1. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 10 1

2. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2 Account for current liabilities of known amount Account for current liabilities that must be estimated Calculate payroll and payroll tax amounts Journalize basic payroll transactions

3. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Account for current liabilities of known amount 3 1 1

4. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Current liabilities must be paid in a year or less Accounts payable Short-term notes payable Sales tax payable Current portion of long-term notes payable Accrued liabilities Unearned revenues 4

5. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. For products and services purchased on account Integrated accounts payable and inventory systems Paid later within a discount period or not Usually due in 30 days 5

6. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Tax levied by state on retail goods sales Recording a $10,000 sales w/6% sales tax: Forwarding the funds to the taxing entity 6

7. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Initially record note as long-term Make a second entry to reclassify current portion May 1 st : Borrow $20,000 long term note, due in four annual installments Enables proper tracking of nearly due amounts Does not alter terms of the note 7

8. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Expense incurred, but not yet paid Often an adjusting entry Debit expense and credit an accrued liability Examples: Salaries Interest payable 8

9. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cash received in advance of performing work Obligation to provide goods or services Revenue earned as goods delivered or work performed Debit liability and credit revenues as earned 9

10. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Note vs. account: Large, infrequent, or risky Accruing interest with year-end adjusting entry Paying it back next June 3rd 10

11. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. On December 31, 2012, Edgmont, Co., purchased $10,000 of inventory on a one-year, 10% note payable. Edgmont uses a perpetual inventory system. 1.Journalize the purchase transaction 2.Journalize the company’s accrual of interest expense on June 30, 2013, its fiscal year-end. 3.Journalize payment of the note Dec 31, 2013. 11

12. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 12 Journal Entry DATE ACCOUNTS DEBITCREDIT Dec 31 Notes payable, short-term10,000 Interest payable500 Interest expense500 Cash11,000 Journal Entry DATE ACCOUNTS DEBITCREDIT Jun 30 Interest expense500 Interest Payable500 Journal Entry DATE ACCOUNTS DEBITCREDIT Dec 31 Inventory10,000 Notes Payable, short-term10,000

13. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Account for current liabilities that must be estimated 13 2 2

14. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Warranty Payable Record estimated expense in sales period Use a liability account vs. contra asset account Settle warranty claims Debit estimated payable Credit a variety of accounts used to fix the problem 14

15. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Safety-Kleen’s post merger $500 million misstatement Failed to report estimated liabilities among other CEO & CFO $200 million fines plus prison Directors $36 million in fines PWC auditing firm $84 million settlement How hard could it be to find this? http://www.sec.gov/litigation/complaints/com p17891.htm http://www.sec.gov/litigation/complaints/com p17891.htm See #32 specifically for failure to record environmental remediation reserves. 15

16. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Trekster Corporation guarantees its snowmobiles for three years. Company experience indicates that warranty costs will add up to 4% of sales. Trekster’s sales totaled $533,000 during 2012. 30% of those were cash sales, Notes Receivable made up 70%. Warranty payments totaled $17,000 during 2012. Requirements: 1.Journalize the summary sales transaction. 2.Prepare the adjustment to recognize the warranty liability. 3.Journalize the incurrence of the warranty cash payments. 16

17. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 1.Journalize the summary sales transaction. 17 Journal Entry DATE ACCOUNTS AND EXPLANATIONS DEBITCREDIT Cash159,900 Notes receivable373,100 Sales revenue533,000 Recorded sales.

18. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2. Prepare the adjustment to recognize the warranty liability. 18 Journal Entry DATE ACCOUNTS AND EXPLANATIONS DEBITCREDIT Warranty expense21,320 Estimated warranty payable21,320 Record the warranty expense.

19. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 3. Journalize the incurrence of the warranty cash payments. 19 Journal Entry DATE ACCOUNTS AND EXPLANATIONS DEBITCREDIT Estimated warranty payable17,000 Cash17,000 Payment of warranty payable.

20. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Potential liability May or may not become actual liability Depends on a future event Accounting treatment depends on likelihood of actual loss 20

21. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. How to report based upon likelihood 21

22. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Calculate payroll and payroll tax amounts 22 3 3

23. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 23 Salary Pay stated at an annual, monthly, or weekly rate Wages Pay stated at an hourly rate Commission Pay stated as percentage of sales amount Bonus Pay over and above base salary Benefits Extra compensation items not paid directly to the employee

24. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Straight time Base rate paid for a set period Overtime Additional time worked over straight time Higher pay rate Depends upon job classification and wage and hour laws Gross pay Total amount earned during a pay period Expense to the employer Net pay Take-home pay The amount the employee keeps 24

25. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Required deductions from employees’ gross pay Federal income tax State income tax Social Security (FICA) tax Amount depends on: Gross pay Withholding allowances–Form W-4 Optional deductions–at employee’s request Insurance Retirement Charitable gifts 25

26. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Employee files to indicate allowances claimed 26 Allowances claimed

27. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Payroll costs for an employee who earns a weekly salary of $1,000 27

28. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Program to provide retirement, disability, and medical benefits Two components: Old age, survivors’ and disability insurance (OASDI) 6.2% of pay up to a wage base In 2010, wage base = $106,800 Health insurance (Medicare) 1.45% of pay, no maximum wage base 28

29. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. An employee earned $99,800 prior to December and $10,000 for December Total of $109,800 for the year 29 * Assume that the 2012 FICA tax rate is 7.65%.

30. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Employers must pay additional payroll taxes These are not employee deductions Employer (FICA) tax Employer matches amount withheld from employees’ pay SS system is funded by equal contributions State, federal unemployment compensation taxes Funds temporary partial wages to laid off workers SUTA (State unemployment tax) Usually 5.4% of first $7,000 paid to each employee FUTA (Federal unemployment tax Usually 0.8% of the first $7,000 paid to each employee 30

31. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Gloria Traxell is paid $800 for a 40-hour workweek and time-and-a- half for hours above 40. Requirements: 1. Compute Traxell’s gross pay for working 48 hours during the first week of February. Carry amounts to the nearest cent. 31 Straight-time pay for 40 hours $ 800.00 Overtime pay for 8 hours 240.00 Total gross pay $1,040.00

32. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2. Traxell is single, and her income tax withholding is 10% of total pay. Traxell’s only payroll deductions are payroll taxes. Compute Traxell’s net (take-home) pay for the week. Use a 7.65% FICA tax rate, and carry amounts to the nearest cent. Use Excel to calculate FICAExcel 32 Total gross pay $1,040.00 Less: Withhold income tax $ 104.00 FICA tax 79.56183.56 Net pay $ 856.44

33. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Traxell’s employer, College of San Bernardino, pays all the standard payroll taxes based on gross pay of $1,040: FICA (match employee @ $79.56), State unemployment (5.4%), Federal unemployment (0.8%) Plus they pay these benefits: Retirement plan (5% of gross pay), Health insurance ($113 per employee per month), Disability insurance ($8 per employee per month). Requirements: 1.Compute College of San Bernardino’s total expense of employing Gloria Traxell for the 48 hours that she worked during the first week of February. Carry amounts to the nearest cent. 2.Calculate the Total cost to the employer as a percentage of net pay ($856.44). 33

34. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 34 Straight-time pay for 40 hours $ 800.00 Overtime pay for 8 hours 240.00 Total pay to employee $1,040.00 Employer payroll taxes: FICA$79.56 State Unemployment Taxes56.16 Federal Unemployment Taxes8.32 Benefit cost: Retirement plan52.00 Health insurance28.25 Disability insurance2.00 Total payroll taxes and benefit cost226.29 Total expense of employer$1,266.29

35. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Journalize basic payroll transactions 35 4 4

36. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 1. Record the payroll expense and payment Record total payroll expense as a liability Record payment of salaries with deductions recorded as liabilities. 36 Liabilities to be paid by employer to the respective agencies on behalf of the employee.

37. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2. Record any employee benefits paid by the employer Record total benefit expense as a liability Record the benefits paid as expenses 37

38. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 3. Record the employer payroll tax expense and payment Record payroll tax expense as a liability Record payment of employee withholdings and the matching portion of FICA **No FUTA or SUTA tax is due in December as most entities are over the maximum wage base. 38

39. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Controls for efficiency Use of two payroll bank accounts Use of computer processing Use of direct deposits to facilitate reconciliation Controls to safeguard payroll disbursements Hiring and firing separate from accounting Use of photo IDs and time clocks 39

40. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Companies have separate departments for payroll functions: Human Resources Department hires and fires Payroll Department maintains employee records Accounting Department records transactions The Treasurer (or bursar) distributes paychecks 40

41. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Consult your solutions for Short Exercises 10-4 and 10-5. 1. Journalize salary expense for College of San Bernardino related to the employment of Gloria Traxell. 41 Journal Entry DATE ACCOUNTS DEBITCREDIT Salary expense1,040 Salary payable1,040

42. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. S10-7: JOURNALIZING PAYROLL 1. Journalize salary payment for College of San Bernardino related to the employment of Gloria Traxell. 42 Journal Entry DATE ACCOUNTS DEBITCREDIT Salary payable1040.00 Employee income tax payable104.00 FICA tax payable79.56 Cash856.44

43. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2. Journalize benefits expense for College of San Bernardino related to the employment of Gloria Traxell. 43 Journal Entry DATE ACCOUNTS DEBITCREDIT Retirement Plan expense41.60 Health insurance expense26.25 Disability insurance expense2.75 Employer benefits payable70.60

44. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 3. Journalize employer payroll taxes for College of San Bernardino related to the employment of Gloria Traxell. 44 Journal Entry DATEACCOUNTSDEBITCREDIT Payroll tax expense144.04 FICA tax payable79.56 State Unemployment Taxes 56.16 Federal Unemployment Taxes 8.32

45. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A current liability must be paid in a year or less. For some current liabilities, the exact amount is known or can easily be calculated, such as the amount of sales tax payable, interest owed (payable) on a note, or the amount of work still owed to a customer who paid in advance (unearned revenue). For some, the current liability is known based on a contract, such as with the current portion of long-term notes payable. Still others must be accrued and are known based on a bill received or hours worked, such as accounts payable or salaries payable. The key to all of these is the current liability amount is known, not estimated. 45

46. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Estimated current liabilities are owed, but the amount owed is based on an educated guess–not an exact known amount. So, for example, estimated warranty claims are recorded as a liability at the time a sale is made. The estimated expense and liability are journalized at the time of sale because of the matching principle. So the sales revenue and its related expense (estimated warranty claims) are reported (matched) in the same time period on the income statement. 46

47. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Almost all businesses have employees and, therefore, have payroll. It is important to remember that taxes the employee pays are deducted from the employee’s gross pay before the employee gets his or her paycheck. The employer must also pay taxes based on the gross pay of each employee. Each tax has its own unique purpose as well as its own annual maximum. 47

48. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Recording payroll amounts requires five basic journal entries: The first entry records the gross payroll expense and liability. The second entry records the payment of net pay and the accrual of all employee paid payroll liabilities. The third entry records employee benefits. The fourth journal entry records the employer payroll liabilities. The last journal entry records the payment of taxes to the taxing authorities. 48

49. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. These payroll liabilities are all current liabilities of the company. Internal controls over payroll focus on operational efficiency and insuring the payroll disbursements are valid and accurate. 49

50. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 50

51. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 51