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Chapter 11Current LiabilitiesWarren Reeve FessPowerPoint
Presentation by Douglas Cloud Professor Emeritus of Accounting
Pepperdine University
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1.Define and give examples of current liabilities.2.Prepare
journal entries for short-term notes payable and disclosure for the
current portion of long-term debt.3.Describe the accounting
treatment for contingent liabilities and journalize entries for
product warranties.4.Determine employer liabilities for payroll,
including liabilities arising from employee earnings and deductions
from earnings.ObjectivesAfter studying this chapter, you should be
able to:
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5.Describe payroll accounting systems that use a payroll
register, employee earnings record, and a general
journal.6.Journalize entries for employee fringe benefits,
including vacation pay and pensions.7.Use the quick ratio to
analyze the ability of a business to pay its current
liabilities.Objectives
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The Nature of Current LiabilitiesLiabilities that are to be paid
out of current assets and are due within a short time, usually
within one year, are called current liabilities.Examples:Accounts
payableNotes payableUnearned rentTaxes payableWages payableCurrent
portion of long term debt
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Short-Term Notes PayableAug.1Accounts PayableMurray Co.1 000
00Issued a 90-day, 12% note on account.Notes Payable 1 000 00A firm
issues a 90-day, 12% note for $1,000, dated August 1, 2006 to
Murray Co. for a $1,000 overdue account.
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Oct.30Notes Payable1 000 00Interest Expense30 00Issued a 90-day,
12% note on account.Cash 1 030 00On October 30, when the note
matures, the firm pays the $1,000 principal plus $30 interest
($1,000 x .12 x 90/360).Appears on the income statement as an Other
Expense.Short-Term Notes Payable
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Mdse. Inventory10,000Accounts Payable10,000Accounts
Receivable10,000Sales10,000
Cost of Mdse. Sold7,500Mdse. Inventory7,500
May 31. Bowden Co. purchased merchandise on account from Coker
Co., $10,000, 2/10, n/30. The merchandise cost Coker Co.
$7,500.Short-Term Notes Payable
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DescriptionDebitCreditAccounts Receivable10,000Sales10,000
Cost of Mdse. Sold7,500Mdse. Inventory7,500
Bowden Co. (Borrower)Coker Co. (Creditor)May 31. Bowden Co.
issued a 60-day, 12% note for $10,000 to Coker on account.Accounts
Payable10,000Notes Payable10,000
Notes Receivable10,000Accounts Receivable10,000
Mdse. Inventory10,000Accounts Payable10,000Accounts
Receivable10,000Sales10,000
Cost of Mdse. Sold7,500Mdse. Inventory7,500
Short-Term Notes Payable
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DescriptionDebitCreditMdse. Inventory10,000Accounts
Payable10,000
Accounts Receivable10,000Sales10,000
Cost of Mdse. Sold7,500Mdse. Inventory7,500
Bowden Co. (Borrower)Coker Co.
(Creditor)DescriptionDebitCreditJuly 30. Bowden Co. paid Coker Co.
the amount due on the note of May 31. Interest: $10,000 x 12% x
60/360 = $200.Accounts Payable10,000Notes Payable10,000
Notes Receivable10,000Accounts Receivable10,000
Notes Payable10,000Interest Expense200Cash10,200
Cash10,200Interest Revenue 200Notes Receivable10,000
Short-Term Notes Payable
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Discounted Notes PayableAug.10Merchandise Inventory19 250
00Interest Expense750 00Issued a 90-day, note to Rock Co.
discounted at 15%.Notes Payable 20 000 00On August 10, Cary Company
issues a $20,000, 90-day note to Rock Company in exchange for
inventory. Rock discounts the note at 15%.Discount: $20,000 x .15 x
90/360ProceedsDiscount rate
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Discounted Notes PayableNov. 8Notes Payable20 000 00Paid note
due.Cash 20 000 00On November 8 the note is paid in full.
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Contingent Liabilities
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Product LiabilityOn June 30, a company sells a product for
$60,000 on which there is a 36-month warranty. Past experience
indicates that repairs of defects cost 5% of the sales price over
the warranty period.June 30Product Warranty Expense3 000 00Warranty
expenses projected for June, 5% of $60,000.Product Warranty
Liability 3 000 00
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On August 16, a customer needed a defective part replaced. Cost
to the company was $200 for the part. Aug.16Product Warranty
Payable200 00Replaced defective part under warranty.Supplies 200
00Product Liability
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Accounting Treatment of Contingent LiabilitiesLikelihood of
OccurringMeasurementAccounting TreatmentContingency
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Payroll and Payroll Taxes
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Liability for Employee Earnings1. 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 is the
amount paid to employees for services provided. Payrolls are
important because--
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Gross Pay CalculationJohn 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.
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FICA TaxEmployers are required to withhold a portion of the
earnings of each of the employees. The amount is matched by the
employer and serves to provide the employee with social security
and Medicare benefits upon retirement.
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Earnings subject to 6% social security tax ($100,000 $99,038)
$962Social security tax rate x 6% Social security tax$57.72FICA Tax
CalculationAssume that John T. McGraths annual earnings prior to
the current period total $99,038. His current period earnings are
$1,462.Earnings subject to 1.5% Medicare taxCurrent
earnings$1,462Medicare tax rate x 1.5% Medicare tax 21.93Total FICA
tax$79.65
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Withholding Taxes, Other DeductionsEmployers 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 withheld from the pay
of each employee.Deductions for other purposes may be withheld by
mutual agreement.
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John T. McGrath is single, has declared one withholding
allowance, and had gross pay of $1,462 for the week ended December
27.Employee Net Pay Calculation
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Responsibility for Tax Payments
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Federal Income
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Federal Outlays
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Payroll RegisterWhat is the purpose of a payroll register?Its a
multicolumn form used to help assemble and summarize the data
needed for each payroll period.
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Earnings:Regular$13,328.00Overtime574.00Total$13,902.00Deductions:Social
security tax$ 643.07Medicare tax208.53Federal income
tax3,332.00Retirement savings680.00United Way470.00Accounts
receivable50.00Total5,383.60Net amount paid$ 8,518.40
Accounts debited:Sales Salaries Expense$11,122.00Office Salaries
Expense2,780.00Total (as above)$13,902.00Payroll Register
Summary
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Recording Employees EarningsDec. 27Sales Salaries Expense11 122
00Office Salaries Expense2 780 00Payroll for week ended December
27.Social Security Tax Payable 643 07Medicare Tax Payable 208
53Employees Federal Inc. Tax Pay. 3 332 00Retirement Savings Ded.
Payable 680 00United Way Deductions Payable 470 00Accounts
ReceivableFred Elrod 50 00Salaries Payable 8 518 40
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Recording Employers Payroll Taxes
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Recording Employers Payroll TaxesDec. 27Payroll Tax Expense1 019
62Payroll taxes for week ended December 27.Social Security Tax
Payable 643 07Medicare Tax Payable 208 53State Unemployment Tax
Payable 146 34Federal Unemployment Tax Pay. 21 68
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Flow of Data in a Payroll System
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Employees Fringe Benefits
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Benefit Dollars as a Percent of Total26%Vacation and sick
pay29%Medical2%Other18%Retirement and savings plans25%Social
security and Medicare
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Employees Fringe BenefitsVacation pay Vacation pay becomes the
employers liability as the employee earns vacation rights.Pensions
Cash payment to retired employees. Could be a defined contribution
plan or a defined benefit planPostretirement Benefits In addition
to pension benefits, employees may earn rights to other
postretirement benefits such as dental care, eye care, life
insurance, etc. Amount is recorded by debiting Postretirement
Benefits Expense and crediting cash.
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PensionsDefined contribution plan Under this plan, a fixed
amount of money is invested on the employees behalf during the
employees working years. Example: 401K Defined benefit plan Under
this plan, the pension benefits are based on a formula and the
employer bears the investment risk in funding a future retirement
income benefit.
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Solvency Measures Quick RatioNoble Co.Hart Co.Quick assets:Cash$
100,000$ 55,000Cash equivalents 47,00065,000Accounts receivable
(net)84,000472,000 Total$231,000$592,000Current
liabilities$220,000$740,000
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Solvency Measures Quick RatioNoble Co.Hart Co.Quick assets:Cash$
100,000$ 55,000Cash equivalents 47,00065,000Accounts receivable
(net)84,000472,000 Total$231,000$592,000Current
liabilities$220,000$740,000Quick assetsCurrent liabilitiesNoble
Company$231,000$220,000Quick ratio = 1.05
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Solvency Measures Quick RatioNoble Co.Hart Co.Quick assets:Cash$
100,000$ 55,000Cash equivalents 47,00065,000Accounts receivable
(net)84,000472,000 Total$231,000$592,000Current
liabilities$220,000$740,000Quick assetsCurrent liabilitiesHart
Company$592,000$740,000Quick ratio = 0.80Use:To indicate instant
debt-paying ability
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The EndChapter 11
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