1. Current Liabilities and Payroll
Chapter 11 1

2. Account for current liabilities
Objective 1
Account for current liabilities
of known amount. 8

3. Accounts Payable...
…are amounts owed to suppliers for goods or services purchased on account.
Accounts payable do not bear interest expense for the debtor.

4. Accounts Payable Example
Suppose that on June 3, Lloyd’s Sporting Store purchased $1,000 of goods on account from Patti Wholesaler.
What is the journal entry?
Inventory , Accounts Payable ,000 Purchase on account

5. Short-Term Notes Payable...
…are promissory notes payable due within one year.
In addition to recording the note payable, the business must also pay interest expense.
If interest expense is accrued at the end of the period, interest payable must also be recorded.

6. Short-Term Notes Payable Example
On April 30, Patti purchased inventory for $10,000 by issuing a 90-day, 10% note payable.
What is the journal entry?
Inventory 10,000
Notes Payable 10,000
Purchase inventory on a 90-day, 10% note

7. Short-Term Notes Payable Example
Assume the accounting period ended May 31.
How much interest was accrued as of May 31?
$10,000 × 10% × 31/360 = $86.11
How does Patti record the payment at maturity?

8. Short-Term Notes Payable Example
July 29
Note Payable 10,000.00
Interest Payable
Interest Expense
Cash ,250.00

9. Sales Tax Payable Example
Most states levy a sales tax on retail sales.
Suppose that a store sold $3,000 worth of merchandise on a given Saturday.
The business collected an additional 5% in sales tax.
How much is the sales tax liability?
$150

10. Accrued Expenses (Liabilities)...
are expenses that have been incurred but not recorded.
salaries
taxes withheld
interest
utilities

11. Payroll Liabilities Salary Expense 10,000
Employee Income Tax Payable 1,200
FICA Tax Payable
Employee Union Dues Payable
Salary Payable ,860
To record salary expense

12. Unearned Revenue Example
Assume that on June 1, Dennis’s Landscaping collected $1,500 for services to be provided during the months of June, July, and August.
June 1
Cash ,500
Unearned Revenue 1,500
Received cash in advance

13. Unearned Revenue Example
What entry does Dennis record on June 30?
June 30
Unearned Revenue 500
Service Revenue
Earned service revenue that was collected
in advance

14. Account for Current Liabilities
Objective 2
Account for Current Liabilities
That Must be Estimated.

15. Estimated Warranty Payable
The matching principle demands that the company record the warranty expense in the same period that the business recognizes sales revenue.

16. Estimated Warranty Payable Example
Patti Wholesaler made sales of $1,000,000 subject to product warranties.
In the past years, claims have averaged 2%.
Warranty Expense ,000
Estimated Warranty Payable 20,000
To accrue warranty expense

17. Estimated Warranty Payable Example
On January 28, a customer returned a defective product and was given a $300 refund.
Estimated Warranty Payable 300
Cash
To record refund under warranty

18. Estimated Vacation Pay Liability Example
Suppose Lloyd’s Sporting Store has a March payroll of $10,000 and vacation pay adds 4% (2 weeks of annual vacation divided by 50 workweeks each year).
How much vacation pay should be accrued?

19. Estimated Vacation Pay Liability Example
March 31
Vacation Pay Expense
Estimated Vacation Pay Liability 400
To accrue vacation expense

20. Contingent Liability
Report a contingent liability in the notes to the financial statement if it is reasonably possible that a loss or expense will occur.
The FASB says to record an actual liability if it is probable that the business has suffered a loss and its amount can be reasonably estimated.

21. Contingent vs. Current Liability
Suppose a hospital has lost a court case for uninsured malpractice.
The hospital estimates that the liability will fall between $1.5 and $2.5 million.

22. Contingent vs. Current Liability
The hospital must record a loss and a liability of $1.5 million.
The hospital must disclose in a note the possibility of an additional $1.0 million loss.

23. Compute Payroll Amounts.
Objective 3
Compute Payroll Amounts.

24. Payroll
Straight time is the base rate paid to employees for a set number of hours.
Overtime is additional time worked by employees for which they received a higher rate (usually 1.5 times the straight time rate).

25. Gross Pay and Net Pay
Gross Pay
Deductions
Net Pay

26. FICA Tax The FICA tax has two components:
Old age, survivors’, and disability insurance (6.2% applied to the first $87,000 of employee earnings in a year)
Health insurance (1.45% applied to all employee earnings)

27. Employer Payroll Taxes
Social Security (FICA) tax
State unemployment compensation tax
Federal unemployment compensation tax

28. Unemployment Compensation Taxes
Employers paid 5.4% to the states and 0.8% to the federal government on the first $7,000 of each employee’s annual earnings.
The state government uses the money to pay unemployment benefits to people who are out of work.

29. Breakdown of Payroll Costs
Employer payroll taxes
to government
$110
Employer cost of health
care to insurance co.
$90
Employer disburses $1,200
Net pay to
employee
$750
Employee payroll
taxes to government
$230
Employee
union dues
$20
Employee Gross Pay – $1,000

30. Record Basic Payroll Transactions.
Objective 4
Record Basic Payroll Transactions.

31. Salary Expense
Salary expense to the employer is the gross salary of all employees.
Employees pay their own income and FICA taxes as well as union dues.
The employer serves as a collecting agent and sends these amounts to the government and union.

32. To Record Salaries Expense:
Salary Expense
Employee Income Tax Payable
FICA Tax Payable
Employees Union Dues Payable
Salary Payable to Employees (take-home pay)

33. To Record Salaries Expense:
Payroll Tax Expense
FICA Tax Payable
State Unemployment Tax Payable
Federal Unemployment Tax Payable

34. To Record Salaries Expense:
Health Insurance Expense for Employees
Life Insurance Expense for Employees
Pension Expense
Employee Benefits Payable

35. Objective 5
Use a Payroll System.

36. Payroll System Components
payroll record
special payroll bank account
payroll checks
earnings record for each employee

37. Payroll Record... is also referred to as the payroll journal.
It lists payroll data for each employee.
It serves as a check register.
It provides information for recording payroll expenses and related withholdings.

38. Payroll Bank Account
When companies use a payroll bank account, the company draws a check for the net amount of salary payable to employees on its regular bank account.
The company deposits this check in the special payroll bank account.

39. Payroll Bank Account
The company writes paychecks to employees out of the payroll account.
When the paychecks clear the bank, the payroll account has a zero balance.
Disbursing paychecks from a separate bank account isolates net pay for analysis and control.

40. Recording Cash Disbursements
When the employer pays the employees, the company debits Salary Payable to Employees and credits Cash.
The liabilities to the government, unions, and other parties is also debited when cash is paid.

41. Recording Cash Disbursements
Assume the following journal entry was made at the end of an accounting period:
Salary Expense ,000
Employee Income Tax Payable ,000
FICA Tax Payable ,160
Employee Union Dues Payable
Salary Payable to Employees ,000

42. Recording Cash Disbursements
What is the journal entry when the employer pays these liabilities?
Employee Income Tax Payable 45,000
FICA Tax Payable ,160
Employee Union Dues Payable
Salary Payable to Employees 123,000
Cash ,000

43. Internal Control over Payrolls
controls for efficiency
controls for safeguarding payroll disbursements

44. Controls for Efficiency
making payroll disbursements from one payroll account in one month and from another the next
following established policies for hiring and firing employees
complying with government regulations
testing employees for their interest in the job and their skills to perform the job

45. Controls for Safeguarding Payroll Disbursements
Large organizations must establish controls to ensure that payroll disbursements are made only to legitimate employees.
Duties of hiring and firing should be separated from the duties of accounting for payroll and distributing paychecks.

46. Controls for Safeguarding Payroll Disbursements
Requiring an identification badge bearing an employee’s photograph also helps internal control.
A formal time-keeping system helps ensure that employees have actually worked.

47. Report Current Liabilities
Objective 6
Report Current Liabilities
on the Balance Sheet.

48. Report Current Liabilities
Companies report current liabilities on the balance sheet.
Current liabilities of known amount (payroll)
Current liabilities that must be estimated (warranties)

49. Report Current Liabilities
At the end of the year, companies report the amount of payroll liabilities owed to all parties.
The liability at year end is the amount of the payroll expense that is still unpaid.

50. Liabilities Known When Recorded
accounts payable
short-term notes payable
sales tax payable
current portion of long-term debt
accrued expenses payable
unearned revenues

51. Liabilities Estimated When Recorded
warranty payable
income tax payable
vacation pay liability

52. End of Chapter 11