10 Current Liabilities and Payroll

10-2 Liabilities that are to be paid out of current assets and are due within a short time, usually within one year, are called current liabilities. Accounts payable Current portion of long-term debt Notes payable 1 Current Liabilities

10-3 Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale. 1 Current Liabilities

Accounts Payable as a Percent of Total Current Liabilities Exhibit 1

10-5 Current Portion of Long-Term Debt 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. 1

10-6 The total amount of the installments due after the coming year is classified as a long-term liability. 1 Long-Term Liabilities

10-7 A firm issues a 90-day, 12% note for $1,000, dated August 1, 2008 to Murray Co. for a $1,000 overdue account. Short-Term Notes Payable 1

10-8 On October 30, when the note matures, the firm pays the $1,000 principal plus $30 interest ($1,000 × 12% × 90/360). 1 Interest Expense appears on the income statement as an “Other Expense.” Short-Term Notes Payable

10-9 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, Short-Term Notes Payable

10-10 DescriptionDebitCredit Bowden Co. (Borrower) Mdse. Inventory10,000 Accounts Payable10,000 Coker Co. (Creditor) DescriptionDebitCredit Accounts Receivable10,000 Sales10,000 Cost of Mdse. Sold7,500 Mdse. Inventory7,500 1

10-11 On May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account. Accounts Payable10,000 Notes Payable10,000 DescriptionDebitCredit Bowden Co. (Borrower) Notes Receivable10,000 Accounts Receivable10,000 Coker Co. (Creditor) DescriptionDebitCredit 1

10-12 On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest: $10,000 × 12% × 60/360. Notes Payable10,000 Interest Expense200 Cash10,200 DescriptionDebitCredit Bowden Co. (Borrower) Cash10,200 Interest Revenue 200 Notes Receivable10,000 Coker Co. (Creditor) DescriptionDebitCredit 1

10-13 On September 19, Iceburg Company issues a $4,000, 90-day, 15% note to First National Bank. 1 Short-Term Notes Payable

10-14 On the due date of the note (December 18), Iceburg Company owes $4,000 plus interest of $150 ($4,000 × 15% × 90/360). 1 Short-Term Notes Payable

10-15 Payroll refers to the amount paid to employees for the services they provide during a period. A company’s payroll is important for the following reasons: 1.Employees are sensitive to payroll errors and irregularities. 2.Good employee morale requires payroll to be paid timely and accurately. 3.Payroll is subject to various federal and state regulations. 4.Payroll and related payroll taxes significantly affect the net income of most companies. 2

10-16 Salary usually refers to payment for managerial and administrative services. Salary is normally expressed in terms of a month or a year. 2 Payroll and Payroll Taxes

10-17 Wages usually refers to payment for employee manual labor. The rate of wages is normally stated on an hourly or weekly basis. 2 Payroll and Payroll Taxes

10-18 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. Earnings at regular rate (40 × $34)$1,360 Earnings at overtime rate (2 × $51) 102 Total earnings$1,462 Computing Employee’s Earnings 2

10-19 The total earnings of an employee for a payroll period are called gross pay. From this is subtracted one or more deductions to arrive at the net pay. Net pay is the amount that the employer must pay the employee. 2 Payroll and Payroll Taxes

10-20 FICA Tax The amount of FICA tax withheld is the employees’ contribution to two federal programs. The first program, called social security, is for old age, survivors, and disability insurance (OASDI). The second program, called Medicare, provides health insurance for senior citizens. 2

10-21 John T. McGrath’s annual earnings prior to the payroll period ending on December 27 total $99,038. Earnings subject to 6% social security tax ($100,000 – $99,038)$ 962 Social security tax rate× 6% Social security tax$57.72 Earnings subject to 1.5% Medicare tax$1,462 Medicare tax rate × 1.5% Medicare tax Total FICA tax$79.65 John T. McGrath’s FICA Tax 2

10-22 John T. McGrath’s Net Pay Gross earnings for the week$1, Deductions: Social security tax (Slide 35)$ Medicare tax (Slide 35)21.93 Federal income tax (Slide 31) Retirement savings20.00 United Way 5.00 Total deductions Net pay$1,

10-23 Liability for Employer’s Payroll Taxes Employers are subject to the following payroll taxes for amounts paid their employees: 1.FICA tax 2.Federal Unemployment Compensation Tax (FUTA) 3.State Unemployment Compensation Tax (SUTA) 2

10-24 Employer’s Federal Payroll Taxes Employers are required to contribute to the social security and Medicare programs for each employee. The employer must match the employee’s contribution to each program. 2

10-25 A FUTA tax of 6.2% is levied on employers only to provide for temporary unemployment to those who become unemployed as a result of layoffs due to economic causes beyond their control. This tax applies to only the first $7,000 of the earnings of each covered employee during a calendar year. Employer’s Federal Unemployment Taxes 2

10-26 This employer tax also provides temporary payments to those who become unemployed. The FUTA and SUTA programs are closely coordinated, with the states distributing the unemployment checks. SUTA tax rates and earnings subject to tax vary by state. 2 Employer’s State Unemployment Taxes

Responsibility for Tax Payments Exhibit 4

10-28 Internal Controls for Payroll Systems 1.If a check-signing machine is used, blank payroll checks and access to the machine should be restricted to prevent their theft. 2.The hiring and firing of employees should be properly authorized and approved in writing. 3.All changes in pay rates should be properly authorized and approved in writing. (continued) 3

Payroll checks should be distributed by someone other than employee supervisors. 6.A special payroll bank account should be used. 3 4.Employees should be observed when arriving for work to verify they are “checking in” for work only once and only for themselves.

10-30 Many companies provide their employees a variety of benefits in addition to salary and wages earned. Such fringe benefits may take many forms, including vacations, medical, and retirement benefits. 4 Employees’ Fringe Benefits

Benefit Dollars as a Percent of Payroll Costs Exhibit 9

10-32 Most employers grant vacation rights, sometimes called compensated absences, to their employees. The estimated vacation pay for the year ending December 31 is $325,000. Vacation Pay 4 325,000

10-33 A pension represents a cash payment to retired employees. Rights to pension payments are earned by employees during their working years, based on the pension plan established by the employer. 4 Pension

10-34 In a defined contribution plan, a fixed amount of money is invested on the employee’s behalf during the employee’s working years. 4 Defined Contribution Plan

10-35 The pension plan of Heaven Scent Perfumes Company requires an employer contribution of 10% of employee monthly salaries to an employee 401k plan. December salaries totaled $500,000, so $50,000 was sent to the employees’ plan administrator. 4 Heaven Scent Perfumes Co.

10-36 The entry to record the payment to the plan administrator is shown below: 4 Heaven Scent Perfumes Co.

10-37 Defined Benefit Plan In a defined benefit plan, employers promise employees a fixed annual pension benefit at retirement, based on years of service and compensation levels. 4

10-38 Postretirement Benefits Other Than Pensions 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. 4

10-39 Some liabilities may arise from past transactions if certain events occur in the future. These potential obligations are called contingent liabilities. 5 Contingent Liabilities

10-40 The accounting for contingent liabilities depends on the following two factors: 1.Likelihood of occurring: Probable, reasonably possible, or remote. 2.Measurement: Estimable or not estimable. 5 Contingent Liabilities

10-41 During June, a company sells a product for $60,000 on which there is a 36-month warranty. Past experience indicates that the average cost to repair defects is 5% of the sales price over the warranty period. Recording Contingent Liabilities 5

10-42 If a customer required a $200 part replacement on August 16, the entry would be: 5 Recording Contingent Liabilities

Accounting Treatment of Contingent Liabilities Exhibit 10