11 Current Liabilities

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Learning Objectives

Power Notes

1. The Nature of Current Liabilities2. 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

Chapter11

Current Liabilities

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Short-Term Notes Payable Product Warranty Liability

Payroll and Payroll Taxes

Employees Earnings

Employers Payroll Taxes Payroll System and Data Flow

Quick Ratio

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Power NotesChapter11

Current Liabilities


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Short-Term Notes Payable

Description Debit Credit

Mdse. Inventory 10,000

Accts. Payable 10,000

Accts. Receivable 10,000

Sales 10,000

Cost of Mdse. Sold 7,500


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


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


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Notes Payable 10,000


Sales 10,000



Notes Receivable 10,000




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


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Interest Expense 200

Cash 10,200


Sales 10,000





Cash 10,200Interest Revenue 200




July 30. Bowden Co. paid the amount due.

Interest: $10,000 x 12% x 60 / 360 = $200


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Date Description Debit Credit

Product 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 sameperiod 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 offederal, state, and local taxes.

3. Total payroll expense (gross payroll plus payroll

taxes) has a major impact on net income.

Payroll and Payroll Taxes

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


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Base earnings (40 x $25) $1,000

Overtime earnings (4 x $37.50) 150

Total earnings $1,150

Base earnings (44 x$25) $1,100

Overtime premium (4 x $12.50) 50


Gross Pay Calculation

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

Employee viewpoint:

Employer viewpoint:


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Overtime earnings (4 x $37.50) 150



Overtime premium (4 x $12.50) 50


Gross Pay Calculation

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

Same totalearnings

but a

differentview of the

overtimehours

Employee viewpoint:

Employer viewpoint:


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($70,000 - $69,150) $850

Social security tax rate x 6%

Social security tax $51.00

Current earnings $1,150

Medicare tax rate x 1.5%

Medicare tax 17.25

Total FICA tax $68.25

FICA Tax Calculation

Assume that John T. McGraths annual earnings prior

to the current period total $69,150. The current periodearnings are $1,150.

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 Deductions

Employers are required to withhold federal income

tax from each employee based on the withholding

table and information provided by the employees

W-4 form.

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

Deductions forother purposes may be withheld by

mutual agreement.


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Earnings:

Regular earnings $1,000.00Overtime earnings 150.00

Total $1,150.00

Deductions:

Social security tax tax $ 51.00

Medicare tax 17.25Federal income tax 237.00

Retirement savings 20.00

United Way 5.00

Total deductions 330.25

Net 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 Calculation


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Earnings:

Regular $13,328.00Overtime 574.00Total $13,902.00

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

Total 5,383.60

Net amount paid $ 8,518.40

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

Total (as above) $13,902.00

Payroll Register Summary


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Recording Employees Earnings


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

Social Security Tax Payable 643.07

Medicare Tax Payable 208.53

Employees Fed. Inc. Tax Payable 3,332.00

Retirement Savings Deductions Payable 680.00

United Way Deductions Payable 470.00

Accounts ReceivableFred G. Elrod 50.00

Salaries 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 unemploymentcompensation 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.

Employers Payroll Taxes

In addition to the amounts due employees, the

employer must calculate and pay the following:


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Recording Employers Payroll Taxes

General Journal


12/27 Payroll Tax Expense 1,019.62



State Unemployment Tax Payable 146.34Federal Unemployment Tax Payable 21.68


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Employers Total Payroll Costs






Retirement Savings Deductions Payable 680.00


Accounts ReceivableFred G. Elrod 50.00


12/27 Payroll Tax Expense 1,019.62Social Security Tax Payable 643.07


State Unemployment Tax Payable 146.34

Federal Unemployment Tax Payable 21.68


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Employers Total Payroll Costs






Retirement Savings Deductions P 680.00


Accounts ReceivableFred G. Elr 50.00


Total

Payroll

Expens

e

12/27 Payroll Tax Expense 1,019.62Social Security Tax Payable 643.07


State Unemployment Tax Payable 146.34

Federal Unemployment Tax Payable 21.68


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Flow of Data in a Payroll System

Updated Variables(cumulative

earnings, taxes)

Constant Data

(rates of pay,tax, etc.)

Current PeriodsVariables

(hours worked)


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earnings, taxes)

Constant Data


PAYROLLREGISTER


(hours worked)


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earnings, taxes)

Constant Data


PAYROLLREGISTER

EMPLOYEESEARNINGSRECORDS


(hours worked)


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Wage and TaxStatements

Payroll TaxReturns


earnings, taxes)

Constant Data


PAYROLLREGISTER



(hours worked)


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Payroll Checksand Statements


Payroll TaxReturns


earnings, taxes)

Constant Data


PAYROLLREGISTER



(hours worked)


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Payroll TaxReturns


earnings, taxes)

Constant Data


PAYROLLREGISTER

GENERALLEDGER



(hours worked)


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FinancialStatements


Payroll TaxReturns


earnings, taxes)

Constant Data


PAYROLLREGISTER

GENERALLEDGER



(hours worked)


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Solvency 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 Ratio

Use: 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 ratio 1.05 .8


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This is the last slide in Chapter 11.

Power NotesChapter11

Current Liabilities

11 Current Liabilities

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