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2009 The McGraw-HillCompanies, Inc.,
CURRENT LIABILITIES ANDPAYROLL ACCOUNTING
Chapter 11
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McGraw-Hill/Irwin Slide 2McGraw-Hill/Irwin Slide 2
Past Present Future
DEFINING LIABILITIES
Because of apast event . . .
Because of apast event . . .
The
companyhas a
presentobligation
The
companyhas a
presentobligation
. . . For futuresacrifices
. . . For futuresacrifices
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McGraw-Hill/Irwin Slide 3McGraw-Hill/Irwin Slide 3
Expected to bepaid within one
year or thecompanys
operating cycle,whichever is
longer.
CLASSIFYING LIABILITIES
CurrentLiabilities
Expected not to bepaid within one
year or thecompanys
operating cycle,whichever is
longer.
Long-TermLiabilities
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McGraw-Hill/Irwin Slide 4McGraw-Hill/Irwin Slide 4
CURRENT AND LONG-TERM
LIABILITIES
Percent of Total Liabilities
Current Liabilities as a Percent of Total Liabilities
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McGraw-Hill/Irwin Slide 5McGraw-Hill/Irwin Slide 5
UNCERTAINTY IN LIABILITIES
Uncertainty inWhom to Pay
Uncertainty inWhen to Pay
Uncertainty in HowMuch to Pay
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McGraw-Hill/Irwin Slide 6McGraw-Hill/Irwin Slide 6
Accounts Payable
Sales Taxes Payable
Unearned Revenues
Short-Term Notes Payable
KNOWN (DETERMINABLE)
LIABILITIES
Payroll Liabilities
Multi-Period Known Liabilities
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7/37McGraw-Hill/Irwin Slide 7McGraw-Hill/Irwin Slide 7
On May 15, 2009, Max Hardware sold toolsand supplies for $7,500 that are subject to a
6% sales tax.
SALES TAXES PAYABLE
DR CR
May 15 Cash 7,950
Sales 7,500
Sales Taxes Payable 450
To record cash sales and 6% sales tax.
$7,500 6% = $450
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8/37McGraw-Hill/Irwin Slide 8McGraw-Hill/Irwin Slide 8
On May 1, 2009, A-1 Catering received$3,000 in advance for catering a wedding
party to take place on July 12, 2009.
UNEARNED REVENUES
DR CR
May 1 Cash 3,000
Unearned Revenue - Catering 3,000
To record advance payment.
DR CR
Jul 12 Unearned Revenue - Catering 3,000
Revenue - Catering 3,000
To recognize revenue earned.
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9/37McGraw-Hill/Irwin Slide 9McGraw-Hill/Irwin Slide 9
A written promise to pay a specifiedamount on a definite future date within one
year or the companys operating cycle,
whichever is longer.
SHORT-TERM NOTES PAYABLEP 1
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10/37McGraw-Hill/Irwin Slide 10McGraw-Hill/Irwin Slide 10
On August 1, 2009, Matrix, Inc. asked Carter, Co.to accept a 90-day, 12% note to replace its
existing $5,000 account payable to Carter. Matrix
would make the following entry:
NOTE GIVEN TO EXTENDCREDIT PERIOD
DR CR
Aug 1 Accounts Payable - Carter 5,000
Notes Payable - Carter 5,000
To replace customer a ccount with note.
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11/37McGraw-Hill/Irwin Slide 11McGraw-Hill/Irwin Slide 11
On October 30, 2009, Matrix, Inc. paysthe note plus interest to Carter.
Oct 30 Notes payable - Carter 5,000
Interest expense 150
Cash 5,150
To record payment of note and
interest
Interest expense = $5,000 12% (90 360) = $150
NOTE GIVEN TO EXTENDCREDIT PERIOD
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12/37McGraw-Hill/Irwin Slide 12McGraw-Hill/Irwin Slide 12
PROMISSORY NOTE
Face Value Date
after date promise to pay to the order of
American Bank
Nashville, TN
Dollarsplus interest at the annual rate of .
PROMISSORY NOTE
Face Value Date
after date promise to pay to the order of
American Bank
Nashville, TN
Dollarsplus interest at the annual rate of .
$20,000 Sept. 1, 2009
Ninety days I
Twenty thousand and no/100 - - - - - - - - - - - - - - - -- 6%
Jackson
NOTE GIVEN TO BORROW FROMBANK
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13/37McGraw-Hill/Irwin Slide 13McGraw-Hill/Irwin Slide 13
FACE VALUE EQUALS AMOUNTBORROWED
On September 1, 2009, Jackson Smith borrows$20,000 from American Bank. The note bearsinterest at 6% per year. Principal and interest
are due in 90 days (November 30, 2009).
DR CR
Sep 1 Cash 20,000
Notes payable 20,000
To record note to American Bank .
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14/37McGraw-Hill/Irwin Slide 14McGraw-Hill/Irwin Slide 14
On November 30, 2009, Smith wouldmake the following entry:
DR CR
Notes payable 20,000
Interest expense 300Cash 20,300
To record payment of note and interest
$20,000 6% (90 360) = $300
FACE VALUE EQUALS AMOUNTBORROWED
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McGraw-Hill/Irwin Slide 15McGraw-Hill/Irwin Slide 15
NoteDate
End ofPeriod
MaturityDate
An adjusting entryis required torecord Interest
Expense incurredto date.
An adjusting entryis required torecord Interest
Expense incurredto date.
END-OF-PERIOD ADJUSTMENTTO NOTES
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McGraw-Hill/Irwin Slide 16McGraw-Hill/Irwin Slide 16
Dec. 16,2009
Dec. 31,2009 Feb. 14,
2010
James Burrows borrowed $8,000 on Dec. 16,2009, by signing a 12%, 60-day note payable.
NoteDate
End ofPeriod
MaturityDate
END-OF-PERIOD ADJUSTMENTTO NOTES
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McGraw-Hill/Irwin Slide 17McGraw-Hill/Irwin Slide 17
On December 16, 2009, James Burrowswould make the following entry:
Dec 16 Cash 8,000
Notes payable 8,000
To record a mount borrowed
from bank
On December 31, 2009, the adjustment is:DR CR
Dec 31 Interest expense 40
Interest payable 40
To accrue interest on note
$8,000 12% (15 360) = $40
END-OF-PERIOD ADJUSTMENTTO NOTES
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McGraw-Hill/Irwin Slide 18McGraw-Hill/Irwin Slide 18
On February 14, 2010, James Burrowswould make the following entry.
DR CR
Feb 14 Notes payable 8,000Interest payable 40
Interest expense 120
Cash 8,160
To record payment of note
$8,000 12% (45 360) = $120
END-OF-PERIOD ADJUSTMENTTO NOTES
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McGraw-Hill/Irwin Slide 19
Employers incur
expenses andliabilities from
having employees.
PAYROLL LIABILITIESP 2
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McGraw-Hill/Irwin Slide 20McGraw-Hill/Irwin Slide 20
EMPLOYEE PAYROLLDEDUCTIONS
FICA TaxesMedicare
TaxesFederal
Income TaxState and LocalIncome Taxes
VoluntaryDeductions
Gross Pay
Net Pay
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McGraw-Hill/Irwin Slide 21McGraw-Hill/Irwin Slide 21
FICA Taxes Soc. Sec. FICA Taxes Medicare
2008: 6.2% of the first$102,200 earned in theyear ( Max = $6,324).
2008: 1.45% ofallwages earned in the
year.
Employers must pay withheld taxes tothe Internal Revenue Service (IRS).
EMPLOYEE FICA TAXES
Federal Insurance Contributions Act (FICA)
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McGraw-Hill/Irwin Slide 22McGraw-Hill/Irwin Slide 22
Amounts withheld depend on the employees earnings,tax rates, and number of withholding allowances.
Employers must pay the taxes withheld from employeesgross pay to the appropriate government agency.
FederalIncome Tax
State andLocal Income
Taxes
EMPLOYEE INCOME TAXP 2
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McGraw-Hill/Irwin Slide 23McGraw-Hill/Irwin Slide 23
Amounts withheld depend on the employees request.
Employers owe voluntary amounts withheld fromemployees gross pay to the designated agency.
Voluntary Deductions
Examples include union dues, savings accounts, pensioncontributions, insurance premiums, and charities
EMPLOYEE VOLUNTARYDEDUCTIONS
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McGraw-Hill/Irwin Slide 24McGraw-Hill/Irwin Slide 24
The entry to record payroll expenses anddeductions for an employee might look like this.
DR CR
Jan. 31 Salaries Expense 4,000
FICA - Social Security Tax Payable 248FICA - Medicare Tax Payable 58
Employee Federal Income Tax Payable 420
Employee Medical Insurance Payable 48
Employee Union Dues Payable 100
Accrued Salaries Payable 3,126
To record accrued payroll for January
$4,000 6.20% =$248
=
RECORDING EMPLOYEE PAYROLLDEDUCTIONS
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McGraw-Hill/Irwin Slide 25McGraw-Hill/Irwin Slide 25
FICA TaxesMedicare
TaxesFederal and
StateUnemployment
Taxes
Employers pay amounts equal to thatwithheld from the employees gross pay.
Employers pay amounts equal to thatwithheld from the employees gross pay.
EMPLOYER PAYROLL TAXESP 3
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McGraw-Hill/Irwin Slide 26McGraw-Hill/Irwin Slide 26
2008: 6.2% on the first$7,000 of wages paidto each employee (Acredit up to 5.4% is
given for SUTA paid,therefore the net rate
is 0.8%.)
FederalUnemployment Tax
(FUTA)
2008: Basic rate of
5.4% on the first$7,000 of wages paid
to each employee(Merit ratings may
lower SUTA rates.)
StateUnemployment Tax
(SUTA)
FEDERAL AND STATEUNEMPLOYMENT TAXES
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McGraw-Hill/Irwin Slide 27McGraw-Hill/Irwin Slide 27
The entry to record the employer payrolltaxes for January might look like this:
SUTA: $4,000 5.4% = $216
FUTA: $4,000 (6.2% - 5.4%) =$32
FICA amounts are the same asthat withheld from the
employees gross pay.
RECORDING EMPLOYERPAYROLL TAXES
DR CR
Jan. 31 Payroll Taxes expense 554
FICA Social Security Tax Payable 248
FICA Medicare Tax Payable 58State Unemployment Taxes Payable 216
Fe de ral Unem ployment Tax es Paya ble 32
To record employer payrol l taxes for Janua ry
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McGraw-Hill/Irwin Slide 28McGraw-Hill/Irwin Slide 28
MULTI-PERIOD KNOWNLIABILITIES
Often include unearned revenues and notes payable.
Unearned revenues frommagazine subscriptionsoften cover more than
one accounting period. Aportion of the earnedrevenue is recognized
each period and theunearned revenue
account is reduced.
Notes payable oftenextend over more thanone accounting period.
A three-year notepayable would be
classified as a current
liability for one year anda long-term liability for
two years.
Notes payable oftenextend over more thanone accounting period.
A three-year notepayable would be
classified as a current
liability for one year anda long-term liability for
two years.
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McGraw-Hill/Irwin Slide 29
An estimatedliability is a known
obligation of anuncertain amount,but one that can
be reasonablyestimated.
ESTIMATED LIABILITIESP 4
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McGraw-Hill/Irwin Slide 30McGraw-Hill/Irwin Slide 30
Employer expenses for pensions or medical,dental, life and disability insurance
HEALTH AND PENSION BENEFITS
Assume an employer agrees to pay an amount for
medical insurance equal to $8,000, and contribute anadditional 10% of the employees $120,000 gross
salary to a retirement program.
DR CR
Jan. 31 Employee Benefits Expense 20,000
Employee Medical Insurance Payable 8,000
Employee Retirement Program Payable 12,000
To record employee benefit costs
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McGraw-Hill/Irwin Slide 31McGraw-Hill/Irwin Slide 31
Employer expenses for paid vacation by employees
VACATION BENEFITS
Assume an employee earns $62,400 per year andearns two weeks of paid vacation each year.
$62,400 52 weeks = $1,200$62,400 50 weeks = $1,248
Weekly vacation benefit $ 48
Jan. 5 Vacation Benefits Expense 48
Vacation Benefits Payable 48
To record weekly vacation for one
employee
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McGraw-Hill/Irwin Slide 32McGraw-Hill/Irwin Slide 32
WARRANTY LIABILITIES
Sellers obligation to replace or correct a product (orservice) that fails to perform as expected within aspecified period. To conform with the matching
principle, the seller reports expected warranty expensein the period when revenue from the sale is reported.
A dealer sells a car for $32,000, on December 1, 2009, witha warranty for parts and labor for 12 months, or 12,000
miles. The dealership experiences an average warrantycost of 3% of the selling price of each car.
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McGraw-Hill/Irwin Slide 33
WARRANTY LIABILITIES
DR CR
Dec. 1 Warranty Expense 960Estimated Warranty Liability 960
To accrue estimated warranty expense
On February 15, 2010, parts of $200 and labor
of $250 covered under warranty were incurred.DR CRFeb. 15 Estimated Warranty Liability 450
Auto Parts Inventory 200
Salaries Payable 250
To record warranty costs
A dealer sells a car for $32,000, on December 1, 2009, with
a warranty for parts and labor for 12 months, or 12,000miles. The dealership experiences an average warranty
cost of 3% of the selling price of each car.
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McGraw-Hill/Irwin Slide 34McGraw-Hill/Irwin Slide 34
Probability of future sacrifice . . .
Reasonably
Probable Possible Remote
Record the Disclose the
Can be contingent liability in the No
Estimated liability. notes to the action.
financial stmts.
Disclose the Disclose the
Cannot be liability in the liability in the No
Estimated notes to the notes to the action.financial stmts. financial stmts.
Amount...
CONTINGENT LIABILITIES
Potential obligation that depends on a future eventarising out of a past transaction or event.
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McGraw-Hill/Irwin Slide 35McGraw-Hill/Irwin Slide 35
ACCOUNTING FORCONTINGENT LIABILITIES
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McGraw-Hill/Irwin Slide 36McGraw-Hill/Irwin Slide 36
REASONABLY POSSIBLECONTINGENT LIABILITIES
Potential Legal Claims A potential claim isrecorded if the amount can be reasonably estimatedand payment for damages is probable.
Debt Guarantees The guarantor usuallydiscloses the guarantee in its financial statement
notes. If it is probable that the debtor will default, theguarantor should record and report the guarantee asa liability.
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END OF CHAPTER 11