C10 - 1 Learning Objectives Power Notes 1.The Nature of Current Liabilities 2.Short-Term Notes Payable 3.Contingent Liabilities 4.Payroll and Payroll Taxes

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Learning Objectives

Power Notes

1. The Nature of Current Liabilities

2. Short-Term Notes Payable

3. Contingent Liabilities

4. Payroll and Payroll Taxes

5. Accounting Systems for Payroll

6. Employees’ Fringe Benefits

7. Financial Analysis and Interpretation

Chapter F10

Current Liabilities Current Liabilities

C10

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• Short-Term Notes Payable• Product Warranty Liability• Payroll and Payroll Taxes• Employees’ Earnings• Employer’s Payroll Taxes• Payroll System and Data Flow• Quick Ratio

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Power NotesChapter F10


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Short-Term Notes PayableShort-Term Notes Payable

Description Debit Credit

Mdse. Inventory 10,000Accts. Payable 10,000

Accts. Receivable 10,000Sales 10,000

Cost of Mdse. Sold 7,500Mdse. Inventory 7,500

Bowden Co. (Buyer/Borrower)Bowden Co. (Buyer/Borrower) Coker Co. (Seller/Creditor)Coker Co. (Seller/Creditor)


May 1. Bowden Co. purchased merchandise on account from Coker Co., $10,000, terms 2/10, n/30

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Accts. Payable 10,000Notes Payable 10,000



Notes Receivable 10,000Accts. Receivable 10,000



May 31. Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.

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Accts. Payable 10,000Notes Payable 10,000

Notes Payable 10,000Interest Expense 200

Cash 10,200



Notes Receivable 10,000Accts. Receivable 10,000

Cash 10,200Interest Revenue 200Notes Receivable 10,000



July 30. Bowden Co. paid the amount due. Interest: $10,000 x 12% x 60 / 360 = $200

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DateDate DescriptionDescription DebitDebit CreditCredit

Product Warranty LiabilityProduct Warranty Liability

Product Warranty Expense 3,000Product Warranty Payable 3,000

Estimated warranty: $60,000 x 5% = $3,000

Dec. 31

Sales of $60,000 with a 36-month warranty.Estimated average cost to repair defects is 5%.

To match revenues and expenses properly, warranty costs should be recognized as expense in the same period in which related revenues are recorded.

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1. Good employee relations demand that payrolls be

calculated accurately and paid as scheduled.

2. Payroll expenditures are subject to a variety of

federal, state, and local taxes.

3. Total payroll expense (gross payroll plus payroll

taxes) has a major impact on net income.

Payroll and Payroll TaxesPayroll and Payroll Taxes

Payroll is the amount paid to employees for services provided. Payrolls are important because:

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Base earnings (40 x $25) $1,000Overtime earnings (4 x $37.50) 150 Total earnings $1,150

Base earnings (44 x$25) $1,100Overtime premium (4 x $12.50) 50 Total earnings $1,150

Gross Pay CalculationGross Pay Calculation

John T. McGrath is employed by McDermott Supply Co. at the rate of $25 per hour, plus 1.5 times the normal hourly rate for hours over 40 per week. For the week ended December 27, McGrath worked 44 hours.

Employee viewpoint:Employee viewpoint:

Employer viewpoint:Employer viewpoint:

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Base earnings (40 x$25) $1,000Overtime earnings (4 x $37.50) 150 Total earnings $1,150

Base earnings (44 x$25) $1,100Overtime premium (4 x $12.50) 50 Total earnings $1,150

Gross Pay CalculationGross Pay Calculation

John T. McGrath is employed by McDermott Supply Co. at the rate of $25 per hour, plus 1.5 times the normal hourly rate for hours over 40 per week. For the week ended December 27, McGrath worked 44 hours.

Same total earnings

but a different

view of the overtime

hours

Employee viewpoint:Employee viewpoint:

Employer viewpoint:Employer viewpoint:

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($70,000 - $69,150) $850Social security tax rate x 6% Social security tax $51.00

Current earnings $1,150Medicare tax rate x 1.5% Medicare tax 17.25Total FICA tax $68.25

FICA Tax CalculationFICA Tax Calculation

Assume that John T. McGrath’s annual earnings prior to the current period total $69,150. The current period earnings are $1,150.

FICA tax calculation:FICA tax calculation:

Earnings subject to 6.0% social security tax

Earnings subject to 1.5% Medicare tax

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Withholding Taxes, Other DeductionsWithholding Taxes, Other Deductions

Employers are required to withhold federal income tax from each employee based on the withholding table and information provided by the employee’s W-4 form.

Federal income tax and FICA tax must be withheld from the pay of each employee.

Deductions for other purposes may be withheld by mutual agreement.

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Earnings:Earnings:Regular earnings $1,000.00Overtime earnings 150.00

Total $1,150.00Deductions:Deductions:

Social security tax tax $ 51.00Medicare tax 17.25Federal income tax 237.00Retirement savings 20.00United Way 5.00

Total deductions 330.25Net pay $ 819.75

John T. McGrath is single, has declared one withholding allowance, and had gross pay of $1,150 for the week ended December 27.

Employee Net Pay CalculationEmployee Net Pay Calculation

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Earnings:Earnings:Regular $13,328.00Overtime 574.00

Total $13,902.00Deductions:Deductions:

Social security tax $ 643.07Medicare tax 208.53Federal income tax 3,332.00Retirement savings 680.00United Way 470.00Accounts receivable 50.00

Total 5,383.60Net amount paid $ 8,518.40

Accounts debited:Accounts debited:Sales Salaries Expense $11,122.00Office Salaries Expense 2,780.00

Total (as above) $13,902.00

Payroll Register SummaryPayroll Register Summary

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Recording Employees’ EarningsRecording Employees’ Earnings

Date Description Debit Credit

12/27 Sales Salaries Expense 11,122.00Office Salaries Expense 2,780.00

Social Security Tax Payable 643.07Medicare Tax Payable 208.53Employees Fed. Inc. Tax Payable 3,332.00Retirement Savings Deductions Payable 680.00United Way Deductions Payable 470.00Accounts Receivable–Fred G. Elrod 50.00Salaries Payable 8,518.40

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1. FICA tax must be paid by the employer on the earnings of each employee.

2. Employers must pay federal unemployment compensation tax at the rate of .8% (.008) on the first $7,000 of annual earnings of each employee.

3. Employers in most states also pay state unemployment compensation tax based on claims experience at a rate not to exceed 5.4% (.054) of the first $7,000 of annual earnings.

Employer’s Payroll TaxesEmployer’s Payroll Taxes

In addition to the amounts due employees, the employer must calculate and pay the following:

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Recording Employer’s Payroll TaxesRecording Employer’s Payroll Taxes

General Journal


12/27 Payroll Tax Expense 1,019.62Social Security Tax Payable 643.07Medicare Tax Payable 208.53State Unemployment Tax Payable 146.34Federal Unemployment Tax Payable 21.68

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Employer’s Total Payroll CostsEmployer’s Total Payroll Costs


12/27 Sales Salaries Expense 11,122.00Office Salaries Expense 2,780.00

Social Security Tax Payable 643.07Medicare Tax Payable 208.53Employees Fed. Inc. Tax Payable 3,332.00Retirement Savings Deductions Payable 680.00United Way Deductions Payable 470.00Accounts Receivable–Fred G. Elrod 50.00Salaries Payable 8,518.40

12/27 Payroll Tax Expense 1,019.62Social Security Tax Payable 643.07Medicare Tax Payable 208.53State Unemployment Tax Payable 146.34Federal Unemployment Tax Payable 21.68

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Employer’s Total Payroll CostsEmployer’s Total Payroll Costs


12/27 Sales Salaries Expense 11,122.0011,122.00Office Salaries Expense 2,780.002,780.00

Social Security Tax Payable 643.07Medicare Tax Payable 208.53Employees Fed. Inc. Tax Payable 3,332.00Retirement Savings Deductions P 680.00United Way Deductions Payable 470.00Accounts Receivable–Fred G. Elr 50.00Salaries Payable 8,518.40

TotalTotalPayrollPayrollExpensExpens

ee

12/27 Payroll Tax Expense 1,019.621,019.62Social Security Tax Payable 643.07Medicare Tax Payable 208.53State Unemployment Tax Payable 146.34Federal Unemployment Tax Payable 21.68

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Flow of Data in a Payroll SystemFlow of Data in a Payroll System

Updated VariablesUpdated Variables(cumulative (cumulative

earnings, taxes)earnings, taxes)

Constant DataConstant Data(rates of pay,(rates of pay,

tax, etc.)tax, etc.)

Current Period’sCurrent Period’sVariablesVariables

(hours worked)(hours worked)

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PAYROLL PAYROLL REGISTER REGISTER



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EMPLOYEES’EMPLOYEES’EARNINGSEARNINGSRECORDSRECORDS



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Wage and TaxWage and TaxStatementsStatements

Payroll TaxPayroll TaxReturnsReturns









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Payroll ChecksPayroll Checksand Statementsand Statements











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GENERALGENERALLEDGERLEDGER




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FinancialFinancialStatementsStatements








GENERALGENERALLEDGERLEDGER




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Solvency Measures — Quick RatioSolvency Measures — Quick Ratio

Noble Co. Hart Co.Quick assets:

Cash $ 100,000 $ 55,000Cash equivalents 47,000 65,000Accounts receivable (net) 84,000 472,000 Total $231,000 $592,000

Current liabilities $220,000 $740,000

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Solvency Measures — Quick RatioSolvency Measures — Quick Ratio

Use: To indicate instant debt-paying abilityUse: To indicate instant debt-paying ability

Noble Co. Hart Co.Quick assets:

Cash $ 100,000 $ 55,000Cash equivalents 47,000 65,000Accounts receivable (net) 84,000 472,000 Total $231,000 $592,000

Current liabilities $220,000 $740,000

Quick ratioQuick ratio 1.05 1.05 .8 .8

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This is the last slide in Chapter F10. This is the last slide in Chapter F10.

Power NotesChapter F10


Documents

C10 - 1 Learning Objectives Power Notes 1.The Nature of Current Liabilities 2.Short-Term Notes Payable 3.Contingent Liabilities 4.Payroll and Payroll Taxes