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

2. Current Liabilities and Payroll Accounting
Accounting for Current Liabilities
Contingent Liabilities
Payroll Accounting
Notes payable
Sales taxes payable
Unearned revenues
Current maturities of long-term debt
Statement presentation and analysis
Recording
Disclosure
Determining payroll
Recording payroll
Employer payroll taxes
Filing and remitting payroll taxes
Internal control for payroll
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

3. Accounting for Current Liabilities
Current liability is debt with two key features:
Company expects to pay the debt from existing current assets or through the creation of other current liabilities.
Company will pay the debt within one year or the operating cycle, whichever is longer.
Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes payable, salaries payable, and interest payable.
SO 1 Explain a current liability, and identify the major types of current liabilities.

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

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

6. Accounting for Current Liabilities
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.
Cash 100,000
Notes payable 100,000
b) Prepare the adjusting entry on June 30.
$100,000 x 12% x 4/12 = $4,000
Interest expense 4,000
Interest payable 4,000
SO 2 Describe the accounting for notes payable.

7. Accounting for Current Liabilities
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).
Notes payable 100,000
Interest payable 4,000
Cash 104,000
SO 2 Describe the accounting for notes payable.

8. Accounting for 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.
SO 3 Explain the accounting for other current liabilities.

9. Accounting for Current Liabilities
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:
Cash 10,600
Sales 10,000
Sales tax payable 600
SO 3 Explain the accounting for other current liabilities.

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

11. Accounting for Current Liabilities
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:
Aug. 6
Cash 50,000
Unearned revenue 50,000
As the school completes each of the five home games, it would record the revenue earned.
Sept. 7
Unearned revenue 100,000
Ticket revenue 100,000
SO 3 Explain the accounting for other current liabilities.

12. 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.

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

14. Accounting for Current Liabilities
Statement Presentation and Analysis
Illustration 11-4
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
SO 4 Explain the financial statement presentation and analysis of current liabilities.

15. 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.
SO 5 Describe the accounting and disclosure requirements for contingent liabilities.

16. Contingent Liabilities
Probability
Accounting
Probable
Accrue
Reasonably
Possible
Footnote
Remote
Ignore
SO 5 Describe the accounting and disclosure requirements for contingent liabilities.

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

18. Contingent Liabilities
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.
Illustration 11-6
Computation of estimated
product warranty liability
SO 5 Describe the accounting and disclosure requirements for contingent liabilities.

19. Contingent Liabilities
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
Estimated warranty liability 40,000
SO 5 Describe the accounting and disclosure requirements for contingent liabilities.

20. Contingent Liabilities
Illustration: Prepare the entry to record the repair costs incurred in 2010 to honor warranty contracts on 2010 sales.
Estimated warranty liability 24,000
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 liability 1,600
Repair parts 1,600
SO 5 Describe the accounting and disclosure requirements for contingent liabilities.

21. Payroll Accounting 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).
Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay.

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

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

24. 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.
Payroll Deductions
Mandatory:
FICA tax
Federal income tax
State income tax
SO 6 Compute and record the payroll for a pay period.

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

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

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

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

29. Recording the Payroll Maintaining Payroll Department Records
Many companies find it useful to prepare a payroll register.
Illustration Payroll register

30. Recording the Payroll Recognizing Payroll Expenses and Liabilities
Illustration: Prepare the entry Academy Company would make to record the payroll for the week ending January 14.
Office salaries expense 5,200.00
Wages expense 12,010.00
FICA tax payable 1,376.80
Federal income tax payable 3,490.00
State income tax payable
United Way payable
Union dues payable
Salaries and wages payable 11,462.50
SO 6 Compute and record the payroll for a pay period.

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

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

33. Employer Payroll Taxes
Payroll tax expense results from three taxes that governmental agencies levy on employers.
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.
These taxes are:
FICA tax
Federal unemployment tax
State unemployment tax
SO 7 Describe and record employer payroll taxes.

34. Employer Payroll Taxes
Payroll tax expense results from three taxes that governmental agencies levy on employers.
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%.
These taxes are:
FICA
Federal unemployment tax
State unemployment tax
SO 7 Describe and record employer payroll taxes.

35. Employer Payroll Taxes
Payroll tax expense results from three taxes that governmental agencies levy on employers.
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.
SO 7 Describe and record employer payroll taxes.

36. Employer Payroll Taxes
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 expense 2,443.82
FICA tax payable 1,376.80 *
State unemployment tax payable **
Federal unemployment tax payable
***
* $ 17, x 8% = $1,376.80
** $17, x 5.4% = $929.34
*** $17,210 x .8% = $137.68
SO 7 Describe and record employer payroll taxes.

37. Filing and Remitting Payroll Taxes
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.

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

39. Additional Fringe Benefits
APPENDIX
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.

40. Paid Absences APPENDIX
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.

41. Post-Retirement Benefits
APPENDIX
Post-retirement benefits are benefits that employers provide to retired employees for
pensions and
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.

42. Pensions
APPENDIX
A pension plan is an agreement whereby employers provide benefits to employees after they retire.
Two types of pension plans:
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.
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.

43. Copyright
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