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Copyright © 2007 Prentice-Hall. All rights reserved 1 Current Liabilities and Payroll Chapter 11.

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1 Copyright © 2007 Prentice-Hall. All rights reserved 1 Current Liabilities and Payroll Chapter 11

2 Copyright © 2007 Prentice-Hall. All rights reserved 2 Objective 1 Account for current liabilities of known amount

3 Copyright © 2007 Prentice-Hall. All rights reserved 3 Accounts Payable Amounts owed for products or services purchased on account

4 Copyright © 2007 Prentice-Hall. All rights reserved 4 Short-Term Notes Payable Promissory notes payable due within one year Interest expense is recognized If interest expense is accrued at the end of the period, interest payable must also be recorded

5 Copyright © 2007 Prentice-Hall. All rights reserved 5 E11-14E11-14 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT 2002 May1Equipment15,000 Note Payable15,000 Dec31Interest Expense800 Interest Payable800 (15,000 x.08 x 8/12)

6 Copyright © 2007 Prentice-Hall. All rights reserved 6 E11-14E11-14 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT 2003 May1Note Payable15,000 Interest Expense400 Interest Payable800 Cash16,200 Interest expense for 2003 = 15,000 x.08 x 4/12

7 Copyright © 2007 Prentice-Hall. All rights reserved 7 Sales Tax Payable E11-14 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Mar31Cash216,000 Sales Revenue200,000 Sales Tax Payable16,000 Apr6Sales Tax Payable16,000 Cash16,000

8 Copyright © 2007 Prentice-Hall. All rights reserved 8 Other Current Liabilities Current portion of long-term note payable Accrued Expenses (Liabilities) –Expenses that have been incurred but not yet paid –Salaries Payable –Interest Payable –Utilities Payable

9 Copyright © 2007 Prentice-Hall. All rights reserved 9 Unearned Revenue E11-15 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Mar31Cash218 Unearned Subscription Revenue200 Sales Tax Payable18 Nov15Sales Tax Payable18 Cash18 Dec31Unearned Subscription Revenue150 Subscription Revenue150

10 Copyright © 2007 Prentice-Hall. All rights reserved 10 Objective 2 Account for current liabilities that must be estimated

11 Copyright © 2007 Prentice-Hall. All rights reserved 11 Estimated Warranty Payable Record warranty expense in same period as the revenue –Warranty expense –Estimated warranty payable

12 Copyright © 2007 Prentice-Hall. All rights reserved 12 E11-16E11-16 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT 2006 Warranty Expense6,000 Estimated Warranty Payable6,000 Estimated Warranty Payable7,000 Cash7,000

13 Copyright © 2007 Prentice-Hall. All rights reserved 13 E11-16E11-16 Estimated Warranty Payable Balance 3,000 6,0007,000 Balance 2,000

14 Copyright © 2007 Prentice-Hall. All rights reserved 14 Contingent Liabilities Potential liability Depends on a future event Accounting treatment depends on likelihood that the future event will create a liability –Remote – ignore –Reasonably possible – in notes to financial statements –Probable – estimate and record expense and liability

15 Copyright © 2007 Prentice-Hall. All rights reserved 15 Objective 3 Compute payroll amounts

16 Copyright © 2007 Prentice-Hall. All rights reserved 16 PayrollPayroll Salary – pay stated at 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 not paid in cash, such as health insurance, retirement contributions

17 Copyright © 2007 Prentice-Hall. All rights reserved 17 PayrollPayroll Straight time - base rate paid for a set number of hours Overtime - additional time worked for which employees receive a higher rate (usually 1.5 times the straight time rate)

18 Copyright © 2007 Prentice-Hall. All rights reserved 18 Gross Pay and Net Pay Employee Income Tax FICA OASD FICA Medicare Optional Deductions Gross Pay Net Pay

19 Copyright © 2007 Prentice-Hall. All rights reserved 19 FICA Tax The FICA tax has two components: 1Old age, survivors’, and disability insurance (6.2% applied to the first $90,000 of employee earnings in a calendar year) 2Health insurance (1.45% applied to all employee earnings) Note: Your text instructs you to assume an 8% tax on income earned up to $90,000 for FICA. That’s just to simplify things for the course

20 Copyright © 2007 Prentice-Hall. All rights reserved 20 Employer Payroll Taxes Social Security (FICA) tax State unemployment compensation tax Federal unemployment compensation tax Employers match the FICA tax withheld from employees

21 Copyright © 2007 Prentice-Hall. All rights reserved 21 Unemployment Compensation Taxes Employers pay 5.4% to the state and 0.8% to the federal government on the first $7,000 of each employee’s annual earnings Provides for workmen’s compensation for people laid off from work

22 Copyright © 2007 Prentice-Hall. All rights reserved 22 Objective 4 Record basic payroll transactions

23 Copyright © 2007 Prentice-Hall. All rights reserved 23 Salary Expense GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Sep30Salary Expense Employee Income Tax Payable FICA Tax Payable United Fund Payable Salary Payable Gross amount Take home pay

24 Copyright © 2007 Prentice-Hall. All rights reserved 24 Payroll Tax Expense GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Sep30Payroll Tax Expense FICA Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable Remember, the employer pay the unemployment taxes, not the employees

25 Copyright © 2007 Prentice-Hall. All rights reserved 25 Benefits Expense GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Sep30Health Insurance Expense Life Insurance Expense Retirement Plan Expense Employee Benefits Payable Fringe benefits are an expense to the employer

26 Copyright © 2007 Prentice-Hall. All rights reserved 26 E11-17E11-17 Base salary$750 Commission8,000 Gross pay for December $8,750 Charitable contribution(25) Income taxes(875) Health insurance(50) FICA (on $3,000)(240)(1,190) $7,560

27 Copyright © 2007 Prentice-Hall. All rights reserved 27 E11-18E11-18 Gross pay: Regular hours (40 x $10)$400.00 Overtime (10 x $10 x 1.5)150.00 Gross pay$550.00 Deductions: Income tax(49.50) FICA(44.00) Charitable contribution(5.00)(98.50) Net pay$451.50

28 Copyright © 2007 Prentice-Hall. All rights reserved 28 E11-18E11-18 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Dec31Salary Expense550.00 Employee Income Tax Payable49.50 FICA Tax Payable44.00 United Fund Contribution Payable5.00 Salary Payable451.50

29 Copyright © 2007 Prentice-Hall. All rights reserved 29 E11-19E11-19 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Dec31Payroll Tax Expense6,068 FICA Tax Payable5,200 State Unemployment Tax Payable756 Federal Unemployment Tax Payable112 FICA – 65,000 x.08 State Unemployment Tax – 14,000 x.054 Federal Unemployment Tax – 14,000 x.008

30 Copyright © 2007 Prentice-Hall. All rights reserved 30 E11-19E11-19 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Dec31Health Insurance Expense2,060 Life Insurance Expense350 Pension Expense3,900 Employee Benefits Payable6,310

31 Copyright © 2007 Prentice-Hall. All rights reserved 31 Objective 5 Use a payroll system

32 Copyright © 2007 Prentice-Hall. All rights reserved 32 ComponentsComponents Payroll Record Payroll Check Earnings Reports

33 Copyright © 2007 Prentice-Hall. All rights reserved 33 GROSS PAY EMPLOYEE NAMEHRS. STRAIGHT- TIMEOVERTIMETOTAL Sara Canne4240022422 Jim Lake404800 Kyle Metz48800160960 Total1,6801821,862 Payroll Record DEDUCTIONSNET PAY FED. INCOME TAXFICA HEALTH INS.TOTALAMOUNT CHECK NO. 633715115307166 723822132348167 1447740261699168 279152775081,354 Payroll Record GROSS PAYDEDUCTIONSNET PAY EMPLOYEE NAME HR S. STRAIGHT TIMEOVERTIME TOTA L FED. INCOME TAXFICA HEALTH INS. TOTA LAMOUNT CHECK NO. Sara Canne4240022422633715115307166 Jim Lake404800 723822132348167 Kyle Metz488001609601447740261699168 Total1,6801821,862279152775081,354

34 Copyright © 2007 Prentice-Hall. All rights reserved 34 Payroll Checks Stile's 166 Payroll Account Baltimore, MDSep. 30, 2007 Pay to the Order of Sara Canne $307.00 Three hundred seven & 00/100's Dollars First Bank Baltimore Maryland 21244 James Carn A1119000031A 0787C50000454C Treasurer PayDeductions Net Pay Check No. STRAIGHT TIMEOVERTIMETOTAL INCOME TAXFICA HEALTH INS. TOTAL 40022422633715115307166

35 Copyright © 2007 Prentice-Hall. All rights reserved 35 Earnings Report

36 Copyright © 2007 Prentice-Hall. All rights reserved 36 Earnings Report

37 Copyright © 2007 Prentice-Hall. All rights reserved 37 Internal Control over Payroll Efficiency controls –Keep two payroll accounts –Computerize Controls to safeguard payroll disbursements –Separate hiring and firing function from accounting and from passing out paychecks –Photo ID’s for employees –Employees clock in and out

38 Copyright © 2007 Prentice-Hall. All rights reserved 38 Objective 6 Report current liabilities on the balance sheet

39 Copyright © 2007 Prentice-Hall. All rights reserved 39 E11-22E11-22 Oriental Rug Company Balance Sheet (partial) December 31, 2004 Current liabilities: Estimated warranty payable $6,000 Unearned sales revenue15,000 Employee withheld income tax payable8,100 FICA tax payable14,400 State unemployment tax payable4,860 Federal unemployment tax payable720 Total current liabilities$49,080 Warranties payable (200,000 x.03) Employee income tax (90,000 x.09) FICA (90,000 x.08 x 2) State unemployment (90,000 x.054) Federal unemployment (90,000 x.008)

40 Copyright © 2007 Prentice-Hall. All rights reserved 40 End of Chapter 11

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