1. Chapter 11-1 CHAPTER 11 CURRENT LIABILITIES AND PAYROLL ACCOUNTING Accounting Principles, Eighth Edition

2. Chapter 11-2 Current liability is debt with two key features: 1. Company expects to pay the debt from existing current assets or through the creation of other current liabilities. 2. Company will pay the debt within one year or the operating cycle, whichever is longer. Accounting for Current Liabilities LO 1 Explain a current liability, and identify the major types of current liabilities. Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes payable, salaries payable, and interest payable.

3. Chapter 11-3 Accounting for Current Liabilities LO 2 Describe the accounting for notes payable. Notes Payable Written promissory note. Require the borrower to pay interest. Issued for varying periods. Notes (Loans) due for payment within one year of the balance sheet date are usually classified as current liabilities.

4. Chapter 11-4 E11-2 E11-2 On June 1, Melendez Company borrows $90,000 from First Bank on a 6-month, $90,000, 12% note. Instructions a)Prepare the entry on June 1. b)Prepare the adjusting entry on June 30. c)Prepare the entry at maturity (December 1), assuming monthly adjusting entries have been made through November 30. d)What was the total financing cost (interest expense)? Accounting for Current Liabilities LO 2 Describe the accounting for notes payable.

5. Chapter 11-5 What formula do we use to calculate Interest?

6. Chapter 11-6 E11-2 E11-2 On June 1, Melendez Company borrows $90,000 from First Bank on a 6-month, $90,000, 12% note. a)Prepare the entry on June 1. Accounting for Current Liabilities $90,000 x 12% x 1/12 = $900 b)Prepare the adjusting entry on June 30. (Chapter 3) LO 2 Describe the accounting for notes payable.

7. Chapter 11-7 E11-2 E11-2 On June 1, Melendez Company borrows $90,000 from First Bank on a 6-month, $90,000, 12% note. c) Prepare the entry at maturity (December 1), assuming monthly adjusting entries have been made through November 30. (payoff entry… principle + interest) Accounting for Current Liabilities d)What was the total financing cost (interest expense)? LO 2 Describe the accounting for notes payable.

8. Chapter 11-8 Accounting for Current Liabilities LO 3 Explain the accounting for other current liabilities. Sales Tax Payable Sales taxes are expressed as a stated percentage of the sales price. Either rung up separately or included in total receipts. Retailer collects tax from the customer. Retailer remits the collections to the state’s department of revenue.

9. Chapter 11-9 E11-3 E11-3 In providing accounting services to small businesses, you encounter the following situations pertaining to cash sales. 1. Warkentinne Company rings up sales and sales taxes separately on its cash register. On April 10, the register totals are sales $30,000 and sales taxes $1,500. 2. Rivera Company does not segregate sales and sales taxes. Its register total for April 15 is $23,540, which includes a 7% sales tax. Instructions: Prepare the entry to record the sales transactions and related taxes for each client. Accounting for Current Liabilities LO 3 Explain the accounting for other current liabilities.

10. Chapter 11-10 E11-3 E11-3 1. Warkentinne Company rings up sales and sales taxes separately on its cash register. On April 10, the register totals are sales $30,000 and sales taxes $1,500. Accounting for Current Liabilities LO 3 Explain the accounting for other current liabilities.

11. Chapter 11-11 E11-3 E11-3 2. Rivera Company does not segregate sales and sales taxes. Its register total for April 15 is $23,540, which includes a 7% sales tax. Accounting for Current Liabilities $23,540 / 1.07 = $22,000 LO 3 Explain the accounting for other current liabilities.

12. Chapter 11-12 Accounting for Current Liabilities LO 3 Explain the accounting for other current liabilities. Unearned Revenue Revenues that are received before the company delivers goods or provides services. 1.Company debits Cash, and credits a current liability account (unearned revenue). 2.When the company earns the revenue, it debits the Unearned Revenue account, and credits a revenue account.

13. Chapter 11-13 Accounting for Current Liabilities LO 3 Explain the accounting for other current liabilities.

14. Chapter 11-14 Accounting for Current Liabilities LO 3 Explain the accounting for other current liabilities.

15. Chapter 11-15 Accounting for Current Liabilities Current Maturities of Long-Term Debt Portion of long-term debt that comes due in the current year. No adjusting entry required. LO 3 Explain the accounting for other current liabilities.

16. Chapter 11-16 Accounting for Current Liabilities LO 4 Explain the financial statement presentation and analysis of current liabilities. Statement Presentation and Analysis Illustration 11-3

17. Chapter 11-17 Contingent Liabilities LO 5 Describe the accounting and disclosure requirements for contingent liabilities. The likelihood that the future event will confirm the incurrence of a liability can range from probable to remote. FASB uses three areas of probability: Probable. Reasonably possible. Remote.

18. Chapter 11-18 AccountingProbability Accrue Footnote Ignore Probable Reasonably Possible Remote Contingent Liabilities LO 5 Describe the accounting and disclosure requirements for contingent liabilities.

19. Chapter 11-19 Product Warranties Promise made by a seller to a buyer to make good on a deficiency of quantity, quality, or performance in a product. Recording a Contingent Liability Estimated cost of honoring product warranty contracts should be recognized as an expense in the period in which the sale occurs. Contingent Liabilities LO 5 Describe the accounting and disclosure requirements for contingent liabilities.

20. Chapter 11-20 BE11-6 On December 1, Diaz Company introduces a new product that includes a one-year warranty on parts. In December, 1,000 units are sold. Management believes that 5% of the units will be defective and that the average warranty costs will be $80 per unit. Prepare the adjusting entry at December 31 to accrue the estimated warranty cost. Dec. 31 Warranty expense 4,000 Warranty liability4,000 Contingent Liabilities LO 5 Describe the accounting and disclosure requirements for contingent liabilities. 1,000 units x 5% x $80 = $4,000

21. Chapter 11-21 The term “payroll” pertains to both: Salaries - managerial, administrative, and sales personnel (monthly or yearly rate). Wages - store clerks, factory employees, and manual laborers (rate per hour). Payroll Accounting Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay.

22. Chapter 11-22 Total compensation earned by an employee (wages or salaries, plus any bonuses and commissions). Gross Earnings LO 6 Compute and record the payroll for a pay period. Determining the Payroll Illustration 11-8

23. Chapter 11-23 Mandatory: FICA tax Federal income tax State income tax NYC/Yonkers Payroll Deductions LO 6 Compute and record the payroll for a pay period. Determining the Payroll Voluntary: Charity Retirement Union dues (if optional to join) Health and life insurance Pension plans

24. Chapter 11-24 Mandatory: FICA tax Federal income tax State income tax (NYC/Yonkers) Payroll Deductions LO 6 Compute and record the payroll for a pay period. Determining the Payroll Social Security taxes  Supplemental retirement, employment disability, and medical benefits.  In 2006, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $94,200 of gross earnings for each employee.

25. Chapter 11-25 Mandatory: FICA tax Federal income tax State income tax Payroll Deductions LO 6 Compute and record the payroll for a pay period. Determining the Payroll  Employers are required to withhold income taxes from employees pay.  Withholding amounts are based on gross wages and the number of allowances claimed.

26. Chapter 11-26

27. Chapter 11-27 Mandatory: FICA tax Federal income tax State income tax Payroll Deductions LO 6 Compute and record the payroll for a pay period. Determining the Payroll  Most states (and some cities) require employers to withhold income taxes from employees’ earnings.

28. Chapter 11-28 Gross earnings minus payroll deductions. Net Pay LO 6 Compute and record the payroll for a pay period. Determining the Payroll Illustration 11-11

29. Chapter 11-29 Employer required by law to keep a cumulative record of each employee’s gross earnings, deductions, and net pay during the year. Maintaining Payroll Department Records LO 6 Compute and record the payroll for a pay period. Recording the Payroll Illustration 11-12 Employee earnings record

30. Chapter 11-30 Many companies find it useful to prepare a payroll register. This record accumulates the gross earnings, deductions, and net pay by employee for each pay period. Maintaining Payroll Department Records LO 6 Compute and record the payroll for a pay period. Recording the Payroll Illustration 11-13 Payroll register

31. Chapter 11-31 E11-10 Joyce Kieffer’s regular hourly wage rate is $15, and she receives a wage of 1.5 times the regular hourly rate for work in excess of 40 hours. During a March weekly pay period Joyce worked 42 hours. Her gross earnings prior to the current week were $6,000. Joyce is married and claims three withholding allowances. Her only voluntary deduction is for group hospitalization insurance at $25 per week. For state income tax, assume a 2.0% rate. Instructions: Record Joyce’s pay, assuming she is an office computer operator. Recognizing Payroll Expenses and Liabilities LO 6 Compute and record the payroll for a pay period. Recording the Payroll

32. Chapter 11-32 E11-10 Record Joyce’s pay, assuming she is an office computer operator. LO 6 Compute and record the payroll for a pay period. Recording the Payroll *** Table, next slide ***

33. Chapter 11-33 E11-10 Joyce is married and claims three withholding allowances. LO 6 Compute and record the payroll for a pay period. Recording the Payroll Federal Tax Withholding Illustration 11-10

34. Chapter 11-34 Using the facts from E11-10. Recording Payment of the Payroll LO 6 Compute and record the payroll for a pay period. Recording the Payroll

35. Chapter 11-35 Payroll tax expense results from three taxes that governmental agencies levy on employers. LO 7 Describe and record employer payroll taxes. Employer Payroll Taxes These taxes are: FICA tax Federal unemployment tax State unemployment tax  Same rate and maximum earnings as the employee’s.  In 2006, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $94,200 of gross earnings for each employee.

36. Chapter 11-36 Companies must report FICA taxes and federal income taxes withheld no later than one month following the close of each quarter. Companies generally file and remit federal unemployment taxes annually on or before January 31 of the subsequent year. Companies usually file and pay state unemployment taxes by the end of the month following each quarter. Employers must provide each employee with a Wage and Tax Statement (Form W-2) by January 31. LO 7 Describe and record employer payroll taxes. Filing and Remitting Payroll Taxes

37. Chapter 11-37 As applied to payroll, the objectives of internal control are 1. to safeguard company assets against unauthorized payments of payrolls, and 2. to ensure the accuracy and reliability of the accounting records pertaining to payrolls. LO 8 Discuss the objectives of internal control for payroll. Internal Control for Payroll