Chapter 11 Current Liabilities and Payroll © 2009 The McGraw-Hill Companies, Inc.

Measuring Liabilities A liability must be recorded whenever a transaction or event obligates a company to give up assets or provide services in the future. The dollar amount that is reported for a liability depends on three considerations: The initial dollar amount of the liability. Additional amounts owed to the creditor. Payments or services provided to the creditor.

The dollar amount that is reported for a liability depends on three considerations:

The initial dollar amount of the liability.

Additional amounts owed to the creditor.

Payments or services provided to the creditor.

Classifying Liabilities Current Liabilities Short-term obligations that will be paid within one year. Long-Term Liabilities Long-term obligations that will be paid after one year.

Calculating and Interpreting the Current Ratio Measures whether the company has enough current assets to pay what it currently owes. Current Ratio = Current Assets Current Liabilities

Accounts Payable Accountants record liabilities when the company is obligated to give up assets or services. The advantage of using Accounts Payable to buy goods and services is that suppliers do not charge interest on the unpaid balances, unless they are overdue.

Notes Payable Notes Payable represents the amount the company owes others as a result of issuing promissory notes. 2010 Interest 10 Months 2009Interest 2 months 11/01/09 12/31/09 10/31/10 Create note. Borrow $100,000. Adjust records. Accrue 2 months of interest. Pay 12 months of interest. Pay $100,000 principal.

Current Portion of Long-Term Debt When long-term debt has a portion of the principal due within one year, that portion of the loan must be reported in the current liabilities section of the balance sheet, called Current Portion of Long-Term Debt .

Warranties Payable According to the matching principle, warranty costs should be reported as an expense when the sale is recorded. Because these costs are not paid by the company at the time of the sale, a liability is also recorded. In the second quarter, Gateway sold 1 million computers. Managers estimated that 10 percent of the computers were expected to require warranty repairs and these repairs would cost, on average, $160 per computer, for a total warranty estimate of $16 million.

Warranties Payable Gateway used $300 of parts to repair a computer under warranty.

Other Contingent Liabilities How likely is the liability? Can the amount be estimated? How is it accounted for? Possible Don’t mention it Remote Record a liability and estimated loss Contingent liability Yes Probable Describe in financial statement notes No

Payroll Accounting FICA Taxes Medicare Taxes Federal Income Tax State and Local Income Taxes Voluntary Deductions Gross Earnings Net Pay

Payroll Deductions FICA Taxes Medicare Taxes 2007: 6.2% of the first $97,500 earned in the year. 2007: 1.45% of all wages earned in the year. Employers owe the FICA and income tax amounts withheld from employees’ gross pay to the IRS. The simplest method to determine federal income tax withholding is to look up the amount in tables provided by the Internal Revenue Service.

Employer Payroll Taxes FICA Taxes Medicare Taxes Federal and State Unemployment Taxes Employers pay amounts equal to the amount withheld from the employees’ gross pay.

Unemployment Taxes Tax rate of 6.2% on the first $7,000 of wages paid to each employee. (A credit up to 5.4% is given for SUTA paid.) Federal Unemployment Tax (FUTA) Basic rate of 5.4% on the first $7,000 of wages paid to each employee. (Merit ratings may lower SUTA rates.) State Unemployment Tax (SUTA)

Employer Payroll Taxes Here is the entry to record the employer payroll taxes for General Mills’ employees’ salaries recorded earlier. SUTA: $15,730  .054 = $849.42 FUTA: $15,730  (0.062-0.054) = $125.84 FICA amounts are the same as that withheld from the employees’ gross pay.