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Learning Objectives
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 11 Current liabilities
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The nature of current liabilities
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.
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 $28) $1,120Overtime earnings (2 x $42) 84 Total earnings $1,204
Base earnings (42 x$28) $1,176Overtime premium (2 x $14) 28 Total earnings $1,204
Gross Pay CalculationGross Pay Calculation
John T. McGrath is employed by McDermott Supply Co. at the rate of $28 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.
Employee viewpoint:Employee viewpoint:
Employer viewpoint:Employer viewpoint:
Same total earnings
but a different
view of the overtime
hours
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($80,000 - $79,296) $704Social security tax rate x 6% Social security tax $42.24
Current earnings $1,204Medicare tax rate x 1.5% Medicare tax 18.06Total FICA tax $60.30
FICA Tax CalculationFICA Tax Calculation
Assume that John T. McGrath’s annual earnings prior to the current period total $79,296. The current period earnings are $1,204.
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.
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:
1. Defined Contribution Plan• A defined contribution plan requires that a fixed
amount of money be invested for the employee’s behalf during the employee’s working years. The employer is required to make annual pension contributions.
2. Defined Benefit Plan• Employers may choose to promise employees a
fixed annual pension benefit at retirement, based on years of service and compensation levels.
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Pensions
1. Defined Contribution PlanAssume that the pension plan is 10% of $500,00
of employee annual salaries.
Dec.31 Pension Expense 50,000
Cash 50,000
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Pensions
2. Defined Benefit PlanDec. 31
Pension Expenses 80,000
Cash 60,000
Unfunded Pension Liability
•Short term liability, or•Long-term liability
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Solvency Measures — Quick RatioSolvency Measures — Quick Ratio