Copyright © 2007 Prentice-Hall. All rights reserved 1 Current Liabilities and Payroll Chapter 11.

Copyright © 2007 Prentice-Hall. All rights reserved 1

Current LiabilitiesCurrent Liabilitiesand Payroll and Payroll

Current LiabilitiesCurrent Liabilitiesand Payroll and Payroll

Chapter 11


Objective 1Objective 1Objective 1Objective 1

Account for current liabilities

of known amount


Accounts PayableAccounts PayableAccounts PayableAccounts Payable

• Amounts owed for products or services purchased on account


Short-Term Notes PayableShort-Term Notes PayableShort-Term Notes PayableShort-Term Notes Payable

• Promissory notes payable due within one year

• Interest expense is recognized

• If interest expense is accrued at the end of the period, interest payable must also be recorded


E11-14E11-14E11-14E11-14GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

2002

May 1 Equipment 15,000Note Payable 15,000

Dec 31 Interest Expense 800Interest Payable 800

(15,000 x .08 x 8/12)




2003

May 1 Note Payable 15,000Interest Expense 400Interest Payable 800

Cash 16,200

Interest expense for 2003 = 15,000 x .08 x 4/12


Sales Tax PayableSales Tax PayableE11-14E11-14

Sales Tax PayableSales Tax PayableE11-14E11-14

GENERAL JOURNAL


Mar 31 Cash 216,000Sales Revenue 200,000Sales Tax Payable 16,000

Apr 6 Sales Tax Payable 16,000Cash 16,000


Other Current LiabilitiesOther Current LiabilitiesOther Current LiabilitiesOther Current Liabilities

• Current portion of long-term note payable

• Accrued Expenses (Liabilities)– Expenses that have been incurred but not yet

paid– Salaries Payable– Interest Payable– Utilities Payable


Unearned RevenueUnearned RevenueE11-15E11-15

Unearned RevenueUnearned RevenueE11-15E11-15

GENERAL JOURNAL


Mar 31 Cash 218Unearned SubscriptionRevenue 200Sales Tax Payable 18

Nov 15 Sales Tax Payable 18Cash 18

Dec 31 Unearned Subscription Revenue 150

Subscription Revenue 150



Account for current liabilities that must be estimated


Estimated Warranty PayableEstimated Warranty PayableEstimated Warranty PayableEstimated Warranty Payable

• Record warranty expense in same period as the revenue– Warranty expense– Estimated warranty payable




2006

Warranty Expense 6,000Estimated Warranty Payable 6,000

Estimated Warranty Payable 7,000Cash 7,000


E11-16E11-16E11-16E11-16

Estimated Warranty Payable

Balance 3,000

6,0007,000

Balance 2,000


Contingent LiabilitiesContingent LiabilitiesContingent LiabilitiesContingent Liabilities

• Potential liability• Depends on a future event• Accounting treatment depends on

likelihood that the future event will create a liability– Remote – ignore– Reasonably possible – in notes to financial

statements– Probable – estimate and record expense and

liability



Compute payroll amounts


PayrollPayrollPayrollPayroll

• Salary – pay stated at annual, monthly, or weekly rate

• Wages – pay stated at an hourly rate• Commission – pay stated as percentage of

sales amount• Bonus – pay over and above base salary• Benefits – extra compensation not paid in

cash, such as health insurance, retirement contributions


PayrollPayrollPayrollPayroll

• Straight time - base rate paid for a set number of hours

• Overtime - additional time worked for which employees receive a higher rate (usually 1.5 times the straight time rate)


Gross Pay and Net PayGross Pay and Net PayGross Pay and Net PayGross Pay and Net Pay

Employee Income Tax

FICA OASD

FICAMedicare

OptionalDeductions

Gross Pay

Net Pay


FICA TaxFICA Tax

• The FICA tax has two components:

1 Old age, survivors’, and disability insurance (6.2% applied to the first $90,000 of employee earnings in a calendar year)

2 Health insurance (1.45% applied to all employee earnings)

Note: Your text instructs you to assume an 8% tax on income earned up to $90,000 for FICA. That’s just to simplify things for the course


Employer Payroll TaxesEmployer Payroll TaxesEmployer Payroll TaxesEmployer Payroll Taxes

• Social Security (FICA) tax

• State unemployment compensation tax

• Federal unemployment compensation tax

Employers match the FICA tax withheld from employees


Unemployment Compensation Unemployment Compensation TaxesTaxes

Unemployment Compensation Unemployment Compensation TaxesTaxes

• Employers pay 5.4% to the state and 0.8% to the federal government on the first $7,000 of each employee’s annual earnings

• Provides for workmen’s compensation for people laid off from work



Record basic payroll transactions


Salary ExpenseSalary ExpenseSalary ExpenseSalary Expense

GENERAL JOURNAL


Sep 30 Salary ExpenseEmployee Income Tax PayableFICA Tax PayableUnited Fund PayableSalary Payable

Gross amountGross amount

Take home payTake home pay


Payroll Tax ExpensePayroll Tax ExpensePayroll Tax ExpensePayroll Tax Expense

GENERAL JOURNAL


Sep 30 Payroll Tax ExpenseFICA Tax PayableState Unemployment Tax PayableFederal Unemployment Tax Payable

Remember, the employer pay the unemployment taxes, not the employees

Remember, the employer pay the unemployment taxes, not the employees


Benefits ExpenseBenefits ExpenseBenefits ExpenseBenefits Expense

GENERAL JOURNAL


Sep 30 Health Insurance ExpenseLife Insurance ExpenseRetirement Plan Expense

Employee Benefits Payable

Fringe benefits are an expense to the employer


E11-17E11-17E11-17E11-17

Base salary $750Commission 8,000Gross pay for December $8,750Charitable contribution (25)Income taxes (875)Health insurance (50)FICA (on $3,000) (240) (1,190)

$7,560


E11-18E11-18E11-18E11-18

Gross pay:

Regular hours (40 x $10) $400.00

Overtime (10 x $10 x 1.5) 150.00

Gross pay $550.00

Deductions:

Income tax (49.50)

FICA (44.00)

Charitable contribution (5.00) (98.50)

Net pay $451.50


E11-18E11-18E11-18E11-18

GENERAL JOURNAL


Dec 31 Salary Expense 550.00Employee Income Tax Payable

49.50FICA Tax Payable

44.00United Fund Contribution Payable

5.00Salary Payable

451.50




Dec 31 Payroll Tax Expense 6,068FICA Tax Payable 5,200State Unemployment Tax Payable 756Federal Unemployment Tax Payable 112

FICA – 65,000 x .08State Unemployment Tax – 14,000 x .054Federal Unemployment Tax – 14,000 x .008


E11-19E11-19E11-19E11-19

GENERAL JOURNAL


Dec 31 Health Insurance Expense 2,060Life Insurance Expense 350Pension Expense 3,900 Employee Benefits Payable 6,310



Use a payroll system


ComponentsComponentsComponentsComponents

• Payroll Record

• Payroll Check

• Earnings Reports


GROSS PAY

EMPLOYEENAME HRS.

STRAIGHT-TIME OVERTIME TOTAL

Sara Canne 42 400 22 422

Jim Lake 40 480 0 480

Kyle Metz 48 800 160 960

Total 1,680 182 1,862

Payroll RecordPayroll RecordPayroll RecordPayroll Record

DEDUCTIONS NET PAY

FED.INCOME

TAX FICAHEALTH

INS. TOTAL AMOUNTCHECK

NO.

63 37 15 115 307 166

72 38 22 132 348 167

144 77 40 261 699 168

279 152 77 508 1,354

Payroll Record

GROSS PAY DEDUCTIONS NET PAY

EMPLOYEENAME

HRS.

STRAIGHT TIME OVERTIME TOTAL

FED.INCOME

TAX FICAHEALTH

INS. TOTAL AMOUNTCHECK

NO.

Sara Canne 42 400 22 422 63 37 15 115 307 166

Jim Lake 40 480 0 480 72 38 22 132 348 167

Kyle Metz 48 800 160 960 144 77 40 261 699 168

Total 1,680 182 1,862 279 152 77 508 1,354


Payroll ChecksPayroll ChecksPayroll ChecksPayroll ChecksStile's 166Payroll Account

Baltimore, MD Sep. 30, 2007

Pay to theOrder of

Sara Canne $307.00

Three hundred seven & 00/100's Dollars

First Bank

Baltimore

Maryland 21244 James Carn

A1119000031A 0787C50000454C Treasurer

Pay Deductions

Net Pay

Check No.

STRAIGHT TIME OVERTIME TOTAL

INCOME TAX FICA

HEALTHINS. TOTAL

400 22 422 63 37 15 115 307 166


Earnings ReportEarnings ReportEarnings ReportEarnings Report


Earnings ReportEarnings ReportEarnings ReportEarnings Report


Internal Control over PayrollInternal Control over PayrollInternal Control over PayrollInternal Control over Payroll

• Efficiency controls– Keep two payroll accounts– Computerize

• Controls to safeguard payroll disbursements– Separate hiring and firing function from

accounting and from passing out paychecks– Photo ID’s for employees– Employees clock in and out



Report current liabilities on the balance sheet


E11-22E11-22E11-22E11-22

Oriental Rug CompanyBalance Sheet (partial)

December 31, 2004Current liabilities:Estimated warranty payable $6,000Unearned sales revenue 15,000Employee withheld income tax payable 8,100FICA tax payable 14,400State unemployment tax payable 4,860Federal unemployment tax payable 720 Total current liabilities $49,080

Warranties payable (200,000 x .03)Employee income tax (90,000 x .09)FICA (90,000 x .08 x 2)State unemployment (90,000 x .054)

Federal unemployment (90,000 x .008)


End of Chapter 11End of Chapter 11End of Chapter 11End of Chapter 11

Copyright © 2007 Prentice-Hall. All rights reserved 1 Current Liabilities and Payroll Chapter 11.

Documents

warranty payable slide

liability slide

account slide

sales tax payable e11

revenue warranty expense

accounts payable amounts

estimated warranty payable6

estimated warranty payable7