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Current Liabilities and Payroll
11
Learning Objective 13-1
Describe the nature of the adjusting process.
Learning Objective 13-1
Describe the nature of the adjusting process.
9-2
Insert Chapter Objectives
Current Liabilities and Payroll
1 Define 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 employer earnings and deductions from savings.
After studying this chapter, you should be able to:
11-2
3 Describe 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.
5 Describe the accounting treatment for contingent liabilities and journalize entries for product warranties.
11-3
Current Liabilities and Payroll (continued)
11-4
Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable.
1
11-4
11-5
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
11-6
Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale.
1
11-7
1
Accounts Payable as a Percent of Total Current LiabilitiesExhibit 1
11-8
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.
1
11-9
The total amount of the installments due after the coming year is classified as a long-term liability.
1
11-10
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
11-11
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.”
11-12
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.
1
11-13
Description Debit Credit
Bowden Co. (Borrower)
Mdse. Inventory 10,000Accounts Payable 10,000
Coker Co. (Creditor)
Description Debit Credit
Accounts Receivable 10,000Sales 10,000
Cost of Mdse. Sold 7,500Mdse. Inventory 7,500
1
11-14
On May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.
Accounts Payable 10,000Notes Payable 10,000
Description Debit Credit
Bowden Co. (Borrower)
Notes Receivable 10,000Accounts Receivable 10,000
Coker Co. (Creditor)
Description Debit Credit
1
11-15
On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest: $10,000 × 12% × 60/360.
Notes Payable 10,000Interest Expense 200
Cash 10,200
Description Debit Credit
Bowden Co. (Borrower)
Cash 10,200Interest Revenue 200Notes Receivable 10,000
Coker Co. (Creditor)
Description Debit Credit
1
11-16
On September 19, Iceburg Company issues a $4,000, 90-day, 15% note to First National Bank.
1
11-17
On the due date of the note (December 18), Iceburg Company owes $4,000 plus interest of $150 ($4,000 × 15% × 90/360).
1
11-18
Discounting a Note
A discounted note has the following characteristics:
1. The creditor (lender) requires an interest rate, called the discount rate.
2. Interest, called the discount, is computed on the face amount of the note.
3. The debtor (borrower) receives the face amount of the note less the discount, called the proceeds.
4. The debtor pays the face amount of the note on the due date.
1
11-19
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%.
1
ProceedsDiscount: $20,000
× .15 × 90/360
Discount rate
11-20
On November 8 the note is paid in full.
1
The amount paid is the face amount of the note.
11-21
Example Exercise 10-2Proceeds from Notes Payable
1
On July 1, Bella Salon Company issued a 60-day note with a face amount of $60,000 to Delilah Hair Product Company for merchandise inventory.
Example Exercise 11-1
For Practice: PE 11-1A, PE 11-1B
Follow My Example 6-1 Follow My Example 11-1
a. $60,000
11-21
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%.
b. $59,400 [$60,000 – ($60,000 × 6% × 60/360)]
11-22
Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings.
2
11-22
11-23
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
11-24
Salary usually refers to payment for managerial and administrative services. Salary is normally expressed in terms of a month or a year.
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11-25
Wages usually refers to payment for employee manual labor. The rate of wages is normally stated on an hourly or weekly basis.
2
11-26
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 regular rate (40 × $34) $1,360Earnings at overtime rate (2 × $51) 102Total earnings $1,462
Computing Employee’s Earnings
2
11-27
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.
2
11-28
2
Employee’s Withholding Allowance Certificate (W-4 Form)
Exhibit 2
11-29
McGrath made $1,462 for the week ending December 27. Since McGrath’s W-4 (Slide 28) claims one withholding allowance, $67 (the assumed standard withholding allowance) is deducted from his gross pay to arrive at $1,395 ($1,462 – $67).
Deductions from Employee’s Earnings:
McGrath Example
2
11-30
2
Wage Bracket Withholding TableExhibit 3
Table for Percentage Method of Withholding WEEKLY Payroll Period
Source: Publication 15, Employer’s Tax Guide, Internal Revenue Service, 2008
11-31
McGrath Example (continued)
Initial withholding (Slide 30)
$ 82.95
Plus [25% × ($1,395 – $653)]
185.50Total federal income taxes
withheld
$268.45
2
11-32
Example Exercise 11-22
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 30) with a $67 standard withholding allowance for each exemption, what is Dunn’s federal income tax withholding?
Federal Income Tax Withholding
11-32
11-33
Example Exercise 11-2 (continued) 2
11-33
For Practice: PE 11-2A, PE 11-2B
Total wage payment $2,250One allowance (provided by IRS) $67Multiplied by allowances claimed on W-4 × 2 134Amount subject to withholding $2,116
Initial withholding from wage bracket in Exh. 3 $302.96Plus additional withholding: 28% of excess
over $1,533 163.24*Federal income tax withholding $466.20
*28% × ($2,116 – $1,533)
Follow My Example 11-2
11-34
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
11-35
John T. Mcgrath’s annual earnings prior to the payroll period ending on December 27 total $99,038.
Earnings subject to 6% social security tax ($100,000 – $99,038) $ 962Social security tax rate × 6%Social security tax
$57.72Earnings subject to 1.5%
Medicare tax $1,462Medicare tax rate × 1.5%
Medicare tax 21.93Total FICA tax$79.65
John T. McGrath’s FICA Tax
2
11-36
John T. McGrath’s Net Pay
Gross earnings for the week $1,462.00 Deductions:
Social security tax (Slide 35) $ 57.72Medicare tax (Slide 35) 21.93Federal income tax (Slide 31) 268.45Retirement savings 20.00United Way 5.00 Total deductions 373.10
Net pay $1,088.90
2
11-37
Example Exercise 11-32
Karen Dunn’s weekly gross earnings for the week ending Dec. 3rd were $2,250, and her federal income tax withholding was $466.19. 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?
Employee Net Pay
11-37
11-38
Example Exercise 11-3 (continued) 2
Total wage payment $2,250.00Less: Federal income tax withholding 466.19
Earnings subject to social securitytax ($100,000 – $98,000) $2,000
Social security tax rate × 6%Social security tax 120.00Medicare tax ($2,250 × 1.5%) 33.75
Net pay $1,630.06
11-38
For Practice: PE 11-3A, PE 11-3B
Follow My Example 11-3
11-39
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
11-40
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.
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11-41
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
11-42
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
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2
Responsibility for Tax PaymentsExhibit 4
11-44
Describe payroll accounting systems that use a payroll register, employee earnings records, and a general journal.
3
11-44
11-45
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
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Payroll Register
The payroll register is a multicolumn report used for summarizing the data for each payroll period. The right hand columns of the payroll register indicate the accounts debited for the payroll expense. These columns are often referred to as the payroll distribution.
3
11-47
3
Payroll Register (left side)Exhibit 5
11-48
33
Payroll Register (right side)Exhibit 5
11-49
The entry based on the payroll register in Exhibit 5 (Slides 47 and 48) is shown below.
3
11-50
Example Exercise 10-2Journalize Period Payroll
3 Example Exercise 11-4
For Practice: PE 11-4A, PE 11-4B11-50
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.
Follow My Example 6-1 Follow My Example 11-4
Salaries Expense……………………………… 15,000Social Security Tax Payable………........ 900Medicare Tax Payable………………….... 225Federal Withholding Tax Payable……… 2,925Salaries Payable………………………….. 10,950
11-51
Recording and Paying Payroll TaxesEverson Company’s fiscal year ends on April 30. Assume the following payroll data on December 31, 2009:
Wages owed employees on Dec. 31 $26,000Wages subject to payroll taxes:
Social security tax (6.0%) $18,000Medicare taxes (1.5%) 26,000State (5.4%) and federal (0.8%) unemployment compensation tax 1,000
3
11-52
If the payroll is paid on December 31, the payroll taxes are computed as follows:
Social security $1,080 ($18,000 × 6.0%)Medicare tax 390 ($26,000 × 1.5%)State unemployment
compensation tax (SUTA) 54 ($1,000 × 5.4%)Federal unemployment
compensation tax (FUTA) 8 ($1,000 × 0.8%) Total payroll taxes $1,532
3
11-53
If the payroll is paid on January 2, the entire $26,000 is subject to all payroll taxes, as computed as follows:
Social security $1,560 ($26,000 × 6.0%)Medicare tax 390 ($26,000 × 1.5%)State unemployment
compensation tax (SUTA) 1,404 ($26,000 × 5.4%)Federal unemployment
compensation tax (FUTA) 208 ($26,000 × 0.8%) Total payroll taxes $3,562
3
11-54
Assume that in Exhibit 5 (Slides 47 and 48) the earnings subject to state and federal unemployment compensation taxes are $2,710. In addition, assume a SUTA rate of 5.4% and a FUTA rate of 0.8%. What is the rate for each of the following? Social security ?Medicare tax ?State unemployment
compensation tax (SUTA) ?Federal unemployment
compensation tax (FUTA) ? Total payroll taxes $?
Click to go to Exhibit 5. To return to this slide, type “54” and press “Enter.”
Left click for answers
$ 643.07 (from Exhibit 5)
146.34 ($2,710 × 5.4%)
208.53 (from Exhibit 5)
21.68 ($2,710 × 0.8%)$1,019.62
3
11-55
3Journal Entry to Record
Weekly Payroll
11-56
Example Exercise 11-53
Journalize Payroll Taxes
11-56
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.
11-57
Example Exercise 11-5 (continued) 3
Payroll Tax Expense………………………….. 1,450.50Social Security Tax Payable……………. 900.00Medicare Tax Payable…………………… 225.00State Unemployment Tax Payable ($5,250 × 5.4%)………………………….. 283.50Federal Unemployment Tax Payable ($5,250 × 0.8%)………………………….. 42.00
11-57
For Practice: PE 11-5A, PE11-5B
Follow My Example 11-5
11-58
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.
Employee’s Earnings Record
3
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3
Employee’s Earnings Record (left side)
Exhibit 6
11-60
3
Employee’s Earnings Record (right side)Exhibit 6
11-61
3W-2 Wage and Tax Statement
11-62
3
Payroll CheckExhibit 7
11-63
3
Flow of Data in a Payroll SystemExhibit 8
11-64
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
11-65
5. 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.
11-66
Journalize entries for employee fringe benefits, including vacation pay, and pensions.
4
11-66
11-67
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
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4
Benefit Dollars as a Percent of Payroll CostsExhibit 9
11-69
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
325,000
11-70
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
11-71
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
11-72
The pension plan of Heaven Scent Perfumes Company requires an employer contribution of 10% of employee monthly salaries to an employee 401k plan. December salaries totaled $500,000, so $50,000 was sent to the employees’ plan administrator.
4
11-73
The entry to record the payment to the plan administrator is shown below:
4
11-74
Defined Benefit Plan
In a defined benefit plan, employers promise employees a fixed annual pension benefit at retirement, based on years of service and compensation levels.
4
11-75
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
11-76
Postretirement Benefits Other Than Pensions
Employees may earn rights to other postretirement benefits, such as dental care, eye care, medical care, life insurance, tuition assistance, tax services, and legal services.
4
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Example Exercise 10-2
Vacation Pay and Pension Benefits
4
Manfield Service, Inc. provides their employees vacation benefits and a defined contribution pension plan. Employees earned vacation pay of $44,000 for the period. The pension plan requires a contribution to the plan administrator equal to 8% of employee salaries. Salaries were $450,000 during the period.
Provide the journal entry for (a) the vacation pay and (b) pension benefit.
Example Exercise 11-6
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Example Exercise 11-6 (continued) 4
a. Vacation Pay Expense…………. 44,000Vacation Pay Payable……….. 44,000
Vacation pay accruedfor the period.
b. Pension Expense………………. 36,000Cash……………………………. 36,000
Pension contribution, 8%of $450,000 salary.
11-78
For Practice: PE 11-6A, PE 11-6B
Follow My Example 11-6
11-79
Describe the accounting treatment for contingent liabilities and journalize entries for product warranties.
5
11-79
11-80
Some liabilities may arise from past transactions if certain events occur in the future. These potential obligations are called contingent liabilities.
5
Contingent Liabilities
11-81
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
11-82
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
11-83
If a customer required a $200 part replacement on August 16, the entry would be:
5
11-84
5
Accounting Treatment of Contingent LiabilitiesExhibit 10
11-85
Example Exercise 10-2
Estimated Warranty Liability
5 Example Exercise 11-7
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.
11-85
11-86
Example Exercise 11-7 (continued) 5
a. Product Warranty Expense………………… 8,400Product Warranty Payable…………….. 8,400
To record warranty expense for August, 6% × $140,000.
b. Product Warranty Payable…………………. 290Supplies…………………………………… 200Wages Payable…………………………… 90
Replaced defective part underwarranty.
11-86
For Practice: PE 11-7A, PE11-7B
Follow My Example 11-7
11-87
Noble Co. Hart Co.Quick assets:
Cash $147,000 $120,000Accounts receivable (net) 84,000 472,000 Total quick assets $231,000 $592,000
Current liabilities $220,000 $740,000
Quick Ratio
Quick assetsCurrent 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.
5
11-88
Noble Co. Hart Co.Quick assets:
Cash $147,000 $120,000Accounts receivable (net) 84,000 472,000 Total quick assets $231,000 $592,000
Current liabilities $220,000 $740,000
Quick Ratio
Quick assetsCurrent liabilities
Quick Ratio =
Noble Company =$231,000$220,000
= 1.05
5
11-89
Noble Co. Hart Co.Quick assets:
Cash $147,000 $120,000Accounts receivable (net) 84,000 472,000 Total quick assets $231,000 $592,000
Current liabilities $220,000 $740,000
Quick Ratio
Quick assetsCurrent liabilities
Quick Ratio =
Hart Company =
$592,000$740,000
= 0.80
5
11-90
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