1. Click to edit Master title style 1 1 1 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  Current portion of long-term debt  Notes payable 10-1

2. Click to edit Master title style 2 2 2 Accounts Payable Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale. 10-1

3. Click to edit Master title style 3 3 3 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. 10-1

4. Click to edit Master title style 4 4 4 The total amount of the installments due after the coming year is classified as a long-term liability. 10-1

5. Click to edit Master title style 5 5 5 10 Aug.1Accounts Payable—Murray Co.1 000 00 Issued a 90-day, 12% note on account. Notes Payable 1 000 00 A firm issues a 90-day, 12% note for $1,000, dated August 1, 2008 to Murray Co. for a $1,000 overdue account. Short-Term Notes Payable 10-1

6. Click to edit Master title style 6 6 6 11 On October 30, when the note matures, the firm pays the $1,000 principal plus $30 interest ($1,000 x 12% x 90/360). Oct.30Notes Payable1 000 00 Interest Expense30 00 Paid principal and interest on note. Cash 1 030 00 Appears on the income statement as an “Other Expense.” 10-1

7. Click to edit Master title style 7 7 7 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. 10-1

8. Click to edit Master title style 8 8 8 13 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 10-1

9. Click to edit Master title style 9 9 9 14 On May 3, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account. Accounts Payable10,000 Notes Payable10,000 DescriptionDebitCredit Bowden Co. (Borrower) Notes Receivable10,000 Accounts Receivable10,000 Coker Co. (Creditor) DescriptionDebitCredit 10-1

10. Click to edit Master title style 10 15 On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest: $10,000 x 12% x 60/360. Notes Payable10,000 Interest Expense200 Cash10,200 DescriptionDebitCredit Bowden Co. (Borrower) Cash10,200 Interest Revenue 200 Notes Receivable10,000 Coker Co. (Creditor) DescriptionDebitCredit 10-1

11. Click to edit Master title style 11 16 On September 19, a firm borrows $4,000 from First National Bank by giving the bank a 90-day, 15% note. Sept. 19Cash4 000 00 Notes Payable4 000 00 Issued a 90-day, 15% note to the bank. 10-1

12. Click to edit Master title style 12 17 On the due date of the note (December 18), the borrower owes $4,000 plus interest of $150 ($4,000 x 15% x 90/360). Dec. 18Notes Payable4 000 00 Cash4 150 00 Paid principal and interest due on note. Interest Expense150 00 10-1

13. Click to edit Master title style 13 10-2 Payroll refers to the amount paid to employees for the services they provide during a period. It is usually significant for several reasons. 1)Employees are sensitive to payroll errors and irregularities. 2)The payroll is subject to various federal and state regulations. 3)The payroll and related payroll taxes have a significant effect on the net income of most businesses.

14. Click to edit Master title style 14 Wages usually refers to payment for manual labor, both skilled and unskilled. The rate of wages is normally stated on an hourly or weekly basis. 10-2

15. Click to edit Master title style 15 Salary usually refers to payment for managerial, administrative, or similar services, normally expressed in terms of a month or a year. 10-2

16. Click to edit Master title style 16 The total earnings of an employee for a payroll period are called gross pay. From this is subtracted one or more deductions to arrive at the net pay. Net pay is the amount that the employer must pay the employee. 10-2

17. Click to edit Master title style 17 29 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. Earnings at base rate (40 x $34)$1,360 Earnings at overtime rate (2 x $51) 102 Total earnings$1,462 McGrath Illustration 10-2

18. Click to edit Master title style 18 FICA Tax The amount of FICA tax withheld is the employees’ contribution to two federal programs. The first program, called social security, is for old age, survivors, and disability insurance (OASDI). The second program, called Medicare, is health insurance for senior citizens. 10-2

19. Click to edit Master title style 19 Employer’s Federal Payroll Taxes Employers are required to contribute to the social security and Medicare programs for each employee. The employer must match the employee’s contribution to each program. 10-2

20. Click to edit Master title style 20 A FUTA tax of 6.2% is levied on employers only to provide for temporary unemployment to those who become unemployed as a result of layoffs due to economic causes beyond their control. This tax applies to only the first $7,000 of the earnings of each covered employee during a calendar year. Employer’s Federal Unemployment Taxes 10-2

21. Click to edit Master title style 21 Employer’s State Unemployment Taxes Employers in most states also must pay a state unemployment tax for unemployed workers. A few states require employee contributions. The state plan is designed to reward firms with stable employment, so the tax rate varies from state to state and employer to employer. 10-2

22. Click to edit Master title style 22 43 10-2 Responsibility for Tax Payments

23. Click to edit Master title style 23 Payroll Register The payroll register is a multicolumn report used for summarizing the data for each payroll period. The last two columns of the payroll register are used to accumulate the total wages or salaries to be debited to various expense accounts. The process is usually called payroll distribution. 10-3

24. Click to edit Master title style 24 Recording Employees’ Earnings 48 Dec. 27Sales Salaries Expense11 122 00 Office Salaries Expense2 780 00 Payroll for week ended December 27. Social Security Tax Payable 643 07 Medicare Tax Payable 208 53 Employees’ Federal Inc. Tax Pay. 3 332 00 Retirement Savings Ded. Payable 680 00 United Way Deductions Payable 470 00 Accounts Receivable—Fred Elrod 50 00 Salaries Payable 8 518 40 10-3

25. Click to edit Master title style 25 A detailed payroll record is maintained for each employee. This record is called an employee’s earnings record. At the end of each pay period, payroll checks are prepared. Each check includes a detachable statement showing the details of how the net pay was computed. 10-3

26. Click to edit Master title style 26 Many companies provide their employees a variety of benefits in addition to salary and wages earned. Such fringe benefits may take many forms, including vacations, medical, and postretirement benefits, such as a pension plan. 10-4

27. Click to edit Master title style 27 64 Most employers grant vacation rights, sometimes called compensated absences, to their employees. The estimated vacation pay for the payroll period ending May 5 is $2,000. Vacation Pay May 5Vacation Pay Expense2 000 00 Vacation Pay Payable2 000 00 Vacation pay for week ended May 5. 10-4

28. Click to edit Master title style 28 Pensions A pension represents a cash payment to retired employees. Rights to pension payments are earned by employees during their working years, based on the pension plan established by the employer. 10-4

29. Click to edit Master title style 29 In a defined contribution plan, a fixed amount of money is invested on the employee’s behalf during the employee’s working years. 10-4

30. Click to edit Master title style 30 Pensions In a defined benefit plan, employers promise employees a fixed annual pension benefit at retirement, based on years of service and compensation levels. 10-4

31. Click to edit Master title style 31 Postretirement Benefits Other Than Pensions Employees may earns rights to other postretirement benefits, such as dental care, eye care, medical care, life insurance, tuition assistance, tax services, and legal services. 10-4

32. Click to edit Master title style 32 Some past transactions will result in liabilities if certain events occur in the future. These potential obligations are called contingent liabilities. 10-5

33. Click to edit Master title style 33 76 During June, a company sells a product for $60,000 on which there is a 36-month warranty. Past experience indicates that the average cost to repair defects is 5% of the sales price over the warranty period. June 30Product Warranty Expense3 000 00 Warranty expenses projected for June, 5% of $60,000. Product Warranty Payable 3 000 00 Contingent Liabilities 10-5

34. Click to edit Master title style 34 77 If a customer required a $200 part replacement on August 16, the entry would be: Aug. 16Product Warranty Payable200 00 Replaced defective part under warranty. Supplies 200 00 10-5

35. Click to edit Master title style 35 Likelihood of Occurring Measurement Accounting Treatment Probable Estimable Record and Disclose Liability Not Estimable Disclose Liability Contingency Possible Accounting Treatment of Contingent Liabilities 10 78 10-5