1. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 10 Current Liabilities and Payroll

2. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Current Liabilities & Payroll Determinable (certain) current liabilities Determinable (certain) current liabilities Operating line of credit and bank overdraftOperating line of credit and bank overdraft Short-term notes payableShort-term notes payable Sales and property taxesSales and property taxes Current maturities of long-term debtCurrent maturities of long-term debt Uncertain liabilities Uncertain liabilities Estimated liabilitiesEstimated liabilities ContingenciesContingencies Payroll Payroll Employer and employee payroll costsEmployer and employee payroll costs Recording payrollRecording payroll Financial statement presentation Financial statement presentation

3. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Determinable (Certain) Current Liabilities Obligations that are expected to be settled: Obligations that are expected to be settled: Within one year of the balance sheet date, orWithin one year of the balance sheet date, or Within normal operating cycleWithin normal operating cycle Requires existence of a present obligation Requires existence of a present obligation Determinable liabilities have known amount, payee, due date Determinable liabilities have known amount, payee, due date

4. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Operating Line of Credit Pre-authorized demand loan Pre-authorized demand loan Allows the company to borrow up to a preset limit when neededAllows the company to borrow up to a preset limit when needed May require collateral (security) May require collateral (security) Such as current assets, or property, plant and equipmentSuch as current assets, or property, plant and equipment Used on a short-term basis Used on a short-term basis Negative (overdrawn) cash balance is called bank indebtedness, bank overdraft or bank advances Negative (overdrawn) cash balance is called bank indebtedness, bank overdraft or bank advances

5. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Short-Term Notes Payable Obligations in the form of written promissory notes Obligations in the form of written promissory notes Usually require the borrower to pay interest Usually require the borrower to pay interest Used instead of accounts payable Used instead of accounts payable Gives lender proof of obligation in case legal action is needed to collectGives lender proof of obligation in case legal action is needed to collect Issued for varying periods Issued for varying periods If due within one year of the balance sheet date, classified as current liabilitiesIf due within one year of the balance sheet date, classified as current liabilities

6. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Interest is recorded in the period the loan is outstanding: Interest is recorded in the period the loan is outstanding: At maturity, the face value of the note plus interest must be repaid: At maturity, the face value of the note plus interest must be repaid: Short-Term Notes Payable 2

7. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Sales Taxes Expressed as a percentage of the sales price of goods sold to customers Expressed as a percentage of the sales price of goods sold to customers Includes goods and service tax (GST), provincial sales tax (PST) and harmonized sales taxes (GST and PST combined into the HST) Includes goods and service tax (GST), provincial sales tax (PST) and harmonized sales taxes (GST and PST combined into the HST) Remitted to government monthly, quarterly or annually Remitted to government monthly, quarterly or annually Amounts paid by customers for sales tax are not considered revenue, but are credited to Sales Tax Payable Amounts paid by customers for sales tax are not considered revenue, but are credited to Sales Tax Payable

8. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Property Taxes Paid for a calendar year Paid for a calendar year Upon receipt of the property tax bill, an expense is recorded for the months that have passed: Upon receipt of the property tax bill, an expense is recorded for the months that have passed: When paid, expense is recorded for additional months that have passed, and prepaid is set up for remaining months When paid, expense is recorded for additional months that have passed, and prepaid is set up for remaining months Prepaid is cleared to expense at the end of year Prepaid is cleared to expense at the end of year

9. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Current Maturities of Long-Term Debt The portion of long-term debt that is due within the current year The portion of long-term debt that is due within the current year Amount not due within current year is disclosed as a long-term liabilityAmount not due within current year is disclosed as a long-term liability No adjusting entry is required to recognize the current portion of long-term debt No adjusting entry is required to recognize the current portion of long-term debt The proper classification is made when the balance sheet is preparedThe proper classification is made when the balance sheet is prepared

10. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Estimated Liabilities Obligation exists but the amount and timing is uncertain Obligation exists but the amount and timing is uncertain We owe someone, but not sure how much, when or even whoWe owe someone, but not sure how much, when or even who Liability is recognized when: Liability is recognized when: Settlement of the liability is likely, andSettlement of the liability is likely, and Amount of the liability can be reasonable estimatedAmount of the liability can be reasonable estimated

11. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Product Warranties Promises by seller to buyer to repair or replace a product if it is defective or does not perform as intended Promises by seller to buyer to repair or replace a product if it is defective or does not perform as intended Warranties will lead to future costs for replacement or repair of defective units Warranties will lead to future costs for replacement or repair of defective units Cost of warranty is estimated and accrued based on prior experience Cost of warranty is estimated and accrued based on prior experience Debit warranty expense and credit warranty liabilityDebit warranty expense and credit warranty liability This matches the cost of the warranty to the same period that the related sale occurredThis matches the cost of the warranty to the same period that the related sale occurred

12. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Customer Loyalty Programs and Gift Cards Result in an estimated liability: Result in an estimated liability: Not known if or when rewards will be redeemedNot known if or when rewards will be redeemed If redemptions are likely, and can be estimated based on past experience: If redemptions are likely, and can be estimated based on past experience: Record estimated liability as a reduction in revenue (not an expense)Record estimated liability as a reduction in revenue (not an expense) Sales discount is a contra revenue accountSales discount is a contra revenue account

13. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Contingencies Events with uncertain outcomes Events with uncertain outcomes It is not known whether a gain or loss will occurIt is not known whether a gain or loss will occur Dependent upon occurrence of one or more future events (which may or may not happen)Dependent upon occurrence of one or more future events (which may or may not happen) A contingent asset if possibility of a gain A contingent asset if possibility of a gain A contingent liability if possibility of a loss A contingent liability if possibility of a loss

14. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Contingent Liabilities Record liability if both conditions are met: Record liability if both conditions are met: It is likely that an obligation exists, andIt is likely that an obligation exists, and Amount can be reliably estimatedAmount can be reliably estimated Do not record liability if one of the following circumstances exists: Do not record liability if one of the following circumstances exists: Possible (not likely) obligation exists, to be confirmed by occurrence or non-occurrence of some future eventPossible (not likely) obligation exists, to be confirmed by occurrence or non-occurrence of some future event Obligation exists, but not probable will be settledObligation exists, but not probable will be settled Obligation exists, but amount cannot be measuredObligation exists, but amount cannot be measured

15. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Contingent Liabilities 2 Under IFRS: Under IFRS: A liability is called a contingent liability if any one of these circumstances existsA liability is called a contingent liability if any one of these circumstances exists Contingent liabilities are not recorded on balance sheet, only disclosed in notesContingent liabilities are not recorded on balance sheet, only disclosed in notes Under Canadian GAAP for Private Enterprises: Under Canadian GAAP for Private Enterprises: A liability is called a contingent liability if its existence depends on the outcome of an eventA liability is called a contingent liability if its existence depends on the outcome of an event Contingent liabilities are record on balance sheet if:Contingent liabilities are record on balance sheet if: Contingency is likely (chance of occurrence is high)Contingency is likely (chance of occurrence is high) Amount of contingency can be reasonably estimatedAmount of contingency can be reasonably estimated Otherwise disclosed in notes to financial statementsOtherwise disclosed in notes to financial statements

16. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Contingent Assets Similar to contingent liabilities, except the uncertainty surrounds a future cash inflow or other economic benefit Similar to contingent liabilities, except the uncertainty surrounds a future cash inflow or other economic benefit Treated more conservatively: Treated more conservatively: Never recorded or accrued in the financial statementsNever recorded or accrued in the financial statements Disclosed in the notes only if it is likely the gain will be realizedDisclosed in the notes only if it is likely the gain will be realized

17. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Payroll Accounting More than paying employee salaries and wages More than paying employee salaries and wages Companies are required by law: Companies are required by law: To have payroll records for each employeeTo have payroll records for each employee To report and remit payroll deductionsTo report and remit payroll deductions To respect federal and provincial lawsTo respect federal and provincial laws Two types of payroll costs: Two types of payroll costs: Employee costs: amounts paid to employees (gross pay) & amounts paid by employees (payroll deductions)Employee costs: amounts paid to employees (gross pay) & amounts paid by employees (payroll deductions) Employer costs: amounts paid by employer on behalf of the employee (employee benefits)Employer costs: amounts paid by employer on behalf of the employee (employee benefits)

18. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Gross Pay The total compensation earned by an employee The total compensation earned by an employee Consists of: Consists of: Wages = hours worked x hourly rate of pay, orWages = hours worked x hourly rate of pay, or Salaries: based on a weekly, biweekly, monthly or annual rateSalaries: based on a weekly, biweekly, monthly or annual rate BonusesBonuses CommissionsCommissions

19. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Payroll Deductions The difference between gross pay and the amount actually received (net pay) The difference between gross pay and the amount actually received (net pay) Mandatory payroll deductions: Mandatory payroll deductions: Personal income tax, Canada Pension Plan (CPP) and Employment Insurance (EI)Personal income tax, Canada Pension Plan (CPP) and Employment Insurance (EI) Determined from payroll deduction tablesDetermined from payroll deduction tables Voluntary payroll deductions: Voluntary payroll deductions: For charitable causes, retirement, and other purposesFor charitable causes, retirement, and other purposes Should be authorized in writing by the employeeShould be authorized in writing by the employee Do not result in a payroll expense to the employerDo not result in a payroll expense to the employer

20. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Employer Payroll Costs Amounts an employer is required to pay Amounts an employer is required to pay Required by governments:Required by governments: CPP (matching the employee contribution)CPP (matching the employee contribution) EI (1.4 x the employee contribution)EI (1.4 x the employee contribution) Workplace safety and healthWorkplace safety and health Additional employee benefits:Additional employee benefits: Paid absences: sick days, vacation, holidaysPaid absences: sick days, vacation, holidays Post-employment benefits: to retired employeesPost-employment benefits: to retired employees These benefits give rise to liabilities that must be accrued These benefits give rise to liabilities that must be accrued

21. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Recording the Payroll Involves: Involves: Maintaining payroll recordsMaintaining payroll records Recording payroll expenses and liabilitiesRecording payroll expenses and liabilities Paying the payroll, andPaying the payroll, and Filing and remitting payroll deductionsFiling and remitting payroll deductions Payroll Records Payroll Records A separate earnings record is kept for each employeeA separate earnings record is kept for each employee Payroll register may be used to accumulate gross earnings, deductions & net pay by employee for each periodPayroll register may be used to accumulate gross earnings, deductions & net pay by employee for each period

22. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Recording Payroll Expenses and Liabilities Employee payroll costs: Employee payroll costs: Entry for the employee portion of a payrollEntry for the employee portion of a payroll The company’s expense is equal to total gross payThe company’s expense is equal to total gross pay Employee payroll deductions become current liabilities of the company until remittedEmployee payroll deductions become current liabilities of the company until remitted

23. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Recording Payroll Expenses and Liabilities 2 Employer payroll costs: Employer payroll costs: Recorded when the payroll is journalizedRecorded when the payroll is journalized Become current liabilities of the company until remittedBecome current liabilities of the company until remitted

24. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Recording Payment of the Payroll Payment of payroll is either by cheque or electronic funds transfer (EFT) Payment of payroll is either by cheque or electronic funds transfer (EFT) Entry to record payment of payroll deductions: Entry to record payment of payroll deductions:

25. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Financial Statement Presentation Current liabilities are the first category reported in the liabilities section of the balance sheet Current liabilities are the first category reported in the liabilities section of the balance sheet Each type of current liability is listed separately Each type of current liability is listed separately Listed in order of liquidity, usually by maturity date Listed in order of liquidity, usually by maturity date Also common to show bank loans, notes payable and accounts payable first regardless of sizeAlso common to show bank loans, notes payable and accounts payable first regardless of size Terms of operating lines of credit, notes payable and other information are disclosed in the notes Terms of operating lines of credit, notes payable and other information are disclosed in the notes

26. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Appendix 10A: Mandatory Payroll Deductions Canada Pension Plan (CPP) contributions: Canada Pension Plan (CPP) contributions: Calculated as a percentage of earnings (contribution rate) over a set minimum (basic exemption) to a maximum amount of earnings (maximum pensionable earnings)Calculated as a percentage of earnings (contribution rate) over a set minimum (basic exemption) to a maximum amount of earnings (maximum pensionable earnings) Pro-rated per pay periodPro-rated per pay period Employment Insurance (EI) contributions: Employment Insurance (EI) contributions: Calculated as a percentage of earnings to a maximum amount (maximum insurable earnings)Calculated as a percentage of earnings to a maximum amount (maximum insurable earnings) No basic exemptionNo basic exemption Not pro-rated: deducted from pay until reach maximumNot pro-rated: deducted from pay until reach maximum

27. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Appendix 10A: Mandatory Payroll Deductions 2 Personal income tax deductions: Personal income tax deductions: Based on tax rates set by federal and provincial governmentsBased on tax rates set by federal and provincial governments Progressive rates: higher percentage rates for higher income levelsProgressive rates: higher percentage rates for higher income levels Complicated calculations: Complicated calculations: Best done using deduction tables or automated tools provided by the Canada Revenue AgencyBest done using deduction tables or automated tools provided by the Canada Revenue Agency

28. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. COPYRIGHT Copyright © 2010 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.