1. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Student Version Current Liabilities and Payroll Chapter 11 These slides should be viewed using the presentation mode (click the icon to start presentation).

2. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 1.Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable.

3. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Current Liabilities  When a company or a bank advances credit, it is making a loan.  The company or bank is called a creditor (or lender ).  The individuals or companies receiving the loans are called debtors (or borrowers ).  Current Liabilities are debts that will be paid out of current assets and are due within one year. LO 1

4. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounts Payable  Accounts payable transactions arise from purchasing goods or services for use in a company ’ s operations or from purchasing merchandise for resale. LO 1

5. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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.  The installments due after the coming year are classified as a long-term liability. LO 1

6. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Short-Term Notes Payable Example: Nature’s Sunshine Company issues a 90-day, 12% note for $1,000, dated August 1, 2011 to Murray Co. for a $1,000 overdue account. The entry to record the issuance of the note: LO 1 Note may be issued to purchase merchandise or other assets. Note may also be issued to creditor to satisfy an account payable created earlier.

7. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Short-Term Notes Payable When the note matures, the entry to record the payment of $1,000 plus $30 interest ($1,000 x 12% x 90/360) is as follows: LO 1 Interest Expense appears on the income statement as an “Other Expense.”

8. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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 Short-Term Notes Payable LO 1 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. $7,500. The following illustrations show how same transactions are recorded by the debtor (borrower) and creditor (lender)

9. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Short-Term Notes Payable LO 1 Accounts Payable10,000 Notes Payable10,000 DescriptionDebitCredit Bowden Co. (Borrower) Notes Receivable10,000 Accounts Receivable10,000 Coker Co. (Creditor) DescriptionDebitCredit On May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.

10. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Short-Term Notes Payable LO 1 Notes Payable10,000 Interest Expense200 Cash10,200 DescriptionDebitCredit Bowden Co. (Borrower) Cash10,200 Interest Revenue 200 Notes Receivable10,000 Coker Co. (Creditor) DescriptionDebitCredit On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31, the face amount of $10,000 plus interest of $200 ($10,000 x 12% x 60/360).

11. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Short-Term Notes Payable LO 1 Example 2: On September 19, Iceburg Company borrowed cash from First National Bank by issuing a $4,000, 90-day, 15% note to the bank.

12. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Short-Term Notes Payable LO 1 On December 18, Iceburg Company paid First National Bank $4,000 plus interest of $150 ($4,000 x 15% x 90/360).

13. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Short-Term Notes Payable  In some cases, a discounted note may be issued rather than an interest-bearing note. A discounted note has the following characteristics: 1.The interest rate on the note is called the discount rate. 2.The amount of interest on the note, called the discount, is computed by multiplying the discount rate times the face amount of the note. (continued) LO 1

14. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Short-Term Notes Payable 3.The debtor (borrower) receives the face amount of the note less the discount, called the proceed s. 4.The debtor must repay the face amount of the note on the due date. LO 1

15. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Short-Term Notes Payable LO 1 On August 10, Cary Company issues a $20,000, 90- day discounted note to Western National Bank. The discount rate is 15%, and the amount of the discount is $750 ($20,000 x 15% x 90/360). proceeds

16. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Short-Term Notes Payable LO 1 The entry when Cary Company pays the discounted note on November 8 is as follows:

17. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 1.Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. 2.Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings.

18. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Payroll and Payroll Taxes  In accounting, payroll refers to the amount paid to employees for services they provided during the period. A company ’ s payroll is important for the following reasons:  Payroll and related payroll taxes significantly affect the net income of most companies.  Payroll is subject to federal and state regulations.  Good employee morale requires payroll to be paid timely and accurately. LO 2

19. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Liability for Employee Earnings  Salary usually refers to payment for managerial and administrative services. Salary is normally expressed in terms of a month or a year.  Wages usually refers to payment for employee manual labor. The rate of wages is normally stated on an hourly or weekly basis.

20. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Liability for Employee Earnings 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. His earnings are computed as follows: Earnings at regular rate (40 x $34)$1,360 Earnings at overtime rate (2 x $51) 102 Total earnings$1,462

21. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Deductions from Employee Earnings  The total earnings of an employee for a payroll period, including any overtime pay, are called gross pay.  From this amount is subtracted one or more deductions to arrive at the net pay. The deductions normally include income taxes, medical insurance, and pension contributions. LO 2

22. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Federal Insurance Contributions Act (FICA) tax withheld contributes to the following two federal programs.  Social security, which provides payments for retirees, survivors, and disability insurance. (Assume 6% on all earnings.)  Medicare, which provides health insurance benefits for senior citizens. (Assume 1.5% on all earnings.) LO 2 Deductions from Employee Earnings

23. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 2 Deductions from Employee Earnings John T. McGrath’s earnings for the week ending December 27 are $1,462. Total FICA tax to be withheld is calculated as follows : Earnings subject to 6% social security tax $1,462 Social security tax ratex 6% Social security tax$ 87.72 Earnings subject to 1.5% Medicare tax$1,462 Medicare tax rate x 1.5% Medicare tax 21.93 Total FICA tax $109.65

24. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. John T. McGrath’s Net Pay Gross earnings for the week$1,462.00 Deductions: Social security tax $ 87.72 Medicare tax 21.93 Federal income tax 258.90 Retirement savings20.00 United Fund 5.00 Total deductions 393.55 Net pay$1,068.45 Computing Employee Net Pay LO 2