Chapter 11 - Current Liabilities and Payroll

Current Current

Liabilities and Liabilities and

PayrollPayroll

Chapter 11Chapter 11

Learning Learning Objective

ObjectiveDescribe and illustrate current

Describe and illustrate current

liabilities related to accounts

liabilities related to accounts

payable, current portion of long-

payable, current portion of long-

term debt, and notes payable

term debt, and notes payable

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_________ Liabilities _________ Liabilities

o When a company or a bank advances When a company or a bank advances _________ , it is making a loan._________ , it is making a loan.

o The company or bank is called a _________ The company or bank is called a _________ (or _________ ).(or _________ ).

o The individuals or companies receiving The individuals or companies receiving the loans are called _________ (or _________ the loans are called _________ (or _________ ).).

Current _________ Current _________

o Long-term _________ are _________ due Long-term _________ are _________ due beyond _________ _________ .beyond _________ _________ .

o _________ _________ are debts that will be _________ _________ are debts that will be paid out of _________ _________ and are due paid out of _________ _________ and are due within _________ year.within _________ year.

Accounts _________ Accounts _________

o _________ payable transactions arise from _________ payable transactions arise from purchasing _________ or _________ for use purchasing _________ or _________ for use in a company’s _________ or from _________ in a company’s _________ or from _________ _________ for resale._________ for resale.

_________ Portion of ____-_____ Debt _________ Portion of ____-_____ Debt

o ____-_____ liabilities are often paid back in ____-_____ liabilities are often paid back in periodic payments, called _________ . periodic payments, called _________ . _________ that are due within the coming _________ that are due within the coming _________ must be classified as a _________ _________ must be classified as a _________ _________ . The _________ due after the _________ . The _________ due after the _________ year are classified as a ____-_________ year are classified as a ____-_____ _________ . _____ _________ .

_______ _________ Interest Expense appears Interest Expense appears

on the on the _________ _________ as an as an

““_________ _________ .”.”

____-_____ _________ Payable____-_____ _________ Payable

o When the note matures, the entry to When the note matures, the entry to record the payment of $1,000 plus $30 record the payment of $1,000 plus $30 interest ($1,000 x 12% x 90/360) is as interest ($1,000 x 12% x 90/360) is as follows:follows:

Short-Term Notes PayableShort-Term Notes Payable

o A discounted _________ has the following A discounted _________ has the following characteristics:characteristics: ______________________________________________________________________________________________

_______________________________________________._______________________________________________. ______________________________________________________________________________________________

_______________________________________________._______________________________________________. ______________________________________________________________________________________________

_______________________________________________._______________________________________________. ______________________________________________________________________________________________

_______________________________________________._______________________________________________.

Learning Learning Objective

ObjectiveDetermine employer liabilities

Determine employer liabilities

for payroll, including liabilities

for payroll, including liabilities

arising from employee earnings

arising from employee earnings

and deductions from earnings.

and deductions from earnings.

22

Payroll and _______ TaxesPayroll and _______ Taxes

o In accounting, _______ refers to the amount In accounting, _______ refers to the amount paid to _______ for services they provided paid to _______ for services they provided during the period. A company’s _______ is during the period. A company’s _______ is important for the following reasons:important for the following reasons: ________________________________________________________________________________________

____________________________________________.____________________________________________. ________________________________________________________________________________________

____________________________________________. ____________________________________________. ________________________________________________________________________________________

____________________________________________.____________________________________________.

_______ for Employee Earnings_______ for Employee Earnings

o _______ usually refers to payment for _______ usually refers to payment for managerial and administrative _______ . managerial and administrative _______ . _______ is normally expressed in terms of _______ is normally expressed in terms of a _______ or a year.a _______ or a year.

o _______ usually refers to payment for _______ usually refers to payment for employee manual labor. The _______ of employee manual labor. The _______ of wages is normally stated on an _______ or wages is normally stated on an _______ or _______ basis._______ basis.

Earnings at regular rate (40 x $34) $1,360Earnings at overtime rate (2 x $51) 102Total earnings $1,462

Liability for Employee EarningsLiability for Employee Earnings

o John T. McGrath is employed by John T. McGrath is employed by McDermott Supply Co. at the rate of $34 McDermott Supply Co. at the rate of $34 per hour, plus 1.5 times the normal hourly per hour, plus 1.5 times the normal hourly rate for hours over 40 per week. For the rate for hours over 40 per week. For the week ended December 27, McGrath week ended December 27, McGrath worked 42 hours. His earnings are worked 42 hours. His earnings are computed as follows:computed as follows:

_______ from Employee Earnings_______ from Employee Earnings

o The _______ _______ of an employee for a The _______ _______ of an employee for a _______ period, including any overtime _______ period, including any overtime pay, are called _______ _______ .pay, are called _______ _______ .

o From this amount is subtracted one or From this amount is subtracted one or more _______ to arrive at the _______ pay.more _______ to arrive at the _______ pay.

Deductions from Employee EarningsDeductions from Employee Earnings

o The _______ _______ _______ _______ (FICA) The _______ _______ _______ _______ (FICA) tax withheld contributes to the following tax withheld contributes to the following two federal programs.two federal programs. _____________________________________________ _____________________________________________

_____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________

_____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________

LO 2LO 2Deductions from Employee EarningsDeductions from Employee Earnings

o John T. McGrath’s earnings for the week John T. McGrath’s earnings for the week ending December 27 are $1,462. Total FICA ending December 27 are $1,462. Total FICA tax to be withheld is calculated as follows:tax to be withheld is calculated as follows: Earnings subject to 6% Earnings subject to 6%

social security tax social security tax $1,462 $1,462 Social security tax rateSocial security tax rate x %x % Social security taxSocial security tax $ $ Earnings subject to 1.5% Medicare taxEarnings subject to 1.5% Medicare tax Medicare tax rate x 1.5% Medicare taxMedicare tax rate x 1.5% Medicare tax

Total FICA tax Total FICA tax $ $

___________ earnings for the week $1,462.00 ____________:

__________________ $ 87.72__________________ 21.93__________________ 263.40__________________ 20.00__________________ 5.00 Total ___________ 398.05

___________ ___________ $1,063.95

Computing Employee Net PayComputing Employee Net Pay

o John T. McGrath’s Net PayJohn T. McGrath’s Net Pay

Liability for Employer’s Payroll TaxesLiability for Employer’s Payroll Taxes

o ___________ are subject to the following ___________ are subject to the following ___________ taxes for amounts paid their ___________ taxes for amounts paid their employees:employees: ________________________ ________________________ ________________________________________________ ________________________________________________

Learning Learning Objective

ObjectiveDescribe payroll accounting

Describe payroll accounting

systems that use a payroll

systems that use a payroll

register, employee earnings

register, employee earnings

records, and a general journal.

records, and a general journal.

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____________ ____________ ____________ ____________ for Payroll and Payroll for Payroll and Payroll TaxesTaxeso Payroll ____________ should be designed Payroll ____________ should be designed

to:to: ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________

___________ Register ___________ Register

o The ___________ ___________ is a The ___________ ___________ is a multicolumn report used for ___________ multicolumn report used for ___________ the data for each ___________ period. the data for each ___________ period. Exhibit 5 illustrates a payroll register for Exhibit 5 illustrates a payroll register for McDermott Supply Co.McDermott Supply Co.

______ ______ tax $ ______ ($13,902 x 6%)___________ tax ______ ($13,902 x 1.5%)______ ______ ($2,710 x 5.4%)______ ($2,710 x 0.8%) Total payroll taxes $1,210.67

___________ and Paying ___________ ___________ and Paying ___________ TaxesTaxeso Employers must ______ the employee’s Employers must ______ the employee’s

______ ______ and ______ tax contributions. ______ ______ and ______ tax contributions. In addition, the employer must pay SUTA In addition, the employer must pay SUTA tax of ______ % and ______ tax of ______ % tax of ______ % and ______ tax of ______ % (assume on $2,710). For McDermott (assume on $2,710). For McDermott Supply’s payroll of December 27, these Supply’s payroll of December 27, these payroll taxes are computed as follows:payroll taxes are computed as follows:

Employee’s Earnings RecordEmployee’s Earnings Record

o A ______ ______ record must be kept for A ______ ______ record must be kept for each employee. This record is called an each employee. This record is called an ______ ______ ______ . Exhibit 6 shows a ______ ______ ______ . Exhibit 6 shows a portion of John T. McGrath’s employee’s portion of John T. McGrath’s employee’s earnings record.earnings record.

______ Checks______ Checks

o At the end of each ______ period,At the end of each ______ period, ______ ______ checks are prepared. Each check includes checks are prepared. Each check includes a ______ ______ showing the details of how a ______ ______ showing the details of how the net pay was ______ .the net pay was ______ .

______ System Design______ System Design

o The ______ into a payroll ______ may be The ______ into a payroll ______ may be classified as:classified as: _________, which are data that remain ______ _________, which are data that remain ______

from payroll to payroll.from payroll to payroll.• ________________________________• ________________ ________________

_________, which are data that change from _________, which are data that change from payroll to payroll.payroll to payroll.• ________________ ________________ • ________________________________

______ ______ for Payroll Systems______ ______ for Payroll Systems

o Some examples of ______ ______ include Some examples of ______ ______ include the following:the following: ______________________________________________ ______________________________________________

______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________

______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________

(continued)

(continued)

Internal Controls for Payroll SystemsInternal Controls for Payroll Systems

______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________

______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________

______________________________________________ ______________________________________________ ____________________________________________________________________________________________

______________________________________________ ______________________________________________ ____________________________________________________________________________________________

Learning Learning Objective

ObjectiveJournalize entries for employee

Journalize entries for employee fringe benefits, including

fringe benefits, including

vacation pay and pensions.

vacation pay and pensions.

44

Employees’ ______ ______ Employees’ ______ ______

o Many companies provide their employees Many companies provide their employees ______ ______ ______ to salary and wages ______ ______ ______ to salary and wages earned. Such ______ ______ may include:earned. Such ______ ______ may include: ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________

Vacation PayVacation Pay

o Assume that employees ______ one day of Assume that employees ______ one day of ______ for each ______ worked. The ______ for each ______ worked. The estimated vacation pay for the year estimated vacation pay for the year ending December 31 is $325,000. The ending December 31 is $325,000. The adjusting entry for the accrued vacation is adjusting entry for the accrued vacation is shown below.shown below.

PensionsPensions

o A ______ is a ______ payment to ______ A ______ is a ______ payment to ______ employees. ______ rights are ______ by employees. ______ rights are ______ by employees as they work, based on the employees as they work, based on the ______ ______ plan. Two types of pension ______ ______ plan. Two types of pension plans are:plans are: ________________________________________________________________________________________ ________________________________________________________________________________________

PensionsPensions

o In a ______ contribution plan, the company In a ______ contribution plan, the company invests ______ on behalf of the employee invests ______ on behalf of the employee during the ______ ______ years.during the ______ ______ years. ________________________________________________________________________________________

________________________________________________________________________________________ ________________________________________________________________________________________

________________________________________________________________________________________

____________

o In a ______ In a ______ benefitbenefit planplan, the employer is , the employer is obligated to ______(______) the employee’s obligated to ______(______) the employee’s future ______ ______.future ______ ______. ________________________________________________________________________________________

________________________________________________________________________________________ ________________________________________________________________________________________

________________________________________________________________________________________

______ ______ ______ ______ Other than PensionsOther than Pensions

o Employees may earn rights to other Employees may earn rights to other postretirement benefits, such as:postretirement benefits, such as:

__________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________

Learning Learning Objective

ObjectiveDescribe the accounting

Describe the accounting treatment for contingent

treatment for contingent

liabilities and journalize entries

liabilities and journalize entries for product warranties.

for product warranties.

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Contingent ______ Contingent ______

o Some ______ may arise from past ______ if Some ______ may arise from past ______ if certain ______ occur in the future. These certain ______ occur in the future. These potential ______ are called ______ ______ . potential ______ are called ______ ______ . The accounting for ______ ______ depends The accounting for ______ ______ depends on the following two factors:on the following two factors: _________________________________________ _________________________________________

__________________________________________________________________________________ __________________________________________________________________________________

__________________________________________________________________________________

CONTINGENT CONTINGENT LIABILITIESLIABILITIES

Learning Learning Objective

ObjectiveDescribe and illustrate the use of

Describe and illustrate the use of

the quick ratio in analyzing a

the quick ratio in analyzing a

company’s ability to pay its

company’s ability to pay its current liabilities.

current liabilities.

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Quick Ratio Quick Ratio

o Current ________ analysis helps ________ Current ________ analysis helps ________ evaluate a company’s ability_____ ________ its evaluate a company’s ability_____ ________ its ________ ________ . It is based on:________ ________ . It is based on: Working capital,___________________________________Working capital,___________________________________

______________________________________________________________________________________________________ Current Current

Ratio,_______________________________________ Ratio,_______________________________________ ________________________________________________________________________________________________________

Quick Quick Ratio,_________________________________________ Ratio,_________________________________________ ________________________________________________________________________________________________________

________ ________ ________ ________

o The ________ ________ measures the “ The ________ ________ measures the “ instant” ________ - ________ ________ of a instant” ________ - ________ ________ of a company and is computed as follows:company and is computed as follows:

o ________ ________ are ________ and ________ ________ ________ are ________ and ________ ________ ________ that can be ________ ________ ________ that can be ________ ________ to ________ .________ to ________ .

Quick Ratio =

Current Current

Liabilities and Liabilities and

PayrollPayroll

The EndThe End