Current Liabilities and Payroll

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Chapter 10

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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.2

Account for current liabilities of known amount

Account for current liabilities that mustbe estimated

Calculate payroll and payroll tax amounts

Journalize basic payroll transactions


Account for current liabilities of known amount

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Current liabilities must be paid in a year or lessAccounts payable

Short-term notes payableSales tax payableCurrent portion of long-term notes payableAccrued liabilitiesUnearned revenues

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For products and services purchased on accountIntegrated accounts payable and inventory systems

Paid later within a discount period or notUsually due in 30 days

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Common form of financing

Incurs interest expense which is paid later

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Tax levied by state on retail salesRecord sales, with the taxes, as follows:

Record and forward the sales tax to the state

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Initially note recorded as long-termSecond entry needed to record current portion

Principal portion of long-term debt due currently

Does not change total amount dueInterest still accrues

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Expense incurred, but not yet paidOften an adjusting entry

Debit expense and credit an accrued liabilityExamples:

Salaries Interest payable

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Cash received in advance of performing workObligation to provide goods or services

Revenue earned as goods delivered or work performedDebit liability and credit revenues as earned

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On December 31, 2012, Edgmont, Co., purchased $10,000 of inventory on a one-year, 10% note payable. Edgmont uses a perpetual inventory system.

1.Journalize the company’s accrual of interest expense on June 30, 2013, its fiscal year-end.

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Journal Entry

DATE ACCOUNTS DEBIT CREDIT

Jun 30 Interest expense 500

Interest Payable 500


(Continued)

2. Journalize the company’s payment of the note plus interest on December 31, 2013

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Journal Entry


Dec 31 Notes payable, short-term 10,000

Interest payable 500

Interest expense 500

Cash 11,000


Account for current liabilities that must be estimated

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Warranty PayableGuarantee that products are free of defectsRecorded in the same period as salesAs sales are incurred and inventory updated, also record estimated warranty expense

Remove payable as warranty claims honored

Liability balance equals expected future claims14


Potential liabilityMay or may not become actual liabilityDepends on a future eventAccounting treatment dependson likelihood of actual loss

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How to report based upon likelihood

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Trekster Corporation guarantees its snowmobiles for three years. Company experience indicates that warranty costs will add up to 4% of sales.Assume that the Trekster dealer in Colorado Springs made sales totaling $533,000 during 2012. The company received cash for 30% of the sales and notes receivable for the remainder. Warranty payments totaled $17,000 during 2012.

Requirements:

1. Record the sales, warranty expense, and warranty payments for the company.2. Post to the Estimated warranty payable T-account. At the end of 2012, how much in Estimated warranty payable does the company owe?

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1. Record the sales, warranty expense, and warranty payments for the company.

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Journal Entry

DATE ACCOUNTS AND EXPLANATIONS DEBIT CREDIT

Cash 159,900

Notes receivable 373,100

Sales revenue 533,000

Recorded sales.



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Journal Entry


Warranty expense 21,320

Estimated warranty payable 21,320

Record the warranty expense.



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Journal Entry


Estimated warranty payable 17,000

Cash 17,000

Payment of warranty payable.


2. Post to the Estimated warranty payable T-account. At the end of 2012, how much in Estimated warranty payable does the company owe?

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17,000 21,320

Bal 4,320

Estimated warranty payable


Calculate payroll and payroll tax amounts

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SalaryPay stated at an annual, monthly, or weekly rate

Wages Pay stated at an hourly rate

CommissionPay stated as percentage of sales amount

Bonus Pay over and above base salary

BenefitsExtra compensation items not paid directly to the employee


Straight timeBase rate paid for a set period

OvertimeAdditional time worked over straight timeHigher pay rateDepends upon job classification and wage and hour laws

Gross payTotal amount earned during a pay periodExpense to the employer

Net payTake-home payThe amount the employee keeps

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Required deductions from employees’ gross payFederal income taxState income taxSocial Security (FICA) tax

Amount depends on:Gross payWithholding allowances–Form W-4

Optional deductions–at employee’s requestInsuranceRetirementCharitable gifts

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Employee files to indicate allowances claimed

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Name and address Soc. Sec Number

Allowances claimed

Signature and Date Employer and address


Program to provide retirement, disability, and medical benefitsTwo components:

Old age, survivors’ and disability insurance (OASDI)

6.2% of pay up to a wage base In 2010, wage base = $106,800

Health insurance (Medicare)1.45% of pay, no maximum wage base

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An employee earned $99,800 prior to December and $10,000 for DecemberTotal of $109,800 for the year

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* Assume that the 2012 FICA tax rate is 7.65%.


Employers must pay additional payroll taxesThese are not employee deductionsEmployer (FICA) tax

Employer matches amount withheld from employees’ paySS system is funded by equal contributions

State, federal unemployment compensation taxes

Finances workers’ compensation for people laid offSUTA (State unemployment tax)

Usually 5.4% of first $7,000 paid to each employee

FUTA (Federal unemployment tax Usually 0.8% of the first $7,000 paid to each employee

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Payroll costs for an employee who earns a weekly salary of $1,000

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Gloria Traxell is paid $800 for a 40-hour workweek and time-and-a-half for hours above 40.

Requirements:

1. Compute Traxell’s gross pay for working 48 hours during the first week of February. Carry amounts to the nearest cent.

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Straight-time pay for 40 hours $ 800.00

Overtime pay for 8 hours 240.00

Total gross pay $1,040.00


2. Traxell is single, and her income tax withholding is 10% of total pay. Traxell’s only payroll deductions are payroll taxes. Compute Traxell’s net (take-home) pay for the week. Use a 7.65% FICA tax rate, and carry amounts to the nearest cent.

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Total gross pay $1,040.00

Less:

Withhold income tax $ 104.00

FICA tax 79.56 183.56

Net pay $ 856.44


Return to the Gloria Traxell payroll situation in Short Exercise 10-4. Traxell’s employer, College of San Bernardino, pays all the standard payroll taxes plus benefits for the employee retirement plan (5% of total pay), health insurance ($113 per employee per month), and disability insurance ($8 per employee per month).

Requirements:1. Compute College of San Bernardino’s total expense of employing Gloria Traxell for the 48 hours that she worked during the first week of February. Carry amounts to the nearest cent.

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Straight-time pay for 40 hours $ 800.00

Overtime pay for 8 hours 240.00

Total pay to employee $1,040.00

Employer payroll taxes:

FICA $79.56

State Unemployment Taxes 56.16

Federal Unemployment Taxes 8.32

Benefit cost:

Retirement plan 52.00

Health insurance 28.25

Disability insurance 2.00

Total payroll taxes and benefit cost 226.29

Total expense of employer $1,266.29


Journalize basic payroll transactions

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1. Record the payroll expense and paymentRecord total payroll expense as a liabilityRecord payment of salaries with deductions recorded as liabilities.

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Liabilities to be paid by employer to the respective agencies on behalf of the employee.


2. Record any employee benefits paid by the employer

Record total benefit expense as a liabilityRecord the benefits paid as expenses

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3. Record the employer payroll tax expense and payment

Record payroll tax expense as a liabilityRecord payment of employee withholdings and the matching portion of FICA

**No FUTA or SUTA tax is due in December as most entities are over the maximum wage base.

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Controls for efficiencyUse of two payroll bank accountsUse of computer processingUse of direct deposits to facilitate reconciliation

Controls to safeguard payroll disbursementsHiring and firing separate from accountingUse of photo IDs and time clocks

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Companies have separate departments for payroll functions:

Human Resources Department hires and firesPayroll Department maintains employee recordsAccounting Department records transactionsThe Treasurer (or bursar) distributes paychecks

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Consult your solutions for Short Exercises 10-4 and 10-5.

1. Journalize salary expense for College of San Bernardino related to the employment of Gloria Traxell.

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Journal Entry


Salary expense 1,040

Salary payable 1,040


S10-7: JOURNALIZING PAYROLL

1. Journalize salary payment for College of San Bernardino related to the employment of Gloria Traxell.

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Journal Entry


Salary payable 1040.00

Employee income tax payable 104.00

FICA tax payable 79.56

Cash 856.44


2. Journalize benefits expense for College of San Bernardino related to the employment of Gloria Traxell.

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Journal Entry


Retirement Plan expense 41.60

Health insurance expense 26.25

Disability insurance expense 2.75

Employer benefits payable 70.60


3. Journalize employer payroll taxes for College of San Bernardino related to the employment of Gloria Traxell.

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Journal Entry


Payroll tax expense 144.04

FICA tax payable 79.56

State Unemployment Taxes 56.16

Federal Unemployment Taxes 8.32


A current liability must be paid in a year or less. For some current liabilities, the exact amount is known or can easily be calculated, such as the amount of sales tax payable, interest owed (payable) on a note, or the amount of work still owed to a customer who paid in advance (unearned revenue). For some, the current liability is known based on a contract, such as with the current portion of long-term notes payable. Still others must be accrued and are known based on a bill received or hours worked, such as accounts payable or salaries payable. The key to all of these is the current liability amount is known, not estimated.

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Estimated current liabilities are owed, but the amount owed is based on an educated guess–not an exact known amount. So, for example, estimated warranty claims are recorded as a liability at the time a sale is made. The estimated expense and liability are journalized at the time of sale because of the matching principle. So the sales revenue and its related expense (estimated warranty claims) are reported (matched) in the same time period on the income statement.

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Almost all businesses have employees and, therefore, have payroll. It is important to remember that taxes the employee pays are deducted from the employee’s gross pay before the employee gets his or her paycheck. The employer must also pay taxes based on the gross pay of each employee. Each tax has its own unique purpose as well as its own annual maximum.

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Recording payroll amounts requires five basic journal entries:

The first entry records the gross payroll expense and liability. The second entry records the payment of net pay and the accrual of all employee paid payroll liabilities. The third entry records employee benefits. The fourth journal entry records the employer payroll liabilities. The last journal entry records the payment of taxes to the taxing authorities.

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These payroll liabilities are all current liabilities of the company. Internal controls over payroll focus on operational efficiency and insuring the payroll disbursements are valid and accurate.

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Current Liabilities and Payroll