c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Current Liabilities and Payroll Chapter 11

c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe and illustrate current liabilities related to accounts payable, current portion of long- term debt, and notes payable 1

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).

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.

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 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings. 2

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

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.

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.)

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 $1,462  Social security tax rate x 6%  Social security tax $  Earnings subject to 1.5% Medicare tax $1,462  Medicare tax rate x 1.5% Medicare tax Total FICA tax$109.65

Computing Employee Net Pay o John T. McGrath’s Net Pay

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)

L IABILITY FOR E MPLOYER ’ S P AYROLL T AXES

Social security tax$ ($13,902 x 6%) Medicare tax208.53($13,902 x 1.5%) SUTA146.34($2,710 x 5.4%) FUTA 21.68($2,710 x 0.8%) Total payroll taxes$1, 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:

Recording and Paying Payroll Taxes o The entry to journalize the payroll tax expense for Exhibit 5 is shown below.

c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Journalize entries for employee fringe benefits, including vacation pay and pensions. 4

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 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe the accounting treatment for contingent liabilities and journalize entries for product warranties. 5

C ONTINGENT L IABILITIES