2. 11 - 1 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Current Liabilities and Payroll Chapter 11

3. 11 - 2 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 1 Account for current liabilities of known amount.

4. 11 - 3 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounts Payable... – are amounts owed to suppliers for goods or services purchased on account. l Accounts payable do not bear interest expense for the debtor.

5. 11 - 4 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounts Payable Example l Suppose that on June 3, Lloyd’s Sporting Store purchased $1,000 of goods on account from Patti Wholesaler. l What is the journal entry? Inventory 1,000 Accounts Payable 1,000 Purchase on account

6. 11 - 5 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Short-Term Notes Payable... – are promissory notes payable due within one year. l In addition to recording the note payable, the business must also pay interest expense. l If interest expense is accrued at the end of the period, interest payable must also be recorded.

7. 11 - 6 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Short-Term Notes Payable Example l On April 30, Patti purchased inventory for $10,000 by issuing a 90-day, 10% note payable. l What is the journal entry? Inventory10,000 Notes Payable10,000 Purchase inventory on a 90-day, 10% note

8. 11 - 7 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Short-Term Notes Payable Example l Assume the accounting period ended May 31. l How much interest was accrued as of May 31? l $10,000 × 10% × 31/360 = $86.11 l How does Patti record the payment at maturity?

9. 11 - 8 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Short-Term Notes Payable Example July 29 Note Payable10,000.00 Interest Payable 86.11 Interest Expense 163.89 Cash10,250.00

10. 11 - 9 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Short-Term Notes Payable Issued at a Discount l Issuing a note at a discount means the bank subtracts the interest from the note’s face value. l Suppose that on February 25, Shanitha discounts a $10,000, 90-day note, payable to the bank at 12%. l The business will receive $9,700. l $10,000 × 0.12 × 90/360 = $300

11. 11 - 10 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Short-Term Notes Payable Issued at a Discount February 25 Cash 9,700 Discount on Note Payable 300 Notes Payable, Short-Term10,000 Discount a $10,000, 90-day, 10% note payable to borrow cash February 25 Cash 9,700 Discount on Note Payable 300 Notes Payable, Short-Term10,000 Discount a $10,000, 90-day, 10% note payable to borrow cash

12. 11 - 11 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Short-Term Notes Payable Issued at a Discount Shanitha Balance Sheet Current liabilities: Note payable, short-term$10,000 Less: Discount on note payable 300 Note payable, short-term, net$ 9,700

13. 11 - 12 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Short-Term Notes Payable Issued at a Discount l What is the accrued interest at the end of the month? l $10,000 × 12% × 3/360 = $10 February 28 Interest Expense 10 Discount on Note Payable 10 Accrue interest expense at month end

14. 11 - 13 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Sales Tax Payable Example l Most states levy a sales tax on retail sales. l Suppose that a store sold $3,000 worth of merchandise on a given Saturday. l The business collected an additional 5% in sales tax. l How much is the sales tax liability? l $150

15. 11 - 14 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accrued Expenses (Liabilities)... – are expenses that have been incurred but not recorded. – salaries – taxes withheld – interest – utilities

16. 11 - 15 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Payroll Liabilities Salary Expense10,000 Employee Income Tax Payable1,200 FICA Tax Payable 800 Employee Union Dues Payable 140 Salary Payable7,860 To record salary expense

17. 11 - 16 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Unearned Revenue Example l 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 1,500 Unearned Revenue1,500 Received cash in advance

18. 11 - 17 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Unearned Revenue Example l What entry does Dennis record on June 30? June 30 Unearned Revenue500 Service Revenue500 Earned service revenue that was collected in advance

19. 11 - 18 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 2 Account for current liabilities that must be estimated.

20. 11 - 19 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Estimated Warranty Payable l The matching principle demands that the company record the warranty expense in the same period that the business recognizes sales revenue.

21. 11 - 20 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Estimated Warranty Payable Example l Patti Wholesaler made sales of $1,000,000 subject to product warranties. l In the past years, claims have averaged 2%. Warranty Expense 20,000 Estimated Warranty Payable20,000 To accrue warranty expense

22. 11 - 21 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Estimated Warranty Payable Example l On January 28, a customer returned a defective product and was given a $300 refund. Estimated Warranty Payable300 Cash300 To record refund under warranty

23. 11 - 22 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Estimated Vacation Pay Liability Example l 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). l How much vacation pay should be accrued?

24. 11 - 23 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Estimated Vacation Pay Liability Example March 31 Vacation Pay Expense400 Estimated Vacation Pay Liability400 To accrue vacation expense

25. 11 - 24 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Income Tax Payable l What is the entry a corporation makes to accrue $50,000 of income tax expense for a one-year period? Income Tax Expense50,000 Income Tax Payable50,000 To accrue income tax at year end Income Tax Expense50,000 Income Tax Payable50,000 To accrue income tax at year end

26. 11 - 25 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Contingent Liability l Report a contingent liability in the notes to the financial statement if it is reasonably possible that a loss or expense will occur. l 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.

27. 11 - 26 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Contingent vs. Current Liability l Suppose a hospital has lost a court case for uninsured malpractice. l The hospital estimates that the liability will fall between $1.5 and $2.5 million.

28. 11 - 27 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Contingent vs. Current Liability l The hospital must record a loss and a liability of $1.5 million. l The hospital must disclose in a note the possibility of an additional $1.0 million loss.

29. 11 - 28 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 3 Compute payroll amounts.

30. 11 - 29 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Payroll l Straight time is the base rate paid to employees for a set number of hours. l Overtime is additional time worked by employees for which they received a higher rate (usually 1.5 times the straight time rate).

31. 11 - 30 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Gross Pay and Net Pay Gross Pay Deductions Net Pay

32. 11 - 31 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber FICA Tax l The FICA tax has two components: 1 Old age, survivors’, and disability insurance (6.2% applied to the first $80,400 of employee earnings in a year) 2 Health insurance (1.45% applied to all employee earnings)

33. 11 - 32 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Employer Payroll Taxes l Social Security (FICA) tax l State unemployment compensation tax l Federal unemployment compensation tax

34. 11 - 33 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Unemployment Compensation Taxes l 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. l The state government uses the money to pay unemployment benefits to people who are out of work.

35. 11 - 34 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Breakdown of Payroll Costs Employer disburses $1,200 Employer cost of health care to insurance co. $90 Employer payroll taxes to government $110 Net pay to employee $750 Employee payroll taxes to government $230 Employee union dues $20 Employee Gross Pay – $1,000

36. 11 - 35 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 4 Record basic payroll transactions.

37. 11 - 36 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Salary Expense l Salary expense to the employer is the gross salary of all employees. l Employees pay their own income and FICA taxes as well as union dues. l The employer serves as a collecting agent and sends these amounts to the government and union.

38. 11 - 37 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber To Record Salaries Expense: Salary Expense Employee Income Tax Payable FICA Tax Payable Employees Union Dues Payable Salary Payable to Employees (take-home pay) Salary Expense Employee Income Tax Payable FICA Tax Payable Employees Union Dues Payable Salary Payable to Employees (take-home pay)

39. 11 - 38 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber To Record Salaries Expense: Payroll Tax Expense FICA Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable Payroll Tax Expense FICA Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable

40. 11 - 39 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber To Record Salaries Expense: Health Insurance Expense for Employees Life Insurance Expense for Employees Pension Expense Employee Benefits Payable Health Insurance Expense for Employees Life Insurance Expense for Employees Pension Expense Employee Benefits Payable

41. 11 - 40 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 5 Use a payroll system.

42. 11 - 41 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Payroll System Components – payroll record – special payroll bank account – payroll checks – earnings record for each employee

43. 11 - 42 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Payroll Record... – is also referred to as the payroll journal. l It lists payroll data for each employee. l It serves as a check register. l It provides information for recording payroll expenses and related withholdings.

44. 11 - 43 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Payroll Bank Account l 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. l The company deposits this check in the special payroll bank account.

45. 11 - 44 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Payroll Bank Account l The company writes paychecks to employees out of the payroll account. l When the paychecks clear the bank, the payroll account has a zero balance. l Disbursing paychecks from a separate bank account isolates net pay for analysis and control.

46. 11 - 45 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Cash Disbursements l When the employer pays the employees, the company debits Salary Payable to Employees and credits Cash. l The liabilities to the government, unions, and other parties is also debited when cash is paid.

47. 11 - 46 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Cash Disbursements l Assume the following journal entry was made at the end of an accounting period: Salary Expense180,000 Employee Income Tax Payable 45,000 FICA Tax Payable 11,160 Employee Union Dues Payable 840 Salary Payable to Employees123,000

48. 11 - 47 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Cash Disbursements l What is the journal entry when the employer pays these liabilities? Employee Income Tax Payable 45,000 FICA Tax Payable 11,160 Employee Union Dues Payable 840 Salary Payable to Employees123,000 Cash180,000

49. 11 - 48 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Internal Control over Payrolls – controls for efficiency – controls for safeguarding payroll disbursements

50. 11 - 49 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 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

51. 11 - 50 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Controls for Safeguarding Payroll Disbursements l Large organizations must establish controls to ensure that payroll disbursements are made only to legitimate employees. l Duties of hiring and firing should be separated from the duties of accounting for payroll and distributing paychecks.

52. 11 - 51 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Controls for Safeguarding Payroll Disbursements l Requiring an identification badge bearing an employee’s photograph also helps internal control. l A formal time-keeping system helps ensure that employees have actually worked.

53. 11 - 52 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 6 Report current liabilities on the balance sheet.

54. 11 - 53 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Report Current Liabilities l Companies report current liabilities on the balance sheet. – current liabilities of known amount (payroll) – current liabilities that must be estimated (warranties)

55. 11 - 54 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Report Current Liabilities l At the end of the year, companies report the amount of payroll liabilities owed to all parties. l The liability at year end is the amount of the payroll expense that is still unpaid.

56. 11 - 55 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Liabilities Known When Recorded – accounts payable – short-term notes payable – sales tax payable – current portion of long-term debt – accrued expenses payable – unearned revenues

57. 11 - 56 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Liabilities Estimated When Recorded – warranty payable – income tax payable – vacation pay liability

58. 11 - 57 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber End of Chapter 11