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Chapter 10 Current Liabilities Financial and Managerial Accounting 8th Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus.

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Presentation on theme: "Chapter 10 Current Liabilities Financial and Managerial Accounting 8th Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus."— Presentation transcript:

1 Chapter 10 Current Liabilities Financial and Managerial Accounting 8th Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

2 Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

3 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. ObjectivesObjectives After studying this chapter, you should be able to:

4 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. ObjectivesObjectives

5 The 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. Examples: Accounts payable Notes payable Unearned rent Taxes payable Wages payable Current portion of long term debt

6 Short-Term Notes Payable Aug.1Accounts PayableMurray 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.

7 Oct.30Notes Payable1 000 00 Interest Expense30 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). Appears on the income statement as an Other Expense. Short-Term Notes Payable

8 DescriptionDebitCredit Bowden Co. (Borrower) Mdse. Inventory10,000 Accounts Payable10,000 Coker Co. (Creditor) DescriptionDebitCredit Accounts Receivable10,000 Sales10,000 Cost of Mdse. Sold7,500 Mdse. Inventory7,500 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 Payable

9 DescriptionDebitCredit Accounts Receivable10,000 Sales10,000 Cost of Mdse. Sold7,500 Mdse. Inventory7,500 Bowden Co. (Borrower)Coker Co. (Creditor) May 31. Bowden Co. issued a 60-day, 12% note for $10,000 to Coker on account. Accounts Payable10,000 Notes Payable10,000 Notes Receivable10,000 Accounts Receivable10,000 Mdse. Inventory10,000 Accounts Payable10,000 Coker Co. (Creditor) DescriptionDebitCredit Accounts Receivable10,000 Sales10,000 Cost of Mdse. Sold7,500 Mdse. Inventory7,500 Short-Term Notes Payable

10 DescriptionDebitCredit Mdse. Inventory10,000 Accounts Payable10,000 Accounts Receivable10,000 Sales10,000 Cost of Mdse. Sold7,500 Mdse. Inventory7,500 Bowden Co. (Borrower)Coker Co. (Creditor) DescriptionDebitCredit 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 Payable10,000 Notes Payable10,000 Notes Receivable10,000 Accounts Receivable10,000 Notes Payable10,000 Interest Expense200 Cash10,200 Interest Revenue 200 Notes Receivable10,000 Short-Term Notes Payable

11 Discounted Notes Payable Aug.10Merchandise Inventory19 250 00 Interest Expense750 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%. Discount: $20,000 x.15 x 90/360 ProceedsProceeds Discount rate

12 Discounted Notes Payable Nov. 8Notes Payable20 000 00 Paid note due. Cash 20 000 00 On November 8 the note is paid in full.

13 Contingent Liabilities

14 Product 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. June 30Product Warranty Expense3 000 00 Warranty expenses projected for June, 5% of $60,000. Product Warranty Liability 3 000 00

15 On August 16, a customer needed a defective part replaced. Cost to the company was $200 for the part. Aug.16Product Warranty Payable200 00 Replaced defective part under warranty. Supplies 200 00 Product Liability

16 Accounting Treatment of Contingent Liabilities Likelihood of Occurring Measurement Accounting Treatment ProbableEstimable Record Liability Not Estimable Disclose Liability Contingency Possible

17 Payroll and Payroll Taxes

18 Liability 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--

19 Gross 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. Earnings at base rate (40 x $34)$1,360 Earnings at overtime rate (2 x $51) 102 Total earnings$1,462

20 FICA 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.

21 Earnings subject to 6% social security tax ($100,000 – $99,038) $962 Social security tax rate x 6% Social security tax$57.72 FICA Tax Calculation Assume that John T. McGraths annual earnings prior to the current period total $99,038. His current period earnings are $1,462. Earnings subject to 1.5% Medicare tax Current earnings$1,462 Medicare tax rate x 1.5% Medicare tax 21.93 Total FICA tax$79.65

22 Withholding Taxes, Other Deductions Employers are required to withhold federal income tax from each employee based on the withholding table and information provided by the employees 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.

23 Gross earnings for the week$1,462.00 Deductions: Social security tax tax$ 57.72 Medicare tax21.93 Federal income tax279.51 Retirement savings20.00 United Way 5.00 Total deductions 384.16 Net pay$1,077.84 John T. McGrath is single, has declared one withholding allowance, and had gross pay of $1,462 for the week ended December 27. Employee Net Pay Calculation

24 RESPONSIBILITY FOR TAX PAYMENTS EMPLOYEE BUSINESS GOVERNMENT Social security tax Medicare tax Federal withholding tax Social security tax Medicare tax Federal unemployment compensation tax State unemployment compensation tax

25 FEDERAL INCOME Personal income tax46% Estate, gift, and other 8% Corporate income tax8% FICA and FUTA38%

26 FEDERAL OUTLAYS Social security and Medicare 33% Interest on debt 8% Physical, human, and community development13% Social programs24% National defense 19% Law enforcement and general government3%

27 Payroll Register What is the purpose of a payroll register? Its a multicolumn form used to help assemble and summarize the data needed for each payroll period.

28 Earnings: Regular$13,328.00 Overtime574.00 Total$13,902.00 Deductions: Social security tax$ 643.07 Medicare tax208.53 Federal income tax3,332.00 Retirement savings680.00 United Way470.00 Accounts receivable50.00 Total5,383.60 Net amount paid$ 8,518.40 Accounts debited: Sales Salaries Expense$11,122.00 Office Salaries Expense2,780.00 Total (as above)$13,902.00 Payroll Register Summary

29 Recording Employees Earnings Dec. 27Sales Salaries Expense11 122 00 Office Salaries Expense2 780 00 Payroll for week ended December 27. Social Security Tax Payable 643 07 Medicare Tax Payable 208 53 Employees Federal Inc. Tax Pay. 3 332 00 Retirement Savings Ded. Payable 680 00 United Way Deductions Payable 470 00 Accounts ReceivableFred Elrod 50 00 Salaries Payable 8 518 40

30 Recording Employers Payroll Taxes Employer Taxes for the Week Ended December 27 Social security tax$ 643.07 Medicare tax208.53 State unemployment compensation tax (5.4% x $2,710)146.34 Federal unemployment compensation tax (0.8% x $2,710) 21.68 Total payroll tax expense$1,019.62 Social security tax$ 643.07 Medicare tax208.53 State unemployment compensation tax (5.4% x $2,710)146.34 Federal unemployment compensation tax (0.8% x $2,710) 21.68 Total payroll tax expense$1,019.62

31 Recording Employers Payroll Taxes Dec. 27Payroll Tax Expense1 019 62 Payroll taxes for week ended December 27. Social Security Tax Payable 643 07 Medicare Tax Payable 208 53 State Unemployment Tax Payable 146 34 Federal Unemployment Tax Pay. 21 68

32 Wage and Tax Statements W-2 Flow of Data in a Payroll System Updated Variables (cumulative earnings, taxes) Constant Data (rates of pay, tax, etc.) Current Periods Variables (hours worked) Payroll Checks and Statements Payroll Tax Returns Financial Statements PAYROLL PAYROLLREGISTER GENERALLEDGER EMPLOYEESEARNINGSRECORDS

33 Employees Fringe Benefits

34 Benefit Dollars as a Percent of Total 26% Vacation and sick pay 29% Medical 2%Other 18% Retirement and savings plans 25% Social security and Medicare

35 Employees Fringe Benefits Vacation pay Vacation pay becomes the employers 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.

36 Pensions Defined contribution plan Under this plan, a fixed amount of money is invested on the employees behalf during the employees 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.

37 Solvency Measures Quick Ratio Noble Co.Hart Co. Quick assets: Cash$ 100,000$ 55,000 Cash equivalents 47,00065,000 Accounts receivable (net)84,000472,000 Total$231,000$592,000 Current liabilities$220,000$740,000 Quick assets Current liabilities

38 Solvency Measures Quick Ratio Noble Co.Hart Co. Quick assets: Cash$ 100,000$ 55,000 Cash equivalents 47,00065,000 Accounts receivable (net)84,000472,000 Total$231,000$592,000 Current liabilities$220,000$740,000 Quick assets Current liabilities Noble Company $231,000 $220,000 Quick ratio = 1.05

39 Solvency Measures Quick Ratio Noble Co.Hart Co. Quick assets: Cash$ 100,000$ 55,000 Cash equivalents 47,00065,000 Accounts receivable (net)84,000472,000 Total$231,000$592,000 Current liabilities$220,000$740,000 Quick assets Current liabilities Hart Company $592,000 $740,000 Quick ratio = 0.80 Use:To indicate instant debt-paying ability

40 The End Chapter 10


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