1 Chapter 9 Current Liabilities, Contingencies, and Payroll Financial Accounting 4e by Porter and Norton

2 Liabilities and shareholders' equity Current liabilities: Notes payable$184.9 Accounts payable689.5 Income taxes 20.4 Other taxes180.4 Accrued interest170.6 Other accrued liabilities824.9 Current maturities of long-term debt Total current liabilities$ 2,248.3 McDonald's Corporation Partial Balance Sheet (in millions) Require payment within one year Listed in order of liquidity

3 Accounts Payable  Purchase of inventory, goods or services on credit 2/10, n30  Discount payment terms offered to encourage early payment

4 Promissory Note S.J.Devona I promise to pay $1,000 plus 12% annual interest on December 31, Date: January 1, 2004 Signed:_________ Lamanski Co. Total repayment = $1,120 $1,000 + ($1,000 x 12%)

5 8 Current Maturities of Long-Term Debt Principal repayment on borrowings due within one year of balance sheet date Due in upcoming year

6 Taxes Payable Record expense when incurred; not when paid Record 2004 tax expense Taxes Paid 12/31/043/15/05

7 11 Contingent Liability  Obligation involving existing condition  Outcome not known with certainty  Dependent upon some future event  Actual amount is estimated

8  Accrue estimated amount if: liability is probable amount can be reasonably estimated Contingent Liability In year criteria are met: Expense (loss)XXX Liability XXX

9 13  Warranties  Premium or coupon offers  Lawsuits Typical Contingent Liabilities

10 Recording Contingent Liabilities Quickkey Computer sells a computer product for $5,000 with a one-year warranty. In 2004, 100 of these products were sold for a total sales revenue of $500,000. Analyzing past records, Quickkey estimates that repairs will average 2% of total sales. Example:

11 Recording Contingent Liabilities Probable liability has been incurred? Amount reasonably estimable? Warranty Expense 100,000 Estimated Liability 100,000 YES Record in 2004:

12 Disclosing Contingent Liabilities IF not probable but reasonably possible OR amount not estimable Disclose in footnotes

13 17 Contingent Assets  Contingent gains and assets are not recorded but may be disclosed in footnotes  Conservatism principle applies

14 Appendix Accounting Tools: Payroll Accounting

15 Calculation of Gross Wages  Hourly Multiply the number of hours worked times employee’s hourly rate  Salaried Paid at a flat rate per week, month, or year, regardless of hours

16 Calculation of Net Pay Gross wages - Income tax (federal, state, local) - FICA - Voluntary deductions (includes health insurance, retirement contributions, savings plans, charitable contributions, union dues) = Net pay

17 Employer Payroll Taxes  Not deducted from paycheck – employer pays taxes per employee, in addition to salary FICA – employer’s share Unemployment tax

18 Payroll Accounting Example: Gross wages for Kori Company for July are $100,000. The following amounts have been withheld from employees’ paychecks: Kori Company’s unemployment tax rate is 3%. Make the appropriate payroll entries. Income Tax$20,000 FICA 7,650 United Way contributions 5,000 Union dues 3,000

19 Payroll Accounting Salary Expense100,000 Salary Payable64,350 Income Tax Payable20,000 FICA Payable 7,650 United Way Payable 5,000 Union Dues Payable 3,000 To record July salary & deductions

20 Payroll Accounting Salary Payable Cash To record payment of employee salaries Payroll Tax Expense FICA Payable Unemployment Tax Payable To record employer’s payroll taxes

21 Compensated Absences  Employee absences for which the employee will be paid Vacation, illness, holidays  Accrued as a liability if The services have been rendered The rights (days) accumulate Payment is probable and can be reasonably estimated

22 End of Chapter 9