1. C11 - 1 Learning Objectives 1.The Nature of Current Liabilities 2.Short-Term Notes Payable 3.Contingent Liabilities 4.Payroll and Payroll Taxes 5.Accounting Systems for Payroll 6.Employees’ Fringe Benefits 7.Financial Analysis and Interpretation Chapter 11 Current liabilities

2. C11 - 2 The nature of current liabilities Liabilities that are to be paid out of current assets and are due within a short time, usually within one year, are called current liabilities. –Accounts payable –Notes payable –Taxes payable –Interest payable –Wages payable –Unearned revenue –Unearned rent

3. C11 - 3 Short-Term Notes Payable DescriptionDebitCredit Mdse. Inventory1,000 Notes Payable1,000 Notes Receivable1,000 Sales1,000 Cost of Mdse. Sold750 Mdse. Inventory750 BuyerSeller DescriptionDebitCredit August1. Purchased merchandise on account from Murray Co., $1,000, a 90-day, 12% note

4. C11 - 4 Short-Term Notes Payable DescriptionDebitCredit Notes payable 1,000 Interest expenses 30 Cash 1,000 Cash 1,030 Notes Receivable 1,000 Interest revenue 30 BuyerSeller DescriptionDebitCredit October 30, paid principal and interest due on note.

5. C11 - 5 Short-Term Notes Payable DescriptionDebitCredit Mdse. Inventory10,000 Accts. Payable10,000 Notes Payable10,000 Accts. Receivable10,000 Sales10,000 Cost of Mdse. Sold7,500 Mdse. Inventory7,500 Notes Receivable10,000 Accts. Receivable10,000 Bowden Co. (Buyer/Borrower) Coker Co. (Seller/Creditor) DescriptionDebitCredit May 1. Bowden Co. purchased merchandise from Coker Co.$10,000 on account. May 31, Bowden Co. issued a 60-day,12% note for $10,000 to Coker Co. on account.

6. C11 - 6 Short-Term Notes Payable DescriptionDebitCredit Mdse. Inventory10,000 Accts. Payable10,000 Notes Payable10,000 Interest Expense200 Cash10,200 Accts. Receivable10,000 Sales10,000 Cost of Mdse. Sold7,500 Mdse. Inventory7,500 Notes Receivable10,000 Accts. Receivable10,000 Cash10,200 Interest Revenue200 Notes Receivable10,000 Bowden Co. (Buyer/Borrower) Coker Co. (Seller/Creditor) DescriptionDebitCredit July 30. Bowden Co. paid the amount due. Interest: $10,000 x 12% x 60 / 360 = $200

7. C11 - 7 Issued a note for borrowing September 19, issued a note,90-day, 15%, Sep.19 Cash4,000 Notes payable4,000 Dec. 18 Notes payable4,000 interest expenses 150 Cash4,150

8. C11 - 8 Issued a discount note Issued a $20,000 90-day,15% note for inventory. Aug.10 Merchandise inventory19,250 Interest expenses 750 Notes payable20,000 Nov. 8 Notes payable20,000 Cash20,000

9. C11 - 9 DateDescriptionDebitCredit DateDescriptionDebitCredit Product Warranty Liability Product Warranty Expense3,000 Product Warranty Payable3,000 Estimated warranty: $60,000 x 5% = $3,000 June. 30 Sales of $60,000 with a 36-month warranty. Estimated average cost to repair defects is 5%. To match revenues and expenses properly, warranty costs should be recognized as expense in the same period in which related revenues are recorded.

10. C11 - 10 DateDescriptionDebitCredit DateDescriptionDebitCredit Product Warranty Liability Product Warranty Payable200 Supplies200 Aug. 16 Replaced defective part under warranty To match revenues and expenses properly, warranty costs should be recognized as expense in the same period in which related revenues are recorded.

11. C11 - 11 1. Good employee relations demand that payrolls be calculated accurately and paid as scheduled. 2. Payroll expenditures are subject to a variety of federal, state, and local taxes. 3. Total payroll expense (gross payroll plus payroll taxes) has a major impact on net income. Payroll and Payroll Taxes Payroll is the amount paid to employees for services provided. Payrolls are important because:

12. C11 - 12 Base earnings (40 x $28)$1,120 Overtime earnings (2 x $42)84 Total earnings$1,204 Base earnings (42 x$28)$1,176 Overtime premium (2 x $14)28 Total earnings$1,204 Gross Pay Calculation John T. McGrath is employed by McDermott Supply Co. at the rate of $28 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. Employee viewpoint: Employer viewpoint: Same total earnings but a different view of the overtime hours

13. C11 - 13 ($80,000 - $79,296) $704 Social security tax rate x 6% Social security tax$42.24 Current earnings$1,204 Medicare tax rate x 1.5% Medicare tax18.06 Total FICA tax$60.30 FICA Tax Calculation Assume that John T. McGrath’s annual earnings prior to the current period total $79,296. The current period earnings are $1,204. FICA tax calculation: Earnings subject to 6.0% social security tax Earnings subject to 1.5% Medicare tax

14. C11 - 14 Withholding Taxes, Other Deductions Employers are required to withhold federal income tax from each employee based on the withholding table and information provided by the employee’s W-4 form. Federal income tax and FICA tax must be withheld from the pay of each employee. Deductions for other purposes may be withheld by mutual agreement.

15. C11 - 15 Earnings: Regular earnings$1,120.00 Overtime earnings84.00 Total$1,204.00Deductions: Social security tax tax$ 42.24 Medicare tax18.06 Federal income tax248.00 Retirement savings20.00 United Way5.00 Total deductions333.30 Net pay$ 870.70 John T. McGrath is single, has declared one withholding allowance, and had gross pay of $1,204 for the week ended December 27. Employee Net Pay Calculation

16. C11 - 16 Earnings: Regular$13,328.00 Overtime574.00 Total$13,902.00Deductions: Social security tax$ 643.07 Medicare tax208.53 Federal income tax3,332.00 Retirement savings680.00 United Way470.00 Accounts receivable50.00 Total5,383.60 Net amount paid$ 8,518.40 Accounts debited: Sales Salaries Expense$11,122.00 Office Salaries Expense2,780.00 Total (as above)$13,902.00 Payroll Register Summary

17. C11 - 17 Recording Employees’ Earnings DateDescriptionDebitCredit 12/27Sales Salaries Expense11,122.00 Office Salaries Expense2,780.00 Social Security Tax Payable643.07 Medicare Tax Payable208.53 Employees Fed. Inc. Tax Payable3,332.00 Retirement Savings Deductions Payable680.00 United Way Deductions Payable470.00 Accounts Receivable–Fred G. Elrod50.00 Salaries Payable8,518.40

18. C11 - 18 1. FICA tax must be paid by the employer on the earnings of each employee. 2. Employers must pay federal unemployment compensation tax at the rate of.8% (.008) on the first $7,000 of annual earnings of each employee. 3. Employers in most states also pay state unemployment compensation tax based on claims experience at a rate not to exceed 5.4% (.054) of the first $7,000 of annual earnings. Employer’s Payroll Taxes In addition to the amounts due employees, the employer must calculate and pay the following:

19. C11 - 19 Recording Employer’s Payroll Taxes General Journal DateDescriptionDebitCredit 12/27Payroll Tax Expense1,019.62 Social Security Tax Payable643.07 Medicare Tax Payable208.53 State Unemployment Tax Payable146.34 Federal Unemployment Tax Payable21.68

20. C11 - 20 Employer’s Total Payroll Costs DateDescriptionDebitCredit 12/27Sales Salaries Expense11,122.00 Office Salaries Expense2,780.00 Social Security Tax Payable643.07 Medicare Tax Payable208.53 Employees Fed. Inc. Tax Payable3,332.00 Retirement Savings Deductions Payable680.00 United Way Deductions Payable470.00 Accounts Receivable–Fred G. Elrod50.00 Salaries Payable8,518.40 12/27Payroll Tax Expense1,019.62 Social Security Tax Payable643.07 Medicare Tax Payable208.53 State Unemployment Tax Payable146.34 Federal Unemployment Tax Payable21.68

21. C11 - 21 Employees’ Fringe benefits A variety of benefits in addition to salary and wages are called Fringe Benefits. Including: –Vacation pay –Pension plans –Health, life, and disability insurance

22. C11 - 22 Vacation Pay It is also called compensated absences. Vacation pay for week ended May 5. May 5, Vacation Pay Expense2,000 Vacation Pay Payable2,000

23. C11 - 23 Pensions 1.Defined Contribution Plan A defined contribution plan requires that a fixed amount of money be invested for the employee’s behalf during the employee’s working years. The employer is required to make annual pension contributions. 2.Defined Benefit Plan Employers may choose to promise employees a fixed annual pension benefit at retirement, based on years of service and compensation levels.

24. C11 - 24 Pensions 1.Defined Contribution Plan Assume that the pension plan is 10% of $500,00 of employee annual salaries. Dec.31 Pension Expense50,000 Cash50,000

25. C11 - 25 Pensions 2.Defined Benefit Plan Dec. 31 Pension Expenses80,000 Cash60,000 Unfunded Pension Liability Short term liability, or Long-term liability

26. C11 - 26 Solvency Measures — Quick Ratio Noble Co.Hart Co. Quick assets: Cash$ 100,000$ 55,000 Cash equivalents 47,00065,000 Accounts receivable (net)84,000472,000 Total$231,000$592,000 Current liabilities$220,000$740,000 Quick Ratio = Quick assets / Current liabilities

27. C11 - 27 Solvency Measures — Quick Ratio Use:To indicate instant debt-paying ability Noble Co.Hart Co. Quick assets: Cash$ 100,000$ 55,000 Cash equivalents 47,00065,000 Accounts receivable (net)84,000472,000 Total$231,000$592,000 Current liabilities$220,000$740,000 Quick ratio1.05.8

28. C11 - 28 HOME WORK READING: 1.Illustrative problem 2.Self- examination questions 3.Multiple choice Writing: 1.Exercise 2.Problem 11-1A Discussion: 1.Activity 11-2;11-3

29. C11 - 29 This is the end of Chapter 11