2. CURRENT LIABILITIES AND PAYROLL ACCOUNTING
CHAPTER 11
CURRENT LIABILITIES AND PAYROLL ACCOUNTING
Accounting Principles, Eighth Edition

3. Study Objectives
Explain a current liability, and identify the major types of current liabilities.
Describe the accounting for notes payable.
Explain the accounting for other current liabilities.
Explain the financial statement presentation and analysis of current liabilities.
Describe the accounting and disclosure requirements for contingent liabilities.
Compute and record the payroll for a pay period.
Describe and record employer payroll taxes.
Discuss the objectives of internal control for payroll.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

4. 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

5. 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, salaries and wages, and interest payable.
LO 1 Explain a current liability, and identify the major types of current liabilities.

6. Accounting for Current Liabilities
Question
To be classified as a current liability, a debt must be expected to be paid:
out of existing current assets.
by creating other current liabilities.
within 2 years.
both (a) and (b).
LO 1 Explain a current liability, and identify the major types of current liabilities.

7. Accounting for Current Liabilities
Notes Payable
Written promissory note.
Require the borrower to pay interest.
LO 2 Describe the accounting for notes payable.

8. Accounting for Current Liabilities
E11-2 On June 1, Melendez Company borrows $90,000 from First Bank on a 6-month, $90,000, 12% note.
Instructions
Prepare the entry on June 1.
Prepare the adjusting entry on June 30.
Prepare the entry at maturity (December 1), assuming monthly adjusting entries have been made through November 30.
What was the total financing cost (interest expense)?
LO 2 Describe the accounting for notes payable.

9. Accounting for Current Liabilities
E11-2 On June 1, Melendez Company borrows $90,000 from First Bank on a 6-month, $90,000, 12% note.
Prepare the entry on June 1.
Cash 90,000
Notes payable 90,000
b) Prepare the adjusting entry on June 30.
$90,000 x 12% x 1/12 = $900
Interest expense 900
Interest payable 900
LO 2 Describe the accounting for notes payable.

10. Accounting for Current Liabilities
E11-2 On June 1, Melendez Company borrows $90,000 from First Bank on a 6-month, $90,000, 12% note.
c) Prepare the entry at maturity (December 1), assuming monthly adjusting entries have been made through November 30.
Notes payable 90,000
Interest payable 5,400
Cash 95,400
d) What was the total financing cost (interest expense)?
$5,400
LO 2 Describe the accounting for notes payable.

11. Accounting for Current Liabilities
Sales Tax Payable
Sales taxes are expressed as a stated percentage of the sales price.
Retailer collects tax from the customer.
Retailer remits the collections to the state’s department of revenue.
LO 3 Explain the accounting for other current liabilities.

12. Accounting for Current Liabilities
E11-3 In providing accounting services to small businesses, you encounter the following situations pertaining to cash sales.
1. Warkentinne Company rings up sales and sales taxes separately on its cash register. On April 10, the register totals are sales $30,000 and sales taxes $1,500.
2. Rivera Company does not segregate sales and sales taxes. Its register total for April 15 is $23,540, which includes a 7% sales tax.
Instructions: Prepare the entry to record the sales transactions and related taxes for each client.
LO 3 Explain the accounting for other current liabilities.

13. Accounting for Current Liabilities
E Warkentinne Company rings up sales and sales taxes separately on its cash register. On April 10, the register totals are sales $30,000 and sales taxes $1,500.
Cash 31,500
Sales 30,000
Sales tax payable 1,500
LO 3 Explain the accounting for other current liabilities.

14. Accounting for Current Liabilities
E Rivera Company does not segregate sales and sales taxes. Its register total for April 15 is $23,540, which includes a 7% sales tax.
$23,540 / 1.07 = $22,000
Cash 23,540
Sales 22,000
Sales tax payable 1,540
LO 3 Explain the accounting for other current liabilities.

15. 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.
LO 3 Explain the accounting for other current liabilities.

16. Accounting for Current Liabilities
E11-4 Guyer Company publishes a monthly sports magazine, Fishing Preview. Subscriptions to the magazine cost $20 per year. During November 2008, Guyer sells 12,000 subscriptions beginning with the December issue. Guyer prepares financial statements quarterly and recognizes subscription revenue earned at the end of the quarter.The company uses the accounts Unearned Subscriptions and Subscription Revenue.
Instructions: (a) Prepare the entry in November for the receipt of the subscriptions. (b) Prepare the adjusting entry at December 31, (c) Prepare the adjusting entry at March 31, 2009.
LO 3 Explain the accounting for other current liabilities.

17. Accounting for Current Liabilities
E11-4 (a) Prepare the entry in November for the receipt of the subscriptions. (b) Prepare the adjusting entry at December 31, (c) Prepare the adjusting entry at March 31, 2009.
Nov. 30
Cash (12,000 x $20) 240,000
Unearned subscriptions 240,000
Dec month
Unearned subscriptions 20,000
Subscriptions revenue 20,000
Mar months
Unearned subscriptions 60,000
Subscriptions revenue 60,000
LO 3 Explain the accounting for other current liabilities.

18. 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.
LO 3 Explain the accounting for other current liabilities.

19. Accounting for Current Liabilities
Statement Presentation and Analysis
Illustration 11-3
LO 4 Explain the financial statement presentation and analysis of current liabilities.

20. Accounting for Current Liabilities
Question
Working capital is calculated as:
current assets minus current liabilities.
total assets minus total liabilities.
long-term liabilities minus current liabilities.
both (b) and (c).
LO 4 Explain the financial statement presentation and analysis of current liabilities.

21. Accounting for Current Liabilities
Statement Presentation and Analysis
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 11-4 & 5
LO 4 Explain the financial statement presentation and analysis of current liabilities.

22. 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.
LO 5 Describe the accounting and disclosure requirements for contingent liabilities.

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

24. Contingent Liabilities
Question
A contingent liability should be recorded in the accounts when:
it is probable the contingency will happen, but the amount cannot be reasonably estimated.
it is reasonably possible the contingency will happen, and the amount can be reasonably estimated.
it is probable the contingency will happen, and the amount can be reasonably estimated.
it is reasonably possible the contingency will happen, but the amount cannot be reasonably estimated.
LO 5 Describe the accounting and disclosure requirements for contingent liabilities.

25. 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.
LO 5 Describe the accounting and disclosure requirements for contingent liabilities.

26. Contingent Liabilities
BE11-6 On December 1, Diaz Company introduces a new product that includes a one-year warranty on parts. In December, 1,000 units are sold. Management believes that 5% of the units will be defective and that the average warranty costs will be $80 per unit. Prepare the adjusting entry at December 31 to accrue the estimated warranty cost.
1,000 units x 5% x $80 = $4,000
Dec. 31 Warranty expense 4,000
Warranty liability 4,000
LO 5 Describe the accounting and disclosure requirements for contingent liabilities.