1. CPA, MBA BY RACHELLE AGATHA, CPA, MBA Current Liabilities & Payroll Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac

2. 2 1. Describe and illustrate current liabilities related to accounts payable, current portion of long- term debt, and notes payable. 2. Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings. Objectives

3. 3 3. Describe the payroll accounting systems that use a payroll register, employee earnings records, and a general journal. 4. Journalize entries for employee fringe benefits, including vacation pay and pensions. Objectives:

4. 4 5. Describe the accounting treatment for contingent liabilities and journalize entries for product warranties. Objectives

5. 5 Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. Objective 1

6. 6 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

7. 7 Accounts Payable Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale.

8. 8 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.

9. 9 The total amount of the installments due after the coming year is classified as a long-term liability.

10. 10 Aug.1Accounts Payable—Murray 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, 2008 to Murray Co. for a $1,000 overdue account. Short-Term Notes Payable

11. 11 On October 30, when the note matures, the firm pays the $1,000 principal plus $30 interest ($1,000 x 12% x 90/360). Oct.30Notes Payable1 000 00 Interest Expense30 00 Paid principal and interest on note. Cash 1 030 00 Appears on the income statement as an “Other Expense.”

12. 12 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.

13. 13 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

14. 14 On May 3, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account. 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) DescriptionDebit Credit

15. 15 On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest: $10,000 x 12% x 60/360. Notes Payable 10,000 Interest Expense 200 Cash 10,200 DescriptionDebit Credit Bowden Co. (Borrower) Cash10,200 Interest Revenue 200 Notes Receivable 10,000 Coker Co. (Creditor) DescriptionDebit Credit

16. 16 On September 19, a firm borrows $4,000 from First National Bank by giving the bank a 90-day, 15% note. Sept. 19Cash4 000 00 Notes Payable4 000 00 Issued a 90-day, 15% note to the bank.

17. 17 On the due date of the note (December 18), the borrower owes $4,000 plus interest of $150 ($4,000 x 15% x 90/360). Dec. 18Notes Payable4 000 00 Cash4 150 00 Paid principal and interest due on note. Interest Expense150 00

18. 18 The interest set by the creditor when a note does not specify the rate is called the discount. The rate used in computing the discount is called the discount rate. The borrower is given the remainder (face – discount), called the proceeds. Discounting a Note

19. 19 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%. Aug. 10Merchandise Inventory19 250 00 Notes Payable20 000 00 Issued a 90-day note to Rock Co., discounted at 15%. Interest Expense750 00

20. 20 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%. Aug. 10Merchandise Inventory19 250 00 Notes Payable20 000 00 Issued a 90-day note to Rock Co., discounted at 15%. Interest Expense750 00 Discount: $20,000 x.15 x 90/360 Discount rate ProceedsProceeds

21. 21 On November 8 the note is paid in full. Nov. 8Notes Payable20 000 00 Cash20 000 00 Paid note due.

22. 22 On July 1, Bella Salon Company issued a 60-day note with a face amount of $60,000 to Delilah Hair Products Company. for merchandise inventory. a.Determine the proceeds of the note assuming the note carries an interest rate of 6%. b.Determine the proceeds of the note assuming the note is discounted at 6%.

23. 23 a.$60,000 b.$59,400 [$60,000 – ($60,000 x 6% x 60/360)]

24. 24 Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings. Objective 2

25. 25 Payroll refers to the amount paid to employees for the services they provide during a period. It is usually significant for several reasons. 1)Employees are sensitive to payroll errors and irregularities. 2)The payroll is subject to various federal and state regulations. 3)The payroll and related payroll taxes have a significant effect on the net income of most businesses.

26. 26 Wages usually refers to payment for manual labor, both skilled and unskilled. The rate of wages is normally stated on an hourly or weekly basis.

27. 27 Salary usually refers to payment for managerial, administrative, or similar services, normally expressed in terms of a month or a year.

28. 28 The total earnings of an employee for a payroll period are called gross pay. From this is subtracted one or more deductions to arrive at the net pay. Net pay is the amount that the employer must pay the employee.

29. 29 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 McGrath Illustration

30. 30 For this illustration assume the standard withholding allowance of $63*. Thus, the wages used in determining McGrath’s withholding for the week are $1,399 ($1,462 – $63). *The actual IRS standard withholding allowance changes every year and was $63.46 for 2006.

31. 31 Wage Bracket Withholding Table Source: Publication 15, Employer’s Tax Guide, Internal Revenue Service, 2006 McGrath wage bracket

32. 32 McGrath Example (Continued) Initial withholding$ 78.30 Plus ($1,399 – $620) x 25% 194.75 Total federal income taxes withheld$273.05

33. 33 Karen Dunn’s weekly gross earnings for the present week were $2,250. Dunn has two exemptions. Using the wage bracket withholding table in Exhibit 3 (Slide 31) with a $63 standard withholding allowance for each exemption, what is Dunn’s federal income tax withholding?

34. 34 Total wage payment$2,250 One allowance (provided by IRS)$63 Multiplied by allowances claimed on W-4x 2 126 Amount subject to withholding$2,124 Initial withholding from wage bracket $275.55 Plus additional withholding: 28% of excess over $1,409 200.20* Federal income tax withholding$475.75 *28% x ($2,124 – $1,409)

35. 35 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, is health insurance for senior citizens.

36. 36 Earnings subject to 6% social security tax ($100,000 – $99,038)$ 962 Social security tax ratex 6% Social security tax$57.72 Earnings subject to 1.5% Medicare tax$1,462 Medicare tax rate x 1.5% Medicare tax 21.93 Total FICA tax$79.65 John T. McGrath’s FICA Tax

37. 37 Computing McGrath’s Net Pay John T. McGrath’s net pay: Gross earnings for the week$1,462.00 Deductions: Social security tax (Slide 37)$ 57.72 Medicare tax (Slide 33)21.93 Federal income tax (Slide 33)273.05 Retirement savings20.00 United Way 5.00 Total deductions 377.70 Net pay$1,084.30

38. 38 Karen Dunn’s weekly gross earnings for the week ending Dec. 3 rd were $2,250, and her federal income tax withholding was $475.75. Prior to this week Dunn had earned $98,000 for the year. Assuming the social security rate is 6% on the first $100,000 of annual earnings and Medicare is 1.5% of all earnings, what is Dunn’s net pay?

39. 39 Total wage payment$2,250.00 Less: Federal income tax withholding475.75 Earnings subject to social security tax ($100,000 – $98,000)$2,000 Social security tax ratex 6% Social security tax120.00 Medicare tax ($2,250 x 1.5%) 33.75 Net pay $1,620.50

40. 40 Employer’s Federal Payroll Taxes 11-2 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.

41. 41 11-2 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

42. 42 Employer’s State Unemployment Taxes Employers in most states also must pay a state unemployment tax for unemployed workers. A few states require employee contributions. The state plan is designed to reward firms with stable employment, so the tax rate varies from state to state and employer to employer.

43. 43

44. 44 Describe payroll accounting systems that use a payroll register, employee earnings records, and a general journal. Objective 3

45. 45 Payroll Register The payroll register is a multicolumn report used for summarizing the data for each payroll period. The last two columns of the payroll register are used to accumulate the total wages or salaries to be debited to various expense accounts. The process is usually called payroll distribution.

46. 46 Payroll Register (Continued)

47. 47 (Concluded)

48. 48 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 Receivable—Fred Elrod 50 00 Salaries Payable 8 518 40

49. 49 The payroll register of Chen Engineering Services indicates $900 of social security withheld and $225 of Medicare tax withheld on total salaries of $15,000 for the period. Federal withholding for the period totaled $2,925. Provide the journal entry for the period’s payroll.

50. 50 Salaries Expense15,000 Social Security Tax Payable900 Medicare Tax Payable225 Federal Withholding Tax Payable2,925 Salaries Payable10,950

51. 51 Recording and Paying Payroll Taxes Everson Company’s fiscal year ends on April 30. Everson Company owes it employees $26,000 of wages on December 31. The following portion of the $26,000 of wages are subject to payroll taxes on December 31: Social Security Tax (6.0%)$18,000 Medicare Tax (1.5%)26,000 State and Federal Unemployment Compensation Tax1,000 Earnings Subject to Payroll Taxes

52. 52 Data for McDermott Supply Co. payroll for the week ending 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

53. 53 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 McDermott Supply Co.’s payroll entry on December 27 is recorded as follows:

54. 54 The payroll register of Chen Engineering Services indicates $900 of social security withheld and $225 of Medicare tax withheld on total salaries of $15,000 for the period. Assume earnings subject to state and federal unemployment compensation taxes are $5,250, at the federal rate of 0.8% and state tax of 5.4%. Provide the journal entry to record the payroll tax expense for the period.

55. 55 Payroll Tax Expense1,450.50 Social Security Tax Payable900.00 Medicare Tax Payable225.00 State Unemployment Tax Payable283.50* Federal Unemployment Tax Payable42.00** *$5,250 x 5.4% **$5,250 x 0.8%

56. 56 A detailed payroll record is maintained for each employee. This record is called an employee’s earnings record. At the end of each pay period, payroll checks are prepared. Each check includes a detachable statement showing the details of how the net pay was computed.

57. 57 Employee’s Earnings Record (Continued)

58. 58 (Concluded)

59. 59 Payroll Check

60. 60

61. 61 Employee fringe benefits, including vacation pay and pensions. Objective 4 11-4

62. 62 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 postretirement benefits, such as a pension plan.

63. 63 Benefit Dollars as a Percent of Payroll Costs

64. 64 Most employers grant vacation rights, sometimes called compensated absences, to their employees. The estimated vacation pay for the payroll period ending May 5 is $2,000. Vacation Pay May 5Vacation Pay Expense2 000 00 Vacation Pay Payable2 000 00 Vacation pay for week ended May 5.

65. 65 Pensions 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.

66. 66 In a defined contribution plan, a fixed amount of money is invested on the employee’s behalf during the employee’s working years.

67. 67 Pensions In a defined benefit plan, employers promise employees a fixed annual pension benefit at retirement, based on years of service and compensation levels.

68. 68 Pension accounting is quite complex – covered in advanced accounting

69. 69 Describe the accounting treatment for contingent liabilities and journalize entries for product warranties. Objective 5

70. 70 Some past transactions will result in liabilities if certain events occur in the future. These potential obligations are called contingent liabilities.

71. 71 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 price. June 30Product Warranty Expense3 000 00 Warranty expenses projected for June, 5% of $60,000. Product Warranty Payable 3 000 00 Contingent Liabilities

72. 72 If a customer required a $200 part replacement on August 16, the entry would be: Aug. 16Product Warranty Payable200 00 Replaced defective part under warranty. Supplies 200 00

73. 73 Likelihood of Occurring Measurement Accounting Treatment Probable Estimable Record and Disclose Liability Not Estimable Disclose Liability Contingency Possible Accounting Treatment of Contingent Liabilities

74. 74 Cook-Rite Inc. sold $140,000 of kitchen appliances during August under a 6 month warranty. The cost to repair defects under the warranty is estimated at 6% of the sales price. On September 11, a customer required a $200 part replacement, plus $90 labor under the warranty. Provide the journal entries for (a) the estimated warranty expense on August 31 and (b) the September 11 warranty work.

75. 75 a. Product Warranty Expense8,400 Product Warranty Payable8,400 To record warranty expense for August, 6% x $140,000. b. Product Warranty Payable290 Supplies200 Wages Payable90 Replaced defective part under warranty.

76. 76 Noble Co.Hart Co. Quick assets: Cash$147,000 $120,000 Accounts receivable (net)84,000 472,000 Total$231,000 $592,000 Current liabilities$220,000 $740,000 Quick Ratio Quick assets Current liabilities Quick Ratio = The quick ratio or acid-test ratio can be used to evaluate a firm’s ability to pay its current liabilities within a short period of time.

77. 77 Quick Ratio Quick assets Current liabilities Quick Ratio = Quick assets: Cash$147,000 $120,000 Accounts receivable (net)84,000 472,000 Total$231,000 $592,000 Current liabilities$220,000 $740,000 Noble Co.Hart Co. Noble Company = $231,000 $220,000 = 1.05

78. 78 83 Quick assets Current liabilities Quick Ratio = Quick assets: Cash$147,000$120,000 Accounts receivable (net)84,000472,000 Total$231,000$592,000 Current liabilities$220,000$740,000 Noble Co.Hart Co. Hart Company = $592,000 $740,000 = 0.80

79. 79 Interpretation Noble Company is in a better quick ratio position than Hart Company. By having a quick ratio in excess of 1, Noble Company has quick assets sufficient to cover the company’s current liabilities. This is not true for Hart Company.

80. Summary  Current Liabilities  A/P, Cur Portion LTD  Payroll Liabilities  Payroll taxes  Payroll Systems  Contingent Liabilities