Chapter 11 Current Liabilities and Payroll © 2009 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin Slide 2 Measuring Liabilities A liability must be recorded whenever a transaction or event obligates a company to give up assets or provide services in the future. The dollar amount that is reported for a liability depends on three considerations: 1.The initial dollar amount of the liability. 2.Additional amounts owed to the creditor. 3.Payments or services provided to the creditor.

McGraw-Hill/Irwin Slide 3 Current Liabilities Short-term obligations that will be paid within one year. Long-Term Liabilities Long-term obligations that will be paid after one year. Classifying Liabilities

McGraw-Hill/Irwin Slide 4 Classifying Liabilities

McGraw-Hill/Irwin Slide 5 Measures whether the company has enough current assets to pay what it currently owes. Calculating and Interpreting the Current Ratio Current Ratio = Current Assets Current Liabilities

McGraw-Hill/Irwin Slide 6 Accountants record liabilities when the company is obligated to give up assets or services. Accounts Payable The advantage of using Accounts Payable to buy goods and services is that suppliers do not charge interest on the unpaid balances, unless they are overdue.

McGraw-Hill/Irwin Slide 7 Notes Payable Notes Payable represents the amount the company owes others as a result of issuing promissory notes Interest 10 Months 2009Interest 2 months 11/01/0912/31/09 10/31/10 Create note. Borrow $100,000. Adjust records. Accrue 2 months of interest. Pay 12 months of interest. Pay $100,000 principal.

McGraw-Hill/Irwin Slide 8 On November 1, 2009, General Mills would make the following entry. What entry would General Mills make on December 31, 2009 to accrue the interest on this note? Notes Payable

McGraw-Hill/Irwin Slide 9 Interest = Principal × Rate × Time Interest = $100,000 × 6% × 2 / 12 Notes Payable 2010 Interest 10 Months 2009Interest 2 months 11/01/0912/31/09 10/31/10 Create note. Borrow $100,000. Adjust records. Accrue 2 months of interest. Pay 12 months of interest. Pay $100,000 principal.

McGraw-Hill/Irwin Slide 10 On October 31, 2010, General Mills must pay the interest and principal on the note. $6,000 = $100,000 × 6% × 12/12 Notes Payable

McGraw-Hill/Irwin Slide 11 Current Portion of Long-Term Debt When long-term debt has a portion of the principal due within one year, that portion of the loan must be reported in the current liabilities section of the balance sheet, called Current Portion of Long-Term Debt.

McGraw-Hill/Irwin Slide 12 Retailers collect sales tax from consumers at the time of sale and forward it to the state government. They report the taxes they collect as a current liability until they forward them to the government. Sales Tax Payable Best Buy sold a television for $1,000 cash plus 5 percent sales tax

McGraw-Hill/Irwin Slide 13 On October 1, IAC, the owner of Ticketmaster and Match.com, received $30 for a three-month subscription for October, November, and December. Unearned Revenue

McGraw-Hill/Irwin Slide 14 On October 31, IAC has provided one month of services for the prepaid subscription. Unearned Revenue

McGraw-Hill/Irwin Slide 15 Warranties Payable According to the matching principle, warranty costs should be reported as an expense when the sale is recorded. Because these costs are not paid by the company at the time of the sale, a liability is also recorded. In the second quarter, Gateway sold 1 million computers. Managers estimated that 10 percent of the computers were expected to require warranty repairs and these repairs would cost, on average, $160 per computer, for a total warranty estimate of $16 million.

McGraw-Hill/Irwin Slide 16 Gateway used $300 of parts to repair a computer under warranty. Warranties Payable

McGraw-Hill/Irwin Slide 17 PossiblePossible Don’t mention it RemoteRemote Record a liability and estimated loss Contingent liability YesYes ProbableProbable Describe in financial statement notes NoNo Other Contingent Liabilities How likely is the liability? Can the amount be estimated? How is it accounted for?

McGraw-Hill/Irwin Slide 18 FICA Taxes Medicare Taxes Federal Income Tax State and Local Income Taxes Voluntary Deductions Gross Earnings Net Pay Payroll Accounting

McGraw-Hill/Irwin Slide 19 FICA Taxes Medicare Taxes 2007: 6.2% of the first $97,500 earned in the year. 2007: 1.45% of all wages earned in the year. Employers owe the FICA and income tax amounts withheld from employees’ gross pay to the IRS. Payroll Deductions The simplest method to determine federal income tax withholding is to look up the amount in tables provided by the Internal Revenue Service.

McGraw-Hill/Irwin Slide 20 Recording the Payroll Payroll Register - For the Week Ending January 7, 2009 Gross EarningsPayroll DeductionsPaymentAccounts Debited Total United NetCheckOfficeWages EmployeeHoursRegularOvertimeGrossFITFICAWayTotalPayNo.Salary Exp.Expense Arent, Jason Caldwell, Nancy Lithgow, Nigel Zvinakis, Kris Total 14, , , , , , , , Most companies use a Payroll Register similar to the one shown below the keep detail information about employee earnings, payroll deductions, payments, and accounting information. We will use the information in the total row to prepare our journal entry for payroll.

McGraw-Hill/Irwin Slide 21 Here is information about the payroll for General Mills: Recording the Payroll

McGraw-Hill/Irwin Slide 22 FICA Taxes Medicare Taxes Federal and State Unemployment Taxes Employers pay amounts equal to the amount withheld from the employees’ gross pay. Employer Payroll Taxes

McGraw-Hill/Irwin Slide 23 Tax rate of 6.2% on the first $7,000 of wages paid to each employee. (A credit up to 5.4% is given for SUTA paid.) Federal Unemployment Tax (FUTA) Basic rate of 5.4% on the first $7,000 of wages paid to each employee. (Merit ratings may lower SUTA rates.) State Unemployment Tax (SUTA) Unemployment Taxes

McGraw-Hill/Irwin Slide 24 Here is the entry to record the employer payroll taxes for General Mills’ employees’ salaries recorded earlier. SUTA: $15,730 .054 = $ FUTA: $15,730  ( ) = $ FICA amounts are the same as that withheld from the employees’ gross pay. Employer Payroll Taxes

McGraw-Hill/Irwin Slide 25 Internal Controls Establish Responsibilities Segregate Duties Restrict Access Document Procedures Independent Verification

McGraw-Hill/Irwin Slide 26 Supplement 11A : Employee Benefits Employer expenses for pensions or medical, dental, life and disability insurance Employer expenses for paid vacation by employees Post-Employment Benefits Paid Leaves

McGraw-Hill/Irwin Slide 27 Supplement 11A : Employee Benefits Defined Benefit The employer promises to pay specified amounts (benefits) to employees after they retire. Defined Contribution The employer is responsible only for making specified contributions to the plan, not for the amounts that are ultimately paid out as pensions.

End of Chapter 11 Slide 28