Completing the Operating Cycle Completing the Operating Cycle C H A P T E R 9

Learning Objective 1 Account for the various components of employee compensation expense.

Describe the Employee Compensation Time Line Time

Salaries and wages earned by employees in the current period. What are the correct journal entries? Accounting for salaries of $2,700: When employees work: Payroll When wages are paid: However, accounting for salaries and related payroll taxes is never this simple.

Withholdings Which taxes must employers withhold from employees’ salaries and wages?

Salaries Expense Entry Sally Wage works for you and earns $32,400 annually.. Make the appropriate journal entry for Sally’s January salary, estimate withholdings.

Payroll Tax Expense Entry Now that the appropriate journal entry is made for Sally’s wages, make the entry to record your company’s portion.

Compensated Absences Matching principle The expense associated with the compensated absence must be accounted for in the period in which it is earned by the employee. Therefore, record the expense estimated at $125. Journal entry when the sick day is actually taken:

Describe Bonuses and Stock Options

Bonuses and Stock Options Your firm met its target goals this year. Your President, Mr. Will Fences, is therefore entitled to a bonus. His annual salary is $1 million and his bonus is 15 percent, payable at the end of the year. Make the appropriate December 31 journal entry for the bonus.

Discuss Post-employment Benefits

Define and Discuss Pensions

Learning Objective 2 Compute income tax expense including appropriate consideration of deferred tax items.

Taxes on Operations What other taxes are companies responsible to pay?

Michael’s Mowers sold a lawnmower for $340. What is the journal entry assuming the state charges a 5 percent sales tax? Example: Sales Taxes

Example: Property Taxes The City of Greenlawn assesses property taxes on land and buildings. Michael’s Mowers pays its property taxes on a calendar-year basis and owes Greenlawn $6,200 for Make Michael’s appropriate journal entry.

Example: Income Taxes Michael’s Mowers pretax income is $385,000. Its income tax rate for 2003 for both federal and state is 30 percent. Prepare an adjusting entry at year-end showing the company’s tax expense.

Learning Objective 3 Distinguish between contingent items that should be recognized in the financial statements and those that should be merely disclosed in the financial statement notes.

Define Contingencies Contingency:

Probable Complete Contingent Liabilities Table TermDefinitionAccounting Reasonably Possible Remote

Learning Objective 4 Understand when an expenditure should be recorded as an asset and when it should be recorded as an expense.

Describe the Expense/Asset Continuum Land and Building Research and Development Repairs Office Supplies Used

Michael’s builds a new $1 million store. Should it simply show this as an expense or capitalize it as an asset? Expense or Capitalize? Why the Debate?

Learning Objective 5 Prepare an income statement summarizing operating activities as well as other revenues and expenses, extraordinary items, and earnings per share.

Income Statement Put these major components of an Income Statement in correct order: Net sales revenue Net income Sales revenue Cost of goods sold Operating expenses Operating income

Review the Income Statement Format

Define Other Revenue and Expenses

Define Extraordinary Items

Discuss and Define Earnings per Share

Chapter 9 Completed