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11 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Current Liabilities
and Payroll
Chapter 11
11 - 2©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 1
Account for current liabilities
of known amount.
11 - 3©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Accounts Payable...
– are amounts owed to suppliers for goods or services purchased on account.
Accounts payable do not bear interest expense for the debtor.
11 - 4©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Accounts Payable Example
Suppose that on June 3, Lloyd’s Sporting Store purchased $1,000 of goods on account from Patti Wholesaler.
What is the journal entry?
Inventory 1,000 Accounts Payable 1,000
Purchase on account
11 - 5©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Short-Term Notes Payable...
– are promissory notes payable due within one year.
In addition to recording the note payable, the business must also pay interest expense.
If interest expense is accrued at the end of the period, interest payable must also be recorded.
11 - 6©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Short-Term Notes Payable Example
On April 30, Patti purchased inventory for $10,000 by issuing a 90-day, 10% note payable.
What is the journal entry?
Inventory 10,000Notes Payable 10,000
Purchase inventory on a 90-day, 10% note
11 - 7©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Short-Term Notes Payable Example
Assume the accounting period ended May 31.
How much interest was accrued as of May 31?
$10,000 × 10% × 31/360 = $86.11 How does Patti record the payment at
maturity?
11 - 8©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Short-Term Notes Payable Example
July 29Note Payable 10,000.00Interest Payable 86.11Interest Expense 163.89
Cash10,250.00
11 - 9©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Short-Term Notes PayableIssued at a Discount
Issuing a note at a discount means the bank subtracts the interest from the note’s face value.
Suppose that on February 25, Shanitha discounts a $10,000, 90-day note, payable to the bank at 12%.
The business will receive $9,700. $10,000 × 0.12 × 90/360 = $300
11 - 10©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Short-Term Notes PayableIssued at a Discount
February 25Cash 9,700Discount on Note Payable 300
Notes Payable, Short-Term 10,000Discount a $10,000, 90-day,10% note payable to borrow cash
February 25Cash 9,700Discount on Note Payable 300
Notes Payable, Short-Term 10,000Discount a $10,000, 90-day,10% note payable to borrow cash
11 - 11©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Short-Term Notes PayableIssued at a Discount
Shanitha Balance Sheet
Current liabilities:Note payable, short-term $10,000Less: Discount on note payable 300Note payable, short-term, net $ 9,700
11 - 12©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Short-Term Notes PayableIssued at a Discount
What is the accrued interest at the end of the month?
$10,000 × 12% × 3/360 = $10
February 28Interest Expense 10
Discount on Note Payable 10Accrue interest expense at month end
11 - 13©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sales Tax Payable Example
Most states levy a sales tax on retail sales. Suppose that a store sold $3,000 worth of
merchandise on a given Saturday. The business collected an additional 5%
in sales tax. How much is the sales tax liability? $150
11 - 14©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Accrued Expenses (Liabilities)...
– are expenses that have been incurred but not recorded.
– salaries– taxes withheld– interest– utilities
11 - 15©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Payroll Liabilities
Salary Expense 10,000Employee Income Tax Payable 1,200FICA Tax Payable 800Employee Union Dues Payable 140Salary Payable 7,860
To record salary expense
11 - 16©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Unearned Revenue Example
Assume that on June 1, Dennis’s Landscaping collected $1,500 for services to be provided during the months of June, July, and August.
June 1Cash 1,500
Unearned Revenue 1,500Received cash in advance
11 - 17©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Unearned Revenue Example
What entry does Dennis record on June 30?
June 30Unearned Revenue 500
Service Revenue 500Earned service revenue that was collectedin advance
11 - 18©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 2
Account for current liabilities
that must be estimated.
11 - 19©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Estimated Warranty Payable
The matching principle demands that the company record the warranty expense in the same period that the business recognizes sales revenue.
11 - 20©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Estimated Warranty Payable Example
Patti Wholesaler made sales of $1,000,000 subject to product warranties.
In the past years, claims have averaged 2%.
Warranty Expense 20,000Estimated Warranty Payable 20,000
To accrue warranty expense
11 - 21©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Estimated Warranty Payable Example
On January 28, a customer returned a defective product and was given a $300 refund.
Estimated Warranty Payable 300Cash 300
To record refund under warranty
11 - 22©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Estimated Vacation PayLiability Example
Suppose Lloyd’s Sporting Store has a March payroll of $10,000 and vacation pay adds 4% (2 weeks of annual vacation divided by 50 workweeks each year).
How much vacation pay should be accrued?
11 - 23©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Estimated Vacation PayLiability Example
March 31Vacation Pay Expense 400
Estimated Vacation Pay Liability 400To accrue vacation expense
11 - 24©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Income Tax Payable
What is the entry a corporation makes to accrue $50,000 of income tax expense for a one-year period?
Income Tax Expense 50,000Income Tax Payable 50,000
To accrue income tax at year end
Income Tax Expense 50,000Income Tax Payable 50,000
To accrue income tax at year end
11 - 25©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Contingent Liability
Report a contingent liability in the notes to the financial statement if it is reasonably possible that a loss or expense will occur.
The FASB says to record an actual liability if it is probable that the business has suffered a loss and its amount can be reasonably estimated.
11 - 26©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Contingent vs. Current Liability
Suppose a hospital has lost a court case for uninsured malpractice.
The hospital estimates that the liability will fall between $1.5 and $2.5 million.
11 - 27©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Contingent vs. Current Liability
The hospital must record a loss and a liability of $1.5 million.
The hospital must disclose in a note the possibility of an additional $1.0 million loss.
11 - 28©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 3
Compute payroll amounts.
11 - 29©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Payroll
Straight time is the base rate paid to employees for a set number of hours.
Overtime is additional time worked by employees for which they received a higher rate (usually 1.5 times the straight time rate).
11 - 30©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Gross Pay and Net Pay
Gross PayGross Pay DeductionsDeductions Net PayNet Pay
11 - 31©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
FICA Tax
The FICA tax has two components:1 Old age, survivors’, and disability insurance
(6.2% applied to the first $80,400 of employee earnings in a year)
2 Health insurance (1.45% applied to all employee earnings)
11 - 32©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Employer Payroll Taxes
Social Security (FICA) tax State unemployment compensation tax Federal unemployment compensation tax
11 - 33©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Unemployment Compensation Taxes
Employers paid 5.4% to the states and 0.8% to the federal government on the first $7,000 of each employee’s annual earnings.
The state government uses the money to pay unemployment benefits to people who are out of work.
11 - 34©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Breakdown of Payroll Costs
Employer disburses $1,200
Employer cost of healthcare to insurance co.
$90
Employer payroll taxesto government
$110
Net pay toemployee
$750
Employee payrolltaxes to government
$230
Employeeunion dues
$20
Employee Gross Pay – $1,000
11 - 35©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 4
Record basic payroll transactions.
11 - 36©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Salary Expense
Salary expense to the employer is the gross salary of all employees.
Employees pay their own income and FICA taxes as well as union dues.
The employer serves as a collecting agent and sends these amounts to the government and union.
11 - 37©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
To Record Salaries Expense:
Salary ExpenseEmployee Income Tax PayableFICA Tax PayableEmployees Union Dues PayableSalary Payable to Employees (take-home
pay)
Salary ExpenseEmployee Income Tax PayableFICA Tax PayableEmployees Union Dues PayableSalary Payable to Employees (take-home
pay)
11 - 38©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
To Record Salaries Expense:
Payroll Tax ExpenseFICA Tax PayableState Unemployment Tax PayableFederal Unemployment Tax
Payable
Payroll Tax ExpenseFICA Tax PayableState Unemployment Tax PayableFederal Unemployment Tax
Payable
11 - 39©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
To Record Salaries Expense:
Health Insurance Expense for Employees
Life Insurance Expense for EmployeesPension Expense
Employee Benefits Payable
Health Insurance Expense for Employees
Life Insurance Expense for EmployeesPension Expense
Employee Benefits Payable
11 - 40©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 5
Use a payroll system.
11 - 41©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Payroll System Components
– payroll record– special payroll bank account– payroll checks– earnings record for each employee
11 - 42©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Payroll Record...
– is also referred to as the payroll journal. It lists payroll data for each employee. It serves as a check register. It provides information for recording
payroll expenses and related withholdings.
11 - 43©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Payroll Bank Account
When companies use a payroll bank account, the company draws a check for the net amount of salary payable to employees on its regular bank account.
The company deposits this check in the special payroll bank account.
11 - 44©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Payroll Bank Account
The company writes paychecks to employees out of the payroll account.
When the paychecks clear the bank, the payroll account has a zero balance.
Disbursing paychecks from a separate bank account isolates net pay for analysis and control.
11 - 45©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Cash Disbursements
When the employer pays the employees, the company debits Salary Payable to Employees and credits Cash.
The liabilities to the government, unions, and other parties is also debited when cash is paid.
11 - 46©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Cash Disbursements
Assume the following journal entry was made at the end of an accounting period:
Salary Expense 180,000Employee Income Tax Payable 45,000FICA Tax Payable 11,160Employee Union Dues Payable 840Salary Payable to Employees 123,000
11 - 47©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Cash Disbursements
What is the journal entry when the employer pays these liabilities?
Employee Income Tax Payable 45,000FICA Tax Payable 11,160Employee Union Dues Payable 840Salary Payable to Employees 123,000
Cash 180,000
11 - 48©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Internal Control over Payrolls
– controls for efficiency– controls for safeguarding payroll
disbursements
11 - 49©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Controls for Efficiency
– making payroll disbursements from one payroll account in one month and from another the next
– following established policies for hiring and firing employees
– complying with government regulations– testing employees for their interest in the job
and their skills to perform the job
11 - 50©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Controls for SafeguardingPayroll Disbursements
Large organizations must establish controls to ensure that payroll disbursements are made only to legitimate employees.
Duties of hiring and firing should be separated from the duties of accounting for payroll and distributing paychecks.
11 - 51©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Controls for SafeguardingPayroll Disbursements
Requiring an identification badge bearing an employee’s photograph also helps internal control.
A formal time-keeping system helps ensure that employees have actually worked.
11 - 52©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 6
Report current liabilities
on the balance sheet.
11 - 53©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Report Current Liabilities
Companies report current liabilities on the balance sheet.
– current liabilities of known amount (payroll)
– current liabilities that must be estimated (warranties)
11 - 54©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Report Current Liabilities
At the end of the year, companies report the amount of payroll liabilities owed to all parties.
The liability at year end is the amount of the payroll expense that is still unpaid.
11 - 55©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Liabilities KnownWhen Recorded
– accounts payable– short-term notes payable– sales tax payable– current portion of long-term debt– accrued expenses payable– unearned revenues
11 - 56©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Liabilities EstimatedWhen Recorded
– warranty payable– income tax payable– vacation pay liability
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