Payroll Taxes

45. Chapter 11-45 Companies must report FICA taxes and federal income taxes withheld no later than one month following the close of each quarter. Companies generally file and remit federal unemployment taxes annually on or before January 31 of the subsequent year. Companies usually file and pay state unemployment taxes by the end of the month following each quarter. Employers must provide each employee with a Wage and Tax Statement (Form W-2) by January 31. SO 7 Describe and record employer payroll taxes. Filing and Remitting Payroll Taxes

46. Chapter 11-46 As applied to payroll, the objectives of internal control are 1. to safeguard company assets against unauthorized payments of payrolls, and 2. to ensure the accuracy and reliability of the accounting records pertaining to payrolls. SO 8 Discuss the objectives of internal control for payroll. Internal Control for Payroll

47. Chapter 11-47 Additional Fringe Benefits In addition to the three payroll-tax fringe benefits, employers incur other substantial fringe benefit costs. Two important fringe benefits include: Paid absences Post-retirement benefits SO 9 Identify additional fringe benefits associated with employee compensation. APPENDIX

48. Chapter 11-48  Employees 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.  When the payment for such absences is probable and the amount can be reasonably estimated, the company should accrue a liability for paid future absences.  When the amount cannot be reasonably estimated, the company should instead disclose the potential liability. SO 9 Identify additional fringe benefits associated with employee compensation. Paid Absences APPENDIX

49. Chapter 11-49 Post-retirement benefits are benefits that employers provide to retired employees for 1.pensions and 2.health care and life insurance. Companies account for post-retirement benefits on the accrual basis. SO 9 Identify additional fringe benefits associated with employee compensation. Post-Retirement Benefits APPENDIX

50. Chapter 11-50 A pension plan is an agreement whereby employers provide benefits to employees after they retire. Two types of pension plans: 1.In a defined-contribution plan, 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 401 (k) plan. 2.In a defined-benefit plan, the employer agrees to pay a defined amount to retirees, based on employees meeting certain eligibility standards. SO 9 Identify additional fringe benefits associated with employee compensation. PensionsPensions APPENDIX

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