Current Liabilities and Payroll Chapter 11

Learning Objective 1 Describe and illustrate current liabilities related to accounts payable, current portion of long- term debt, and notes payable

Current Liabilities When a company or a bank advances credit, it is making a loan. The company or bank is called a creditor (or lender). The individuals or companies receiving the loans are called debtors (or borrowers).

Current Liabilities Long-term liabilities are debts due beyond one year. Current Liabilities are debts that will be paid out of current assets and are due within one year.

Accounts Payable Accounts payable transactions arise from purchasing goods or services for use in a company’s operations or from purchasing merchandise for resale.

Current Portion of Long-Term Debt Long-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. The installments due after the coming year are classified as a long-term liability.

Short-Term Notes Payable Note may be issued to purchase merchandise or other assets. Note may also be issued to creditor to satisfy an account payable created earlier.

Short-Term Notes Payable Nature’s Sunshine Company issues a 90-day, 12% note for $1,000, dated August 1, 2011 to Murray Co. for a $1,000 overdue account.

Short-Term Notes Payable When the note matures, the entry to record the payment of $1,000 plus $30 interest ($1,000 x 12% x 90/360) is as follows:

Short-Term Notes Payable On 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.

Short-Term Notes Payable Description Debit Credit Bowden Co. (Borrower) Mdse. Inventory 10,000 Accounts Payable 10,000 Coker Co. (Creditor) Description Debit Credit Accounts Receivable 10,000 Sales 10,000 Cost of Mdse. Sold 7,500 Mdse. Inventory 7,500

Short-Term Notes Payable On May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.

Short-Term Notes Payable Accounts Payable 10,000 Notes Payable 10,000 Description Debit Credit Bowden Co. (Borrower) Notes Receivable 10,000 Accounts Receivable 10,000 Coker Co. (Creditor) Description Debit Credit

Short-Term Notes Payable On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31, the face amount of $10,000 plus interest of $200 ($10,000 x 12% x 60/360).

Short-Term Notes Payable Interest Expense 200 Cash 10,200 Description Debit Credit Bowden Co. (Borrower) Cash 10,200 Interest Revenue 200 Notes Receivable 10,000 Coker Co. (Creditor) Description Debit Credit

Short-Term Notes Payable On September 19, Iceburg Company borrowed cash from First National Bank by issuing a $4,000, 90-day, 15% note to the bank.

Short-Term Notes Payable On December 18, Iceburg Company paid First National Bank $4,000 plus interest of $150 ($4,000 x 15% x 90/360).

Short-Term Notes Payable In some cases, a discounted note may be issued rather than an interest-bearing note. A discounted note has the following characteristics: The interest rate on the note is called the discount rate. The amount of interest on the note, called the discount, is computed by multiplying the discount rate times the face amount of the note. The debtor (borrower) receives the face amount of the note less the discount, called the proceeds. The debtor must repay the face amount of the note on the due date.

Short-Term Notes Payable On August 10, Cary Company issues a $20,000, 90-day discounted note to Western National Bank. The discount rate is 15%, and the amount of the discount is $750 ($20,000 x 15% x 90/360).

Short-Term Notes Payable The entry when Cary Company pays the discounted note on November 8 is as follows:

Learning Objective 2 Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings.

Payroll and Payroll Taxes In accounting, payroll refers to the amount paid to employees for services they provided during the period. A company’s payroll is important for the following reasons: Payroll and related payroll taxes significantly affect the net income of most companies. Payroll is subject to federal and state regulations. Good employee morale requires payroll to be paid timely and accurately.

Liability for Employee Earnings Salary usually refers to payment for managerial and administrative services. Salary is normally expressed in terms of a month or a year. Wages usually refers to payment for employee manual labor. The rate of wages is normally stated on an hourly or weekly basis. The salary or wage of an employee may be increases by bonuses, commissions or profit sharing.

Liability for Employee Earnings 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. His earnings are computed as follows: Earnings at regular rate (40 x $34) $1,360 Earnings at overtime rate (2 x $51) 102 Total earnings $1,462 34 X 1.5 = 51

Deductions from Employee Earnings The total earnings of an employee for a payroll period, including any overtime pay, are called gross pay. From this amount is subtracted one or more deductions to arrive at the net pay.

Deductions from Employee Earnings John T. McGrath made $1,462 for the week ending December 27. McGrath’s W-4 (previous slide) claims one withholding allowance of $70. Thus, the wages used to determine McGrath’s withholding bracket in Exhibit 3 (next slide) are $1,392 ($1,462 – $70).

Deductions from Employee Earnings The Federal Insurance Contributions Act (FICA) tax withheld contributes to the following two federal programs. Social security, which provides payments for retirees, survivors, and disability insurance. (Assume 6% on all earnings.) Medicare, which provides health insurance benefits for senior citizens. (Assume 1.5% on all earnings.)

Deductions from Employee Earnings John T. McGrath’s earnings for the week ending December 27 are $1,462. Total FICA tax to be withheld is calculated as follows: Earnings subject to 6% social security tax $1,462 Social security tax = 1,462 x 6% $ 87.72 Earnings subject to 1.5% Medicare tax $1,462 Medicare tax rate = 1,462 x 1.5% $ 21.93 Total FICA tax $109.65

Computing Employee Net Pay John T. McGrath’s Net Pay

Liability for Employer’s Payroll Taxes Employers are subject to the following payroll taxes for amounts paid their employees: FICA Tax Federal Unemployment Compensation Tax (FUTA) State Unemployment Compensation Tax (SUTA)

Liability for Employer’s Payroll Taxes

Learning Objective 3 Describe payroll accounting systems that use a payroll register, employee earnings records, and a general journal.

Learning Objective 4 Journalize entries for employee fringe benefits, including vacation pay and pensions.

Learning Objective 5 Describe the accounting treatment for contingent liabilities and journalize entries for product warranties.

Learning Objective 6 Describe and illustrate the use of the quick ratio in analyzing a company’s ability to pay its current liabilities.

H.W: PE 11-1A , PE 11-1B PE11-3A , PE11-3B EX11-2 EX11-4 EX11-5 EX11-8

Current Liabilities and Payroll The End