1. i es
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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
2. Learning Objectives
1. Describe and illustrate current liabilities
related to accounts payable, current portion of
long-term debt, and notes payable.
2. Determine employer liabilities for payroll,
including liabilities arising from employee
earnings and deductions from earnings.
3. Describe payroll accounting systems that use
a payroll register, employee earnings records,
and a general journal.
3. Learning Objectives
4. Journalize entries for employee fringe
benefits, including vacation pay and
pensions.
5. Describe the accounting treatment for
contingent liabilities and journalize entries
for product warranties.
6. Describe and illustrate the use of the quick
ratio in analyzing a company’s ability to pay
its current liabilities.
5. Current Liabilities
o
When a company or a bank advances credit, it
is making a loan.
o
The company or bank is called a creditor (or
lender).
o
The individuals or companies receiving the
loans are called debtors (or borrowers).
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
6. Current Liabilities
o Long-term liabilities are debts due beyond one
year.
o Current Liabilities are debts that will be paid
out of current assets and are due within one
year.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
7. Accounts Payable
o
Accounts payable transactions arise from
purchasing goods or services for use in a
company’s operations or from purchasing
merchandise for resale.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
9. Current Portion of Long-Term Debt
o
Long-term liabilities are often paid back in
periodic payments, called installments.
Installments that are due within the coming
year must be classified as a current liability.
The installments due after the coming year are
classified as a long-term liability.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
10. Short-Term Notes Payable
o Nature’s Sunshine Company issues a 90-day,
12% note for $1,000, dated August 1, 2011 to
Murray Co. for a $1,000 overdue account.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
11. Short-Term Notes Payable
o When the note matures, the entry to record the
payment of $1,000 plus $30 interest ($1,000 x
12% x 90/360) is as follows:
Interest Expense appears
on the income statement
as an “Other Expense.”
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
12. Short-Term Notes Payable
o On May 1, Bowden Co. (borrower) purchased
merchandise on account from Coker Co.
(creditor), $10,000, 2/10, n/30. The
merchandise cost Coker Co. $7,500.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
14. Short-Term Notes Payable
o On May 31, Bowden Co. issued a 60-day, 12%
note for $10,000 to Coker Co. on account.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
16. Short-Term Notes Payable
o On July 30, Bowden Co. paid Coker Co. the
amount due on the note of May 31, the face
amount of $10,000 plus interest of $200
($10,000 x 12% x 60/360).
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
18. Short-Term Notes Payable
o On September 19, Iceburg Company borrowed
cash from First National Bank by issuing a
$4,000, 90-day, 15% note to the bank.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
19. Short-Term Notes Payable
o On December 18, Iceburg Company paid First
National Bank $4,000 plus interest of $150
($4,000 x 15% x 90/360).
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
20. Short-Term Notes Payable
o A discounted note has the following
characteristics:
The interest rate on the note is called the discount
rate.
The amount of interest on the note, called the
discount, is computed by multiplying the discount
rate times the face amount of the note.
The debtor (borrower) receives the face amount of
the note less the discount, called the proceeds.
The debtor must repay the face amount of the note
on the due date.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
21. Short-Term Notes Payable
o On August 10, Cary Company issues a $20,000,
90-day discounted note to Western National
Bank. The discount rate is 15%, and the amount
of the discount is $750 ($20,000 x 15% x
90/360).
proceeds
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
22. Short-Term Notes Payable
o The entry when Cary Company pays the
discounted note on November 8 is as follows:
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
23. Lear
ning
Obje
Dete
ctive
rmin
payr
oll, in e emplo
y
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from luding li er liabili
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and
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2
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
24. Payroll and Payroll Taxes
o
In accounting, payroll refers to the amount
paid to employees for services they provided
during the period. A company’s payroll is
important for the following reasons:
Payroll and related payroll taxes significantly
affect the net income of most companies.
Payroll is subject to federal and state
regulations.
Good employee morale requires payroll to be
paid timely and accurately.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
25. Liability for Employee Earnings
o
Salary usually refers to payment for
managerial and administrative services.
Salary is normally expressed in terms of a
month or a year.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
26. Liability for Employee Earnings
o Wages usually refers to payment for employee
manual labor. The rate of wages is normally
stated on an hourly or weekly basis.
(concluded)
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
27. Liability for Employee Earnings
o John 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. His earnings are
computed as follows:
Earnings at regular rate (40 x $34)
Earnings at overtime rate (2 x $51)
Total earnings
$1,360
102
$1,462
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
28. Deductions from Employee Earnings
o
The total earnings of an employee for a
payroll period, including any overtime pay,
are called gross pay.
o
From this amount is subtracted one or more
deductions to arrive at the net pay.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
30. Deductions from Employee Earnings
o John T. McGrath made $1,462 for the week
ending December 27. McGrath’s W-4 (previous
slide) claims one withholding allowance of $70.
Thus, the wages used to determine McGrath’s
withholding bracket in Exhibit 3 (next slide)
are $1,392 ($1,462 – $70).
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
32. Deductions from Employee Earnings
o
The Federal Insurance Contributions Act
(FICA) tax withheld contributes to the
following two federal programs.
Social security, which provides payments for
retirees, survivors, and disability insurance.
(Assume 6% on all earnings.)
Medicare, which provides health insurance
benefits for senior citizens. (Assume 1.5% on all
earnings.)
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
33. Deductions from Employee Earnings
o John T. McGrath’s earnings for the week ending
December 27 are $1,462. Total FICA tax to be
withheld is calculated as follows:
Earnings subject to 6%
social security tax
Social security tax rate
$1,462
x 6%
Social security tax
$ 87.72
Earnings subject to 1.5% Medicare tax
$1,462
Medicare tax rate x 1.5% Medicare tax
21.93
$109.65
Total FICA tax
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
34. Computing Employee Net Pay
o John T. McGrath’s Net Pay
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
35. Liability for Employer’s Payroll Taxes
o
Employers are subject to the following payroll
taxes for amounts paid their employees:
FICA Tax
Federal Unemployment Compensation Tax (FUTA)
State Unemployment Compensation Tax (SUTA)
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
37. Lear
ning
Obje
ctive
Desc
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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
38. Accounting Systems for Payroll and Payroll Taxes
o
Payroll systems should be designed to:
Pay employees accurately and timely.
Meet regulatory requirements of federal, state, and
local agencies.
Provide useful data for management decision-
making needs.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
39. Payroll Register
o
The payroll register is a multicolumn report
used for summarizing the data for each
payroll period. Exhibit 5 illustrates a payroll
register for McDermott Supply Co.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
43. Recording and Paying Payroll Taxes
o Employers must match the employee’s social
security and Medicare tax contributions. In
addition, the employer must pay SUTA tax of
5.4% and FUTA tax of 0.8% (assume on
$2,710). For McDermott Supply’s payroll of
December 27, these payroll taxes are
computed as follows:
Social security tax
Medicare tax
SUTA
FUTA
Total payroll taxes
$ 834.12
208.53
146.34
21.68
$1,210.67
($13,902 x 6%)
($13,902 x 1.5%)
($2,710 x 5.4%)
($2,710 x 0.8%)
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
44. Recording and Paying Payroll Taxes
o The entry to journalize the payroll tax expense
for Exhibit 5 is shown below.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
45. Employee’s Earnings Record
o
A detailed payroll record must be kept for
each employee. This record is called an
employee’s earnings record. Exhibit 6 (next
two slides) shows a portion of John T.
McGrath’s employee’s earnings record.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
49. Payroll Checks
o
At the end of each payroll period, payroll
checks are prepared. Each check includes a
detachable statement showing the details of
how the net pay was computed.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
51. Payroll System Design
o The inputs into a payroll system may be
classified as:
Constants, which are data that remain unchanged
from payroll to payroll.
• Employee names
• Social security numbers
Variables, which are data that change from payroll to
payroll.
• Number of hours or days worked
• Accrued sick leave
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
52. Internal Controls for Payroll Systems
o
Some examples of payroll controls include the
following:
If a check-signing machine is used, blank payroll
checks and access to the machine should be
restricted to prevent their theft or misuse.
The hiring and firing of employees should be
properly authorized and approved in writing.
(continued)
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
53. Internal Controls for Payroll Systems
All changes in pay rates should be properly
authorized and approved in writing.
Employees should be observed when arriving for
work to verify that employees are “checking in” for
work only once and only for themselves.
Payroll checks should be distributed by someone
other than employee supervisors.
A special payroll bank account should be used.
(continued)
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
54. Lear
ning
Obje
ctive
Journ
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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
55. Employees’ Fringe Benefits
o
Many companies provide their employees
benefits in addition to salary and wages
earned. Such fringe benefits may include:
Vacation pay (sometimes called compensated
absences)
Medical benefits
Retirement benefits
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
56. Vacation Pay
o Assume that employees earn one day of
vacation for each month worked. The
estimated vacation pay for the year ending
December 31 is $325,000. The adjusting entry
for the accrued vacation is shown below.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
57. Pensions
o
A pension is a cash payment to retired
employees. Pension rights are accrued by
employees as they work, based on the
employer’s pension plan. Two types of pension
plans are:
Defined contribution plan
Defined benefit plan
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
58. Pensions
o In a defined contribution plan, the company
invests contributions on behalf of the
employee during the employee’s working
years.
Normally, the employee and employer contribute to
the plan.
The employee’s pension depends on the total
contributions and the investment returns earned on
those contributions.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
59. Pensions
o Heaven Scent Perfumes Company contributes
10% of employee monthly salaries to an
employee 401K plan. Assuming $500,000 of
monthly salaries, the journal entry to record
the monthly contribution is shown below.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
60. Pensions
o In a defined benefit plan, the employer is
obligated to pay for (fund) the employee’s
future pension benefits.
Many companies are replacing their defined benefit
plans with defined contribution plans.
A retired employee receives a specific amount
based on his or her salary history and years of
service.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
61. Pensions
o The defined benefit plan of Hinkle Co. requires
an annual pension cost of $80,000. The annual
contribution is based on estimates of Hinkle’s
future pension liability. On December 31,
Hinkle Co. pays $60,000 to the pension fund.
The entry to record the payment and unfunded
liability is shown below.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
62. Postretirement Benefits Other than Pensions
o
Employees may earn rights to other
postretirement benefits, such as dental care,
eye care, medical care, life insurance, tuition
assistance, tax services, and legal services.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
64. Lear
ning
Obje
Desc
ctive
r ibe
the a
ccou
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c
journ ontinge nting tre
nt lia
a
alize
biliti tment
entri
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r pro
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antie
s.
5
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
65. Contingent Liabilities
o Some liabilities may arise from past
transactions if certain events occur in the
future. These potential obligations are called
contingent liabilities. The accounting for
contingent liabilities depends on the following
two factors:
Likelihood of occurring: Probable, reasonably
possible, or remote
Measurement: Estimable or not estimable
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
66. Contingent Liabilities
o During June, a company sold a product for
$60,000 that includes a 36-month warranty for
repairs. The average cost of repairs over the
warranty period is 5% of the sales price. The
entry to record the estimated product warranty
expense for June is shown below.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
67. Contingent Liabilities
o If a $200 part is replaced under warranty on
August 16, the entry is as follows:
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
69. Lear
ning
Obje
Desc
ctive
r ibe
the q and illu
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.
6
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
70. Quick Ratio
o
Current position analysis helps creditors
evaluate a company’s ability to pay its current
liabilities. It is based on:
Working capital, the excess of current assets over
current liabilities
Current ratio, determined by dividing the current
assets by the current liabilities
Quick ratio, an indicator of a company’s short-term
liquidity
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
71. Quick Ratio
o The quick ratio measures the “instant” debt-
paying ability of a company and is computed
as follows:
Quick Assets
Quick Ratio =
Current Liabilities
o Quick assets are cash and other current assets
that can be easily converted to cash.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
72. i es
ilit
iab roll
tL
ren d Pay
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C
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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
