Accounting Principles Using Excel for Success PowerPoint Presentation by: Douglas Cloud, Professor Emeritus Accounting, Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. Current Liabilities and Payroll 11 Student Version

11-2 Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable

11-3 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. Accounts payable Current portion of long-term debt Notes payable 1

11-4 Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale. 1

11-5 A firm issues a 90-day, 12% note for $1,000, dated August 1, 2008 to Murray Co. for a $1,000 overdue account. Short-Term Notes Payable 1

11-6 On October 30, when the note matures, the firm pays the $1,000 principal plus $30 interest ($1,000 × 12% × 90/360). 1 Interest Expense appears on the income statement as an “Other Expense.”

11-7 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. 1

11-8 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 1

11-9 On May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account. Accounts Payable10,000 Notes Payable10,000 DescriptionDebitCredit Bowden Co. (Borrower) Notes Receivable10,000 Accounts Receivable10,000 Coker Co. (Creditor) DescriptionDebitCredit 1

11-10 On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest: $10,000 × 12% × 60/360. Notes Payable10,000 Interest Expense200 Cash10,200 DescriptionDebitCredit Bowden Co. (Borrower) Cash10,200 Interest Revenue 200 Notes Receivable10,000 Coker Co. (Creditor) DescriptionDebitCredit 1

11-11 On September 19, Iceburg Company issues a $4,000, 90-day, 15% note to First National Bank. 1

11-12 On the due date of the note (December 18), Iceburg Company owes $4,000 plus interest of $150 ($4,000 × 15% × 90/360). 1

11-13 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%. 1 Proceeds Discount: $20,000 ×.15 × 90/360 Discount rate Discounting a Note

11-14 On November 8 the note is paid in full. 1 The amount paid is the face amount of the note.

11-15 Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings

11-16 Payroll 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: 1.Employees are sensitive to payroll errors and irregularities. 2.Good employee morale requires payroll to be paid timely and accurately. 3.Payroll is subject to various federal and state regulations. 4.Payroll and related payroll taxes significantly affect the net income of most companies. 2

11-17 Salary usually refers to payment for managerial and administrative services. Salary is normally expressed in terms of a month or a year. 2 Wages usually refers to payment for employee manual labor. The rate of wages is normally stated on an hourly or weekly basis.

11-18 FICA Tax The 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. 2

11-19 Typical Net Pay Calculation Gross earnings for the week$1, Deductions: Social security tax $ Medicare tax Federal income tax Retirement savings20.00 United Way 5.00 Total deductions Net pay$1,

11-20 Liability for Employer’s Payroll Taxes Employers are subject to the following payroll taxes for amounts paid their employees: 1.FICA tax 2.Federal Unemployment Compensation Tax (FUTA) 3.State Unemployment Compensation Tax (SUTA) 2

11-21 Employer’s Federal Payroll Taxes Employers 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. 2

11-22 A 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. Employer’s Federal Unemployment Taxes 2

11-23 Employer’s State Unemployment Taxes This 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. 2

11-24 Describe payroll accounting systems that use a payroll register, employee earnings records, and a general journal

11-25 Payroll systems should be designed to: 1.Pay employees accurately and timely. 2.Meet regulatory requirements of federal, state, and local agencies. 3.Provide useful data for management decision-making needs. 3

Payroll Register (left side) Exhibit 5

Payroll Register (right side) Exhibit 5

11-28 The entry based on the payroll register in Exhibit 5 (Slides 26 and 27) is shown below. 3

Journal Entry to Record Weekly Payroll

11-30 Internal Controls for Payroll Systems 1.If a check-signing machine is used, blank payroll checks and access to the machine should be restricted to prevent their theft. 2.The hiring and firing of employees should be properly authorized and approved in writing. 3.All changes in pay rates should be properly authorized and approved in writing. (continued) 3

Payroll checks should be distributed by someone other than employee supervisors. 6.A special payroll bank account should be used. 3 4.Employees should be observed when arriving for work to verify they are “checking in” for work only once and only for themselves.

11-32 Journalize entries for employee fringe benefits, including vacation pay, and pensions

11-33 Many 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. 4

11-34 Most employers grant vacation rights, sometimes called compensated absences, to their employees. The estimated vacation pay for the year ending December 31 is $325,000. Vacation Pay 4 325,000

11-35 A 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. 4 Pension

11-36 In a defined contribution plan, a fixed amount of money is invested on the employee’s behalf during the employee’s working years. 4 Defined Contribution Plan

11-37 The entry to record the payment to the plan administrator is shown below: 4

11-38 Assume 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. 4 Defined Benefit Plan

11-39 Describe the accounting treatment for contingent liabilities and journalize entries for product warranties

11-40 Some liabilities may arise from past transactions if certain events occur in the future. These potential obligations are called contingent liabilities. 5 Contingent Liabilities

11-41 The accounting for contingent liabilities depends on the following two factors: 1.Likelihood of occurring: Probable, reasonably possible, or remote. 2.Measurement: Estimable or not estimable. 5

11-42 During 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. Recording Contingent Liabilities 5

11-43 If a customer required a $200 part replacement on August 16, the entry would be: 5

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