This document discusses accounting for current liabilities and payroll. It begins by defining current liabilities as debts that must be paid within one year or the operating cycle, whichever is longer. Current liabilities include notes payable, accounts payable, unearned revenue, and accrued expenses. The document then explains how to account for specific types of current liabilities like notes payable, sales taxes payable, and unearned revenue. It discusses reporting and analyzing current liabilities, including contingent liabilities. Finally, the document covers payroll accounting, including computing gross earnings, payroll deductions, and net pay, and recording payroll journal entries.
ACC205 Discussion QuestionsAccounting Equation As you hav.docxannetnash8266
ACC205 Discussion Questions:
Accounting Equation
As you have learned in this week’s readings the Accounting Equation is Assets = Liabilities + Owners’ Equity. Is the accounting equation true in all instances? Provide sample transactions from your own experiences to demonstrate the validity of the Accounting Equation.
Accounts
What does the term account mean? What are the different classifications of accounts? How do the rules for debits and credits impact accounts? Please provide an example of how debits and credits impact accounts.
Accounting Cycle
Financial statements are a product of the accounting cycle. Think about two different companies: a manufacturing company, and a retail company. Why would different companies have different accounting cycles? Would you expect the steps of the accounting cycle to be the same for each company? Why or why not?
Bank Reconciliation
What is the purpose of a bank reconciliation? What are the reasons for differences between the cash reported in the accounting records and the cash balance in the bank statements?
LIFO vs. FIFO
The controller of Sagehen Enterprises believes that the company should switch from the LIFO method to the FIFO method. The controller’s bonus is based on the next income. It is the controller’s belief that the switch in inventory methods would increase the net income of the company. What are the differences between the LIFO and FIFO methods?
Depreciation
A variety of depreciation methods are used to allocate the cost of an asset to all of the accounting periods benefited by the use of the asset. Your client has just purchased a piece of equipment for $100,000. Explain the concept of depreciation. Which of the following depreciation methods would you recommend: straight-line depreciation, double declining balance method, or an alternative method?
Ratios
Ratios provide the users of financial statements with a great deal of information about the entity. Do ratios tell the whole story? How could liquidity ratios be used by investors to determine whether or not to invest in a company?
Profit Margin
Year Ending December 2012
Year Ending December 2011
Year Ending December 2010
Revenues
40,000
35,000
33,000
Operating Expenses
Salaries
15,000
10,000
9,000
Maintenance and Repairs
6,000
9,000
10,000
Rental Expense
2,500
2,500
2,500
Depreciation
2,000
2,000
2,000
Fuel
4,000
3,500
2,500
Total Operating Expenses
29,500
27,000
26,000
Operating Income
10,500
8,000
7,000
Sales and Administrative Expenses
6,000
4,000
3,000
Interest Expense
2,500
2,000
1,000
Net Income
2,000
2,000
3,000
Above is a comparative income statement for Cecil, Inc. for the years 2010, 2011, and 2012. Calculate the profit margin for each of these years. Comment on the profit margin trend.
BWeek Five Exercise Assignment
Financial Ratios
1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:
Edi.
Top of Form 1.If the Hunter Corp. has an ROE of 13 and.docxamit657720
Top of Form
1.
If the Hunter Corp. has an ROE of 13 and a payout ratio of 15 percent, what is its sustainable growth rate?
(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
2.
The most recent financial statements for Williamson, Inc., are shown here (assuming no income taxes):
Income Statement
Balance Sheet
Sales
$
8,300
Assets
$
23,200
Debt
$
9,000
Costs
5,490
Equity
14,200
Net income
$
2,810
Total
$
23,200
Total
$
23,200
Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $9,545.
What is the external financing needed?
(Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
External financing needed
$
[removed]
3.
*
The external funds needed (EFN) equation projects the addition to retained earnings as:
PM
× ? Sales.
PM
×? Sales
×
(1 -
d
).
PM
× Projected sales × (1 -
d
).
Projected sales × (1 -
d
).
PM
×Projected sales.
4.
The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its:
rate of return on assets.
internal rate of growth.
average historical rate of growth.
rate of return on equity.
sustainable rate of growth.
5.
The extended version of the percentage of sales method:
assumes that all net income will be paid out in dividends to stockholders.
assumes that all net income will be retained by the firm and offset by a reduction in debt.
is based on a capital intensity ratio of 1.0.
requires that all financial statement accounts change at the same rate.
separates accounts that vary with sales from those that do not vary with sales.
6.
Which one of the following depicts a correct relationship?
Dividend payout ratio = 1 – Retention ratio
Total asset turnover = 1 + Capital intensity ratio
ROA = ROE × (1 + Debt-equity ratio)
ROE = 1 – ROA
Equity multiplier = 1 – Debt-equity ratio
7.
The sustainable growth rate will be equivalent to the internal growth rate when, and only when,:
a firm has no debt.
the growth rate is positive.
the plowback ratio is positive but less than 1.
a firm has a debt-equity ratio equal to 1.
the retention ratio is equal to 1.
8.
Financial planning, when properly executed:
ignores the normal restraints encountered by a firm.
is based on the internal rate of growth.
reduces the necessity of daily management oversight of the business operations.
ensures internal consistency among the firm?s various goals.
eliminates the need to plan more than one year in advance.
9.
Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of 35 percent. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Marcie's can grow is equal to:
35 percent ...
You have just graduated from the MBA program of a large university, and one of your favorite courses was “Today’s Entrepreneurs.” In fact, you enjoyed it so much you have decided you want to “be your own boss.” While you were in the master’s program, your grandfather died and left you $300,000 to do with as you please. You are not an inventor and you do not have a trade skill that you can market; however, you have decided that you would like to purchase at least one established franchise in the fast foods area, maybe two (if profitable). The problem is that you have never been one to stay with any project for too long, so you figure that your time frame is three years. After three years you will sell off your investment and go on to something else.
You have narrowed your selection down to two choices; (1) Franchise L: Lisa’s Soups, Salads, & Stuff and (2) Franchise S: Sam’s Wonderful Fried Chicken. The net cash flows shown below include the price you would receive for selling the franchise in year 3 and the forecast of how each franchise will do over the three-year period. Franchise L’s cash flows will start off slowly but will increase rather quickly as people become more health conscious, while Franchise S’s cash flows will start off high but will trail off as other chicken competitors enter the marketplace and as people become more health conscious and avoid fried foods. Franchise L serves breakfast and lunch, while franchise S serves only dinner, so it is possible for you to invest in both franchises. You see these franchises as perfect complements to one another: you could attract both the lunch and dinner crowds and the health conscious and not so health conscious crowds with the franchises directly competing against one another.
ACC 291 GENIUS NEW Introduction Education--acc291genius.comclaric275
FOR MORE CLASSES VISIT
www.acc291genius.com
1. The term “receivables” refers to cash to be paid to debtors. merchandise to be collected from individuals or companies. cash to be paid to creditors. amounts due from individuals or companies. 2. Three accounting issues associated with accounts receivable are depreciating, valuing, and collecting. depreciating, returns, and valuing. accrual, bad debts, and accelerating collections. recognizing, valuing, and accelerating collections. 3. When the allowance method is used to account for uncollectible accounts Bad Debts Expense is debited when: management estimates the amount
ACC 291 GENIUS NEW Remember Education--acc291genius.comchrysanthemu4
FOR MORE CLASSES VISIT
www.acc291genius.com
1. The term “receivables” refers to cash to be paid to debtors. merchandise to be collected from individuals or companies. cash to be paid to creditors. amounts due from individuals or companies. 2. Three accounting issues associated with accounts receivable are depreciating, valuing, and collecting. depreciating, returns, and valuing. accrual, bad debts, and accelerating collections. recognizing, valuing, and accelerating collections. 3. When the allowance method is used to account for uncollectible
ACC 291 GENIUS NEW Education Begins--acc291genius.comkopiko191
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1. The term “receivables” refers to cash to be paid to debtors. merchandise to be collected from individuals or companies. cash to be paid to creditors. amounts due from
Sachpazis:Terzaghi Bearing Capacity Estimation in simple terms with Calculati...Dr.Costas Sachpazis
Terzaghi's soil bearing capacity theory, developed by Karl Terzaghi, is a fundamental principle in geotechnical engineering used to determine the bearing capacity of shallow foundations. This theory provides a method to calculate the ultimate bearing capacity of soil, which is the maximum load per unit area that the soil can support without undergoing shear failure. The Calculation HTML Code included.
ACC205 Discussion QuestionsAccounting Equation As you hav.docxannetnash8266
ACC205 Discussion Questions:
Accounting Equation
As you have learned in this week’s readings the Accounting Equation is Assets = Liabilities + Owners’ Equity. Is the accounting equation true in all instances? Provide sample transactions from your own experiences to demonstrate the validity of the Accounting Equation.
Accounts
What does the term account mean? What are the different classifications of accounts? How do the rules for debits and credits impact accounts? Please provide an example of how debits and credits impact accounts.
Accounting Cycle
Financial statements are a product of the accounting cycle. Think about two different companies: a manufacturing company, and a retail company. Why would different companies have different accounting cycles? Would you expect the steps of the accounting cycle to be the same for each company? Why or why not?
Bank Reconciliation
What is the purpose of a bank reconciliation? What are the reasons for differences between the cash reported in the accounting records and the cash balance in the bank statements?
LIFO vs. FIFO
The controller of Sagehen Enterprises believes that the company should switch from the LIFO method to the FIFO method. The controller’s bonus is based on the next income. It is the controller’s belief that the switch in inventory methods would increase the net income of the company. What are the differences between the LIFO and FIFO methods?
Depreciation
A variety of depreciation methods are used to allocate the cost of an asset to all of the accounting periods benefited by the use of the asset. Your client has just purchased a piece of equipment for $100,000. Explain the concept of depreciation. Which of the following depreciation methods would you recommend: straight-line depreciation, double declining balance method, or an alternative method?
Ratios
Ratios provide the users of financial statements with a great deal of information about the entity. Do ratios tell the whole story? How could liquidity ratios be used by investors to determine whether or not to invest in a company?
Profit Margin
Year Ending December 2012
Year Ending December 2011
Year Ending December 2010
Revenues
40,000
35,000
33,000
Operating Expenses
Salaries
15,000
10,000
9,000
Maintenance and Repairs
6,000
9,000
10,000
Rental Expense
2,500
2,500
2,500
Depreciation
2,000
2,000
2,000
Fuel
4,000
3,500
2,500
Total Operating Expenses
29,500
27,000
26,000
Operating Income
10,500
8,000
7,000
Sales and Administrative Expenses
6,000
4,000
3,000
Interest Expense
2,500
2,000
1,000
Net Income
2,000
2,000
3,000
Above is a comparative income statement for Cecil, Inc. for the years 2010, 2011, and 2012. Calculate the profit margin for each of these years. Comment on the profit margin trend.
BWeek Five Exercise Assignment
Financial Ratios
1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:
Edi.
Top of Form 1.If the Hunter Corp. has an ROE of 13 and.docxamit657720
Top of Form
1.
If the Hunter Corp. has an ROE of 13 and a payout ratio of 15 percent, what is its sustainable growth rate?
(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
2.
The most recent financial statements for Williamson, Inc., are shown here (assuming no income taxes):
Income Statement
Balance Sheet
Sales
$
8,300
Assets
$
23,200
Debt
$
9,000
Costs
5,490
Equity
14,200
Net income
$
2,810
Total
$
23,200
Total
$
23,200
Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $9,545.
What is the external financing needed?
(Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
External financing needed
$
[removed]
3.
*
The external funds needed (EFN) equation projects the addition to retained earnings as:
PM
× ? Sales.
PM
×? Sales
×
(1 -
d
).
PM
× Projected sales × (1 -
d
).
Projected sales × (1 -
d
).
PM
×Projected sales.
4.
The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its:
rate of return on assets.
internal rate of growth.
average historical rate of growth.
rate of return on equity.
sustainable rate of growth.
5.
The extended version of the percentage of sales method:
assumes that all net income will be paid out in dividends to stockholders.
assumes that all net income will be retained by the firm and offset by a reduction in debt.
is based on a capital intensity ratio of 1.0.
requires that all financial statement accounts change at the same rate.
separates accounts that vary with sales from those that do not vary with sales.
6.
Which one of the following depicts a correct relationship?
Dividend payout ratio = 1 – Retention ratio
Total asset turnover = 1 + Capital intensity ratio
ROA = ROE × (1 + Debt-equity ratio)
ROE = 1 – ROA
Equity multiplier = 1 – Debt-equity ratio
7.
The sustainable growth rate will be equivalent to the internal growth rate when, and only when,:
a firm has no debt.
the growth rate is positive.
the plowback ratio is positive but less than 1.
a firm has a debt-equity ratio equal to 1.
the retention ratio is equal to 1.
8.
Financial planning, when properly executed:
ignores the normal restraints encountered by a firm.
is based on the internal rate of growth.
reduces the necessity of daily management oversight of the business operations.
ensures internal consistency among the firm?s various goals.
eliminates the need to plan more than one year in advance.
9.
Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of 35 percent. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Marcie's can grow is equal to:
35 percent ...
You have just graduated from the MBA program of a large university, and one of your favorite courses was “Today’s Entrepreneurs.” In fact, you enjoyed it so much you have decided you want to “be your own boss.” While you were in the master’s program, your grandfather died and left you $300,000 to do with as you please. You are not an inventor and you do not have a trade skill that you can market; however, you have decided that you would like to purchase at least one established franchise in the fast foods area, maybe two (if profitable). The problem is that you have never been one to stay with any project for too long, so you figure that your time frame is three years. After three years you will sell off your investment and go on to something else.
You have narrowed your selection down to two choices; (1) Franchise L: Lisa’s Soups, Salads, & Stuff and (2) Franchise S: Sam’s Wonderful Fried Chicken. The net cash flows shown below include the price you would receive for selling the franchise in year 3 and the forecast of how each franchise will do over the three-year period. Franchise L’s cash flows will start off slowly but will increase rather quickly as people become more health conscious, while Franchise S’s cash flows will start off high but will trail off as other chicken competitors enter the marketplace and as people become more health conscious and avoid fried foods. Franchise L serves breakfast and lunch, while franchise S serves only dinner, so it is possible for you to invest in both franchises. You see these franchises as perfect complements to one another: you could attract both the lunch and dinner crowds and the health conscious and not so health conscious crowds with the franchises directly competing against one another.
ACC 291 GENIUS NEW Introduction Education--acc291genius.comclaric275
FOR MORE CLASSES VISIT
www.acc291genius.com
1. The term “receivables” refers to cash to be paid to debtors. merchandise to be collected from individuals or companies. cash to be paid to creditors. amounts due from individuals or companies. 2. Three accounting issues associated with accounts receivable are depreciating, valuing, and collecting. depreciating, returns, and valuing. accrual, bad debts, and accelerating collections. recognizing, valuing, and accelerating collections. 3. When the allowance method is used to account for uncollectible accounts Bad Debts Expense is debited when: management estimates the amount
ACC 291 GENIUS NEW Remember Education--acc291genius.comchrysanthemu4
FOR MORE CLASSES VISIT
www.acc291genius.com
1. The term “receivables” refers to cash to be paid to debtors. merchandise to be collected from individuals or companies. cash to be paid to creditors. amounts due from individuals or companies. 2. Three accounting issues associated with accounts receivable are depreciating, valuing, and collecting. depreciating, returns, and valuing. accrual, bad debts, and accelerating collections. recognizing, valuing, and accelerating collections. 3. When the allowance method is used to account for uncollectible
ACC 291 GENIUS NEW Education Begins--acc291genius.comkopiko191
FOR MORE CLASSES VISIT
www.acc291genius.com
1. The term “receivables” refers to cash to be paid to debtors. merchandise to be collected from individuals or companies. cash to be paid to creditors. amounts due from
Sachpazis:Terzaghi Bearing Capacity Estimation in simple terms with Calculati...Dr.Costas Sachpazis
Terzaghi's soil bearing capacity theory, developed by Karl Terzaghi, is a fundamental principle in geotechnical engineering used to determine the bearing capacity of shallow foundations. This theory provides a method to calculate the ultimate bearing capacity of soil, which is the maximum load per unit area that the soil can support without undergoing shear failure. The Calculation HTML Code included.
6th International Conference on Machine Learning & Applications (CMLA 2024)ClaraZara1
6th International Conference on Machine Learning & Applications (CMLA 2024) will provide an excellent international forum for sharing knowledge and results in theory, methodology and applications of on Machine Learning & Applications.
Forklift Classes Overview by Intella PartsIntella Parts
Discover the different forklift classes and their specific applications. Learn how to choose the right forklift for your needs to ensure safety, efficiency, and compliance in your operations.
For more technical information, visit our website https://intellaparts.com
Final project report on grocery store management system..pdfKamal Acharya
In today’s fast-changing business environment, it’s extremely important to be able to respond to client needs in the most effective and timely manner. If your customers wish to see your business online and have instant access to your products or services.
Online Grocery Store is an e-commerce website, which retails various grocery products. This project allows viewing various products available enables registered users to purchase desired products instantly using Paytm, UPI payment processor (Instant Pay) and also can place order by using Cash on Delivery (Pay Later) option. This project provides an easy access to Administrators and Managers to view orders placed using Pay Later and Instant Pay options.
In order to develop an e-commerce website, a number of Technologies must be studied and understood. These include multi-tiered architecture, server and client-side scripting techniques, implementation technologies, programming language (such as PHP, HTML, CSS, JavaScript) and MySQL relational databases. This is a project with the objective to develop a basic website where a consumer is provided with a shopping cart website and also to know about the technologies used to develop such a website.
This document will discuss each of the underlying technologies to create and implement an e- commerce website.
Industrial Training at Shahjalal Fertilizer Company Limited (SFCL)MdTanvirMahtab2
This presentation is about the working procedure of Shahjalal Fertilizer Company Limited (SFCL). A Govt. owned Company of Bangladesh Chemical Industries Corporation under Ministry of Industries.
Using recycled concrete aggregates (RCA) for pavements is crucial to achieving sustainability. Implementing RCA for new pavement can minimize carbon footprint, conserve natural resources, reduce harmful emissions, and lower life cycle costs. Compared to natural aggregate (NA), RCA pavement has fewer comprehensive studies and sustainability assessments.
Welcome to WIPAC Monthly the magazine brought to you by the LinkedIn Group Water Industry Process Automation & Control.
In this month's edition, along with this month's industry news to celebrate the 13 years since the group was created we have articles including
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Gen AI Study Jams _ For the GDSC Leads in India.pdf
ch11.pdf
1. 11-1
Current Liabilities and Payroll
Accounting
11
Learning Objectives
Explain how to account for current liabilities.
Discuss how current liabilities are
reported and analyzed.
Explain how to account for payroll.
3
2
1
2. 11-2
A debt that a
company expects to pay within one year or
the operating cycle, whichever is longer.
Current liabilities include notes payable, accounts payable,
unearned revenues, and accrued liabilities such as taxes payable,
salaries and wages payable, and interest payable.
LO 1
LEARNING
OBJECTIVE
Explain how to account for current
liabilities.
1
What Is a Current Liability?
3. 11-3
To be classified as a current liability, a debt must be
expected to be paid within:
a. one year.
b. the operating cycle.
c. 2 years.
d. (a) or (b), whichever is longer
Question
What Is a Current Liability?
LO 1
4. 11-4
Notes Payable
Written promissory note.
Frequently issued to meet short-term financing
needs.
Requires the borrower to pay interest.
Issued for varying periods.
Current Liabilities
LO 1
5. 11-5
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2017, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1.
Instructions
a) Prepare the entry on September 1st.
b) Prepare the adjusting entry on December 31st, assuming
monthly adjusting entries have not been made.
c) Prepare the entry required on January 1, 2018, the
maturity date.
Notes Payable
LO 1
6. 11-6
Notes Payable 100,000
Cash 100,000
Interest Payable 4,000
Interest Expense 4,000
$100,000 x 12% x 4/12 = $4,000
b) Prepare the adjusting entry on December 31st.
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2017, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1.
a) Prepare the entry on September 1st.
LO 1
Notes Payable
7. 11-7
Cash 104,000
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2017, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1, 2018.
c) Prepare the entry at maturity.
Interest Payable 4,000
Notes Payable 100,000
LO 1
Notes Payable
8. 11-8
Sales Taxes Payable
Current Liabilities
LO 1
Sales taxes are expressed as a stated percentage of
the sales price.
Selling company (retailer)
► collects tax from the customer.
► enters tax separately in cash register or includes in
total receipts.
► remits the collections to the state’s department of
revenue.
9. 11-9
Illustration: The March 25 cash register reading for Cooley
Grocery shows sales of $10,000 and sales taxes of $600 (sales
tax rate of 6%), the journal entry is:
Mar. 25
Sales Revenue 10,000
Cash 10,600
Sales Tax Payable 600
Sales Taxes Payable
LO 1
10. 11-10
Illustration: Cooley Grocery enters total receipts of $10,600.
Because the amount received from the sale is equal to the
sales price 100% plus 6% of sales, (sales tax rate of 6%), the
journal entry is:
Mar. 25
Sales revenue 10,000
Cash 10,600
Sales tax payable 600
Sometimes companies do not enter sales taxes separately in
the cash register.
* $10,600 ÷ 1.06 = $10,000
*
Sales Taxes Payable
LO 1
11. 11-11
Unearned Revenue
Revenues received before the company
delivers goods or
provides services.
Current Liabilities
LO 1
Illustration 11-2
Unearned revenue and
revenue accounts
12. 11-12
Illustration: Superior University sells 10,000 season football
tickets at $50 each for its five-game home schedule. The entry
for the sale of season tickets is:
Unearned Ticket Revenue 500,000
Cash 500,000
Aug. 6
Ticket Revenue 100,000
Unearned Ticket Revenue 100,000
Sept. 7
As each game is completed, Superior records the recognition of
revenue with the following entry.
Unearned Revenue
LO 1
13. 11-13
Illustration: Wendy Construction issues a five-year, interest-bearing
$25,000 note on January 1, 2017. This note specifies that each January 1,
starting January 1, 2018, Wendy should pay $5,000 of the note. When the
company prepares financial statements on December 31, 2017,
1. What amount should be reported as a current liability? ___________
2. What amount should be reported as a long-term liability? _________
Current Maturities of Long-Term Debt
Portion of long-term debt that comes due in the current
year.
No adjusting entry required.
$5,000
$20,000
Current Liabilities
LO 1
14. 11-14
You and several classmates are studying for the next accounting
examination. They ask you to answer the following questions.
1. If cash is borrowed on a $50,000, 6-month, 12% note on
September 1, how much interest expense would be incurred by
December 31?
Solution
DO IT! Current Liabilities
1
$50,000 x 12% x 4/12 = $2,000
LO 1
15. 11-15
You and several classmates are studying for the next accounting
examination. They ask you to answer the following questions.
2. How is the sales tax amount determined when the cash register
total includes sales taxes?
Solution
First, divide the total cash register receipts by 100% plus the sales
tax percentage to find the sales revenue amount.
Second, subtract the sales revenue amount from the total cash
register receipts to determine the sales taxes.
DO IT! Current Liabilities
1
LO 1
16. 11-16
You and several classmates are studying for the next accounting
examination. They ask you to answer the following questions.
3. If $15,000 is collected in advance on November 1 for 3 months’
rent, what amount of rent revenue should be recognized by
December 31?
Solution
$15,000 x 2/3 = $10,000
DO IT! Current Liabilities
1
LO 1
17. 11-17
Contingent liability - Potential liability that may become
an actual liability in the future.
Three levels of probability:
Probable
Reasonably possible
Remote
LEARNING
OBJECTIVE
Discuss how current liabilities are
reported and analyzed.
2
LO 2
Reporting Uncertainty
19. 11-19
A contingent liability should be recorded in the accounts when:
a. it is probable the contingency will happen, but the
amount cannot be reasonably estimated.
b. it is reasonably possible the contingency will happen,
and the amount can be reasonably estimated.
c. it is probable the contingency will happen, and the
amount can be reasonably estimated.
d. it is reasonably possible the contingency will happen,
but the amount cannot be reasonably estimated.
Question
Reporting Uncertainty
LO 2
20. 11-20
Contingencies: How Big Are They?
Contingent liabilities abound in the real world. Consider Manville Corp.,
which fi led for bankruptcy when it was hit by billions of dollars in asbestos
product-liability claims. Companies having multiple toxic waste sites are
faced with cleanup costs that average $10 to $30 million and can reach as
high as $500 million depending on the type of waste. For life and health
insurance companies and their stockholders, the cost of diseases such as
diabetes, Alzheimer’s, and AIDS is like an iceberg: Everyone wonders how
big such costs really are and what damage they might do in the future. And
frequent-flyer programs are so popular that airlines at one time owed
participants more than 3 million round-trip domestic tickets. That’s enough
to fly at least 5.4 billion miles—free for the passengers, but at what future
cost to the airlines?
Accounting Across the Organization
LO 2
21. 11-21
Product Warranties
Promise made by a seller to a buyer to make good on a
deficiency of quantity, quality, or performance in a product.
Estimated cost of honoring product warranty contracts
should be recognized as an expense in the period in which
the sale occurs.
Reporting a Contingent Liability
LO 2
22. 11-22
Illustration: Denson Manufacturing Company sells 10,000
washers and dryers at an average price of $600 each. The
selling price includes a one-year warranty on parts. Denson
expects that 500 units (5%) will be defective and that warranty
repair costs will average $80 per unit. In 2017, the company
honors warranty contracts on 300 units, at a total cost of
$24,000. At December 31, compute the estimated warranty
liability.
Illustration 11-3
Computation of estimated
product warranty liability
Reporting a Contingent Liability
LO 2
23. 11-23
Warranty Expense 40,000
Warranty Liability 40,000
Illustration: Denson Manufacturing Company sells 10,000
washers and dryers at an average price of $600 each. The
selling price includes a one-year warranty on parts. Denson
expects that 500 units (5%) will be defective and that warranty
repair costs will average $80 per unit. In 2017, the company
honors warranty contracts on 300 units, at a total cost of
$24,000. At December 31, compute the estimated warranty
liability. Make the required adjusting entry.
Reporting a Contingent Liability
LO 2
24. 11-24
Illustration: Prepare the entry to record the repair costs
incurred in 2017 to honor warranty contracts on 2017 sales.
Warranty Liability 24,000
Repair Parts 24,000
Assume that the company replaces 20 defective units in
January 2018, at an average cost of $80 in parts and labor.
Warranty Liability 1,600
Repair Parts 1,600
Reporting a Contingent Liability
LO 2
26. 11-26
Liquidity refers to the
ability to pay maturing
obligations and meet
unexpected needs for
cash.
Current ratio permits
us to compare the
liquidity of different-
sized companies and
of a single company at
different times.
Illustration 11-6
Illustration 11-5
Analysis of Current Liabilities
LO 2
27. 11-27
Lepid Company has the following account balances at December
31, 2017. Notes payable ($80,000 due after 12/31/18) $200,000,
unearned service revenue $75,000, other long-term debt ($30,000
due in 2018) $150,000, salaries and wages payable $22,000, other
accrued expenses $15,000, and accounts payable $100,000. In
addition, Lepid is involved in a lawsuit. Legal counsel feels it is
probable Lepid will pay damages of $38,000 in 2018.
a. Prepare the current liabilities section of Lepid’s December 31,
2017, balance sheet.
b. Lepid’s current assets are $504,000. Compute Lepid’s working
capital and current ratio.
LO 2
DO IT! Reporting and Analyzing
2
28. 11-28
a. Prepare the current liabilities section of Lepid’s December 31,
2017, balance sheet.
LO 2
DO IT! Reporting and Analyzing
2
Current liabilities
Notes payable $120,000
Accounts payable 100,000
Unearned service revenue 75,000
Lawsuit liability 38,000
Salaries and wages payable 22,000
Other accrued expenses 15,000
Long-term debt due within one year 30,000
Total current liabilities $400,000
29. 11-29
b. Lepid’s current assets are $504,000. Compute Lepid’s working
capital and current ratio.
LO 2
DO IT! Reporting and Analyzing
2
Working capital = Current assets - Current liabilities =
$504,000 - $400,000 = $104,000
Current ratio = Current assets ÷ Current liabilities =
$504,000 ÷ $400,000 = 1.26:1
30. 11-30
“Payroll” pertains to both:
Salaries - managerial, administrative, and sales personnel
(monthly or yearly rate).
Wages - store clerks, factory employees, and manual
laborers (rate per hour).
Involves computing three amounts: (1) gross earnings, (2)
payroll deductions, and (3) net pay.
Determining the Payroll
LO 3
LEARNING
OBJECTIVE Explain how to account for payroll.
3
31. 11-31
Total compensation earned by an employee (wages or
salaries, plus any bonuses and commissions).
GROSS EARNINGS
Determining the Payroll
Illustration 11-7
Computation of total wages
LO 3
33. 11-33
Mandatory:
FICA tax
Federal income tax
State income tax
PAYROLL DEDUCTIONS
Voluntary:
Charity
Insurance
Union dues
Pension plans
Determining the Payroll
LO 3
34. 11-34
Mandatory:
FICA tax
Federal income tax
State income tax
Social Security and Medicare tax
Supplemental retirement,
employment disability, and medical
benefits.
Determining the Payroll
PAYROLL DEDUCTIONS
Illustration 11-9
FICA tax rate and tax base
LO 3
35. 11-35
Employers are required to
withhold income taxes from
employees’ pay.
Withholding amounts are based
on gross wages and the number
of allowances claimed.
Determining the Payroll
Mandatory:
FICA tax
Federal income tax
State income tax
PAYROLL DEDUCTIONS
LO 3
36. 11-36
Most states (and some cities)
require employers to withhold
income taxes from employees’
earnings.
Determining the Payroll
Mandatory:
FICA tax
Federal income tax
State income tax
PAYROLL DEDUCTIONS
LO 3
37. 11-37
Gross earnings minus payroll deductions.
NET PAY
Determining the Payroll
Illustration 11-12
Computation of net pay
LO 3
40. 11-40
Illustration: Prepare the entry Academy Company would make to
record the payroll for the week ending January 14.
RECOGNIZING PAYROLL EXPENSES AND
LIABILITIES
Salaries and Wages Expense 17,210.00
FICA Taxes Payable 1,316.57
Federal Income Taxes Payable 3,490.00
State Income Taxes Payable 344.20
United Fund Contributions Payable 421.50
Union Dues Payable 115.00
Salaries and Wages Payable 11,522.73
Recording the Payroll
LO 3
41. 11-41
Illustration: Prepare the entry Academy Company would make to
record the payment of the payroll.
RECORDING PAYMENT OF THE PAYROLL
Recording the Payroll
Salaries and Wages Payable 11,522.73
Cash 11,522.73
LO 3
43. 11-43
In January, gross earnings in Ramirez Company were $40,000. All
earnings are subject to 7.65% FICA taxes. Federal income tax
withheld was $9,000, and state income tax withheld was $1,000. (a)
Calculate net pay for January, and (b) record the payroll.
DO IT! Payroll
3a
(a) Net pay: $40,000 - (7.65% x $40,000) - $9,000 - $1,000 =
$26,940
(b) Salaries and Wages Expense 40,000
FICA Taxes Payable 3,060
Federal Income Taxes Payable 9,000
State Income Taxes Payable 1,000
Salaries and Wages Payable 26,940
LO 3
44. 11-44
These taxes are:
FICA taxes
Federal
unemployment tax
State
unemployment tax
Same rate and maximum earnings
as the employee’s.
Payroll tax expense results from three taxes that
governmental agencies levy on employers.
Employer Payroll Taxes
LO 3
45. 11-45
FUTA tax rate is 6.2% of first
$7,000 of taxable wages.
Employers who pay the state
unemployment tax on a timely
basis will receive an offset credit
of up to 5.4%. Therefore, the net
federal tax rate is generally
0.8%.
Employer Payroll Taxes
These taxes are:
FICA tax
Federal
unemployment tax
State
unemployment tax
Payroll tax expense results from three taxes that
governmental agencies levy on employers.
LO 3
46. 11-46
SUTA basic rate is usually 5.4% on
the first $7,000 of wages paid.
Employer Payroll Taxes
Payroll tax expense results from three taxes that
governmental agencies levy on employers.
These taxes are:
FICA tax
Federal
unemployment tax
State
unemployment tax
LO 3
48. 11-48
Illustration: Academy records the payroll tax expense
associated with the January 14 payroll (Illustration 11-14) with
the following entry. Use the following rates: FICA 8%, state
unemployment 5.4%, federal unemployment 0.8%.
Payroll Tax Expense 2,383.59
State Unemployment Tax Payable 929.34
FICA Tax Payable 1,316.57
*** $17,210.00 x 5.4% = $929.34
* $ 17,210.00 x 7.65% = $1,316.57
Federal Unemployment Tax Payable 137.68
*
** $17,210 x .8% = $137.68
**
***
Recording Employer Payroll Taxes
LO 3
49. 11-49
Employer payroll taxes do not include:
a. Federal unemployment taxes.
b. State unemployment taxes.
c. Federal income taxes.
d. FICA taxes.
Question
Recording Employer Payroll Taxes
LO 3
50. 11-50
LO 3
It Cost $74,000 to Put $44,000 in Sally’s Pocket
Sally works for Bogan Communications, a small company in New Jersey that
provides audio systems. She makes $59,000 a year but only nets $44,000. What
happened to the other $15,000? Well, $2,376 goes for Sally’s share of the medical
and dental insurance that Bogan provides, $126 for state unemployment insurance,
$149 for disability insurance, and $856 for Medicare. New Jersey takes $1,893 in
income taxes, and the federal government gets $3,658 for Social Security and
another $6,250 for income tax withholding. All of this adds up to some 22% of Sally’s
gross pay going to Washington or Trenton. Employing Sally costs Bogan plenty too.
Bogan has to write checks for $74,000 so Sally can receive her $59,000 in base pay.
Health insurance is the biggest cost. While Sally pays nearly $2,400 for coverage,
Bogan pays the rest—$9,561. Then, the federal and state governments take $56 for
federal unemployment coverage, $149 for disability insurance, $300 for workers’
comp, and $505 for state unemployment insurance. Finally, the government requires
Bogan to pay $856 for Sally’s Medicare and $3,658 for her Social Security. When
you add it all up, it costs $74,000 to put $44,000 in Sally’s pocket and to give her
$12,000 in benefits.
Source: Michael P. Fleischer, “Why I’m Not Hiring,” Wall Street Journal (August 9,
2010), p. A17.
Accounting Across the Organization
51. 11-51
Companies must report FICA taxes and federal income taxes
withheld no later than one month following the close of each
quarter.
Companies generally file and remit federal unemployment
taxes annually on or before January 31 of the subsequent
year. Companies usually file and pay state unemployment
taxes by the end of the month following each quarter.
Employers must provide each employee with a Wage and Tax
Statement (Form W-2) by January 31.
Filing and Remitting Payroll Taxes
LO 3
53. 11-53
THE MISSING CONTROLS
Human resource controls. Thorough background checks should be performed.
No employees should begin work until they have been approved by the Board of
Education and entered into the payroll system. No employees should be entered
into the payroll system until they have been approved by a supervisor. All paychecks
should be distributed directly to employees at the official school locations by designated
employees.
Independent internal verification. Budgets should be reviewed monthly to identify
situations where actual costs significantly exceed budgeted amounts.
Source: Adapted from Wells, Fraud Casebook (2007), pp. 164–171.
Total take: $150,000
ANATOMY OF A FRAUD
Art was a custodial supervisor for a large school district. The district was supposed to
employ between 35 and 40 regular custodians, as well as 3 or 4 substitute custodians to
fill in when regular custodians were absent. Instead, in addition to the regular custodians,
Art “hired” 77 substitutes. In fact, almost none of these people worked for the district.
Instead, Art submitted time cards for these people, collected their checks at the district
office, and personally distributed the checks to the “employees.” If a substitute’s check
was for $1,200, that person would cash the check, keep $200, and pay Art $1,000.
Advance slide in slide show to reveal missing controls. LO 3
54. 11-54
As applied to payrolls, the objectives of internal control are
1. to safeguard company assets against unauthorized
payments of payrolls, and
2. to ensure the accuracy and reliability of the accounting
records pertaining to payrolls.
Internal Control for Payroll
LO 3
56. 11-56
In January, the payroll supervisor determines that gross earnings for
Halo Company are $70,000. All earnings are subject to 7.65% FICA
taxes, 5.4% state unemployment taxes, and 0.8% federal
unemployment taxes. Halo asks you to record the employer’s payroll
taxes.
DO IT! Employer’s Payroll Taxes
3b
The entry to record the employer’s payroll taxes is:
Payroll Tax Expense 9,695
FICA Taxes Payable (7.65%) 5,355
Federal Unemployment Taxes Payable (0.8%) 560
State Unemployment Taxes Payable (5.4%) 3,780
LO 3
57. 11-57
Paid absences for vacation, illness, and holidays.
Accrue a liability if:
Payment of the compensation is probable.
The amount can be reasonably estimated.
Paid Absences
LO 4
LEARNING
OBJECTIVE
APPENDIX 11A: Discuss additional fringe benefits
associated with employee compensation.
4
58. 11-58
Vacation Benefits Expense 3,300
Vacation Benefits Liability 3,300
Illustration: Academy Company employees are entitled to one
day’s vacation for each month worked. If 30 employees earn an
average of $110 per day in a given month record the adjusting
entry to record accrued vacation for the month.
Vacation Benefits Liability 1,100
Cash 1,100
Academy pays vacation benefits for 10 employees.
Paid Absences
LO 4
59. 11-59
Postretirement Benefits
Post-retirement benefits are benefits that employers
provide to retired employees for
1. health care and life insurance
2. pensions.
Companies account for post-retirement benefits on the
accrual basis.
LO 4
60. 11-60
POSTRETIREMENT HEALTHCARE AND LIFE
INSURANCE BENEFITS
Companies estimate and expense postretirement costs
during the working years of the employee.
Companies rarely sets up funds to meet the cost of the
future benefits.
► Pay-as-you-go basis for these costs.
► Major reason is that the company does not receive a
tax deduction until it actually pays the medical bill.
Postretirement Benefits
LO 4
61. 11-61
An arrangement whereby an employer provides benefits to employees
after they retire for services they provided while they were working.
Pension Plan
Administrator
Employer
Retired
Employees Benefit Payments Assets &
Liabilities
PENSION
PLANS
Postretirement Benefits
LO 4
62. 11-62
Defined-Contribution Plan Defined-Benefit Plan
Employer contribution
determined by plan (fixed)
Risk borne by employees
Benefits based on plan value
Benefit determined by plan
Employer contribution varies
(determined by Actuaries)
Risk borne by employer
Companies record pension costs as an expense.
Actuaries estimate the employer contribution by considering
mortality rates, employee turnover, interest and earning rates, early
retirement frequency, future salaries, etc.
PENSION
PLANS
Postretirement Benefits
LO 4
63. 11-63
Similarities
The basic definition of a liability under GAAP and IFRS is very
similar. Liabilities are defined by the IASB as a present obligation of
the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources
embodying economic benefits.
The accounting for current liabilities such as notes payable,
unearned revenue, and payroll taxes payable are similar between
GAAP and IFRS.
Key Points
LEARNING
OBJECTIVE
Compare the accounting for liabilities under
GAAP and IFRS.
5
A Look at IFRS
LO 5
64. 11-64
Under IFRS, liabilities are classified as current if they are expected
to be paid within 12 months.
Differences
Companies using IFRS sometimes show liabilities before assets.
Also, they will sometimes show long-term liabilities before current
liabilities.
Under IFRS, companies sometimes will net current liabilities against
current assets to show working capital on the face of the statement
of financial position.
Key Points
A Look at IFRS
LO 5
65. 11-65
Differences
Under GAAP, some contingent liabilities are recorded in the financial
statements, others are disclosed, and in some cases no disclosure
is required. Unlike GAAP, IFRS reserves the use of the term
contingent liability to refer only to possible obligations that are not
recognized in the financial statements but may be disclosed if
certain criteria are met.
Key Points
A Look at IFRS
LO 5
66. 11-66
Differences
For those items that GAAP would treat as recordable contingent
liabilities, IFRS instead uses the term provisions. Provisions are
defined as liabilities of uncertain timing or amount. Examples of
provisions would be provisions for warranties, employee vacation
pay, or anticipated losses. Under IFRS, the measurement of a
provision related to an uncertain obligation is based on the best
estimate of the expenditure required to settle the obligation.
Key Points
A Look at IFRS
LO 5
67. 11-67
The FASB and IASB are currently involved in two projects, each of
which has implications for the accounting for liabilities. One project is
investigating approaches to differentiate between debt and equity
instruments. The other project, the elements phase of the conceptual
framework project, will evaluate the definitions of the fundamental
building blocks of accounting. The results of these projects could
change the classification of many debt and equity securities.
Looking to the Future
A Look at IFRS
LO 5
68. 11-68
Which of the following is false?
a) Under IFRS, current liabilities must always be presented
before noncurrent liabilities.
b) Under IFRS, an item is a current liability if it will be paid
within the next 12 months.
c) Under IFRS, current liabilities are shown in order of liquidity.
d) Under IFRS, a liability is only recognized if it is a present
obligation.
IFRS Self-Test Questions
A Look at IFRS
LO 5
69. 11-69
The joint projects of the FASB and IASB could potentially:
a) change the definition of liabilities.
b) change the definition of equity.
c) change the definition of assets.
d) All of the above.
IFRS Self-Test Questions
A Look at IFRS
LO 5