Accounting principles 10e by kieso chapter 11

Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes payable, salaries payable, and interest payable.. 11-10 SO 3 Explai

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CHAPTER 11

Current Liabilities and Payroll

Accounting

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Current liability is debt with two key features:

1 Company expects to pay the debt from existing

current assets or through the creation of other current liabilities

2 Company will pay the debt within one year or the

operating cycle, whichever is longer

SO 1 Explain a current liability, and identify the

major types of current liabilities.

Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes payable, salaries

payable, and interest payable.

Accounting for Current Liabilities

To be classified as a current liability, a debt must be

expected to be paid:

a out of existing current assets.

b by creating other current liabilities.

c within 2 years.

d both (a) and (b).

Question

SO 1 Explain a current liability, and identify the

major types of current liabilities.

Accounting for Current Liabilities

11-6 SO 2 Describe the accounting for notes payable.

Notes Payable

 Written promissory note

 Requires the borrower to pay interest

 Issued for varying periods

Accounting for Current Liabilities

Illustration: First National Bank agrees to lend $100,000 on

September 1, 2012, if Cole Williams Co signs a $100,000,

12%, four-month note maturing on January 1

Instructions

a) Prepare the entry on September 1st

b) Prepare the adjusting entry on Dec 31st, assuming

monthly adjusting entries have not been made

c) Prepare the entry at maturity (Jan 1, 2013)

SO 2 Describe the accounting for notes payable.

Accounting for Current Liabilities

Notes payable 100,000

Interest payable 4,000Interest expense 4,000

$100,000 x 12% x 4/12 = $4,000

b) Prepare the adjusting entry on Dec 31st

SO 2 Describe the accounting for notes payable.

Accounting for Current Liabilities

Illustration: First National Bank agrees to lend $100,000 on

September 1, 2012, if Cole Williams Co signs a $100,000,

12%, four-month note maturing on January 1

a) Prepare the entry on Sept 1st

SO 2 Describe the accounting for notes payable.

Accounting for Current Liabilities

Illustration: First National Bank agrees to lend $100,000 on

September 1, 2012, if Cole Williams Co signs a $100,000,

12%, four-month note maturing on January 1

c) Prepare the entry at maturity

Interest payable 4,000Notes payable 100,000

11-10 SO 3 Explain the accounting for other current liabilities.

Sales Tax Payable

 Sales taxes are expressed as a stated percentage

of the sales price

 Either rung up separately or included in total

receipts

 Retailer collects tax from the customer

 Retailer remits the collections to the state’s

department of revenue

Accounting for Current Liabilities

Illustration: The March 25 cash register reading for Cooley

Grocery shows sales of $10,000 and sales taxes of $600 (sales tax rate of 6%), the journal entry is:

Sales revenue 10,000

Sales tax payable 600

SO 3 Explain the accounting for other current liabilities.

Accounting for Current Liabilities

11-12 SO 3 Explain the accounting for other current liabilities.

Illustration: Superior University sells 10,000 season football

tickets at $50 each for its five-game home schedule The

university makes the following entry for the sale of season

tickets:

SO 3 Explain the accounting for other current liabilities.

Unearned ticket revenue500,000

Aug 6

Ticket revenue100,000

Unearned ticket revenue 100,000Sept 7

As the school completes each of the five home games, it would record the revenue earned

Accounting for Current Liabilities

Current Maturities of Long-Term Debt

 Portion of long-term debt that comes due in the

current year

 No adjusting entry required

SO 3 Explain the accounting for other current liabilities.

Accounting for Current Liabilities

Working capital is calculated as:

a current assets minus current liabilities.

b total assets minus total liabilities.

c long-term liabilities minus current liabilities.

d both (b) and (c).

Question

SO 4 Explain the financial statement presentation

and analysis of current liabilities.

Accounting for Current Liabilities

11-17 SO 4 Explain the financial statement presentation

and analysis of current liabilities.

Liquidity refers to the ability to pay maturing obligations and meet unexpected needs for

cash.

Current ratio permits us

to compare the liquidity of

Accounting for Current Liabilities

Statement Presentation and Analysis

11-18 SO 5 Describe the accounting and disclosure

requirements for contingent liabilities.

Potential liability that may become an actual liability in

Accounting Probability

Accrue Footnote Ignore

Probable

Reasonably Possible Remote

SO 5 Describe the accounting and disclosure

requirements for contingent liabilities.

Contingent Liabilities

A contingent liability should be recorded in the accounts when:

a it is probable the contingency will happen, but the

amount cannot be reasonably estimated

b it is reasonably possible the contingency will happen,

and the amount can be reasonably estimated

c it is probable the contingency will happen, and the

amount can be reasonably estimated

d it is reasonably possible the contingency will happen,

but the amount cannot be reasonably estimated

Question

SO 5 Describe the accounting and disclosure

requirements for contingent liabilities.

Contingent Liabilities

Product Warranties

Promise made by a seller to a buyer to make good on

a deficiency of quantity, quality, or performance in a

product.

Recording a Contingent Liability

Estimated cost of honoring product warranty contracts

should be recognized as an expense in the period in

which the sale occurs.

SO 5 Describe the accounting and disclosure

requirements for contingent liabilities.

Contingent Liabilities

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Illustration: Denson Manufacturing Company sells 10,000

washers and dryers at an average price of $600 each The

selling price includes a one-year warranty on parts Denson

expects that 500 units (5%) will be defective and that warranty

repair costs will average $80 per unit In 2012, the company

honors warranty contracts on 300 units, at a total cost of

$24,000 At December 31, compute the estimated warranty

Warranty expense 40,000

SO 5 Describe the accounting and disclosure

requirements for contingent liabilities.

Warranty liability 40,000

Contingent Liabilities

Illustration: Denson Manufacturing Company sells 10,000

washers and dryers at an average price of $600 each The

selling price includes a one-year warranty on parts Denson

expects that 500 units (5%) will be defective and that warranty repair costs will average $80 per unit In 2012, the company

honors warranty contracts on 300 units, at a total cost of

$24,000 At December 31, compute the estimated warranty

liability Make the required adjusting entry.

Illustration: Prepare the entry to record the repair costs

incurred in 2012 to honor warranty contracts on 2012 sales

Warranty liability 24,000

SO 5 Describe the accounting and disclosure

requirements for contingent liabilities.

Repair parts 24,000

Assume that the company replaces 20 defective units in

January 2013, at an average cost of $80 in parts and labor

Warranty liability 1,600

Repair parts 1,600

Contingent Liabilities

11-26 SO 5 Describe the accounting and disclosure

requirements for contingent liabilities.

Contingent Liabilities

Disclosure of Contingent Liabilities

“Payroll” pertains to both:

Salaries - managerial, administrative, and sales personnel (monthly or yearly rate).

Wages - store clerks, factory employees, and manual laborers (rate per hour).

Involves computing three amounts: (1) gross earnings , (2) payroll deductions , and (3) net pay

Payroll Accounting

Determining the Payroll

Total compensation earned by an employee (wages or

salaries, plus any bonuses and commissions).

Mandatory:

 FICA tax

 Federal income tax

 State income tax

11-30 SO 6 Compute and record the payroll for a pay period.

Social Security taxes

 Supplemental retirement, employment disability, and medical benefits

 In 2010, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first

$106,800 of gross earnings for each employee For

purpose of illustration, assume a

rate of 8% on the first $100,000

of gross earnings, maximum of

 Federal income tax

 State income tax

11-31 SO 6 Compute and record the payroll for a pay period.

 Employers are required to withhold income taxes from employees’ pay

 Withholding amounts are based on gross wages and the number of allowances claimed

Determining the Payroll

Payroll Deductions

Mandatory:

 FICA tax

 Federal income tax

 State income tax

11-32 SO 6 Compute and record the payroll for a pay period.

 Most states (and some cities) require employers to withhold income taxes

from employees’ earnings

Determining the Payroll

Payroll Deductions

Mandatory:

 FICA tax

 Federal income tax

 State income tax

An employer must keep a cumulative record of each employee’s

gross earnings, deductions, and net pay during the year.

Maintaining Payroll Department Records

Recording the Payroll

Illustration 11-12

SO 6

Many companies find it useful to prepare a payroll register

Maintaining Payroll Department Records

Recording the Payroll

Illustration 11-13

SO 6

Illustration: Prepare the entry Academy Company would make to record the payroll for the week ending January 14.

Recognizing Payroll Expenses and Liabilities

SO 6 Compute and record the payroll for a pay period.

Salaries and wages expense 17,210.00

Federal income tax payable 3,490.00 FICA tax payable 1,376.80

State income tax payable 344.20 United Way payable 421.50 Union dues payable 115.00 Salaries and wages payable 11,462.50

Recording the Payroll

Illustration: Prepare the entry Academy Company would make to record the payment of the payroll.

Recording Payment of the Payroll

SO 6 Compute and record the payroll for a pay period.

Salaries and wages payable 11,462.50

Cash 11,462.50

Recording the Payroll

11-38 SO 6 Compute and record the payroll for a pay period.

Payroll tax expense results from three taxes that

governmental agencies levy on employers

SO 7 Describe and record employer payroll taxes.

These taxes are:

$106,800 of gross earnings for each employee For purpose

of illustration, assume a rate of 8%

on the first $100,000 of gross earnings, maximum of $8,000.

Employer Payroll Taxes

11-40 SO 7 Describe and record employer payroll taxes.

 FUTA tax rate is 6.2% of first

$7,000 of taxable wages

 Employers who pay the state unemployment tax on a timely basis will receive an offset

credit of up to 5.4%

Therefore, the net federal tax rate is generally 0.8%

Employer Payroll Taxes

Payroll tax expense results from three taxes that

governmental agencies levy on employers

These taxes are:

11-41 SO 7 Describe and record employer payroll taxes.

 SUTA basic rate is usually 5.4% on the first $7,000 of wages paid

Employer Payroll Taxes

Payroll tax expense results from three taxes that

governmental agencies levy on employers

These taxes are:

Illustration: Academy records the payroll tax expense

associated with the January 14 payroll with the following entry Use the following rates: FICA 8%, state unemployment 5.4%,

federal unemployment 0.8%

Payroll tax expense 2,443.82

State unemployment tax payable 929.34 FICA tax payable 1,376.80

SO 7 Describe and record employer payroll taxes.

Employer Payroll Taxes

Employer payroll taxes do not include:

a Federal unemployment taxes.

b State unemployment taxes.

c Federal income taxes.

d FICA taxes.

Question

SO 7 Describe and record employer payroll taxes.

Employer Payroll Taxes

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Companies must report FICA taxes and federal income

taxes withheld no later than one month following the close

Employers must provide each employee with a Wage and

Tax Statement (Form W-2) by January 31

SO 7 Describe and record employer payroll taxes.

Filing and Remitting Payroll Taxes

As applied to payroll, the objectives of internal control are

1 to safeguard company assets against unauthorized

payments of payrolls, and

2 to ensure the accuracy and reliability of the

accounting records pertaining to payrolls.

SO 8 Discuss the objectives of internal control for payroll.

Internal Control for Payroll

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In addition to the three payroll-tax fringe benefits,

employers incur other substantial fringe benefit costs.

Two important fringe benefits include:

 Paid absences

 Post-retirement benefits

SO 9 Identify additional fringe benefits associated

with employee compensation.

APPENDIX

APPENDIX 11A

Additional Fringe Benefits

 Employees often are given rights to receive compensation

for absence when they meet certain conditions of employment.

 The compensation may be for paid vacations, sick pay

benefits, and paid holidays.

 When the payment for such absences is probable and the

amount can be reasonably estimated, the company should accrue a liability for paid future absences.

 When the amount cannot be reasonably estimated, the

company should instead disclose the potential liability.

Paid Absences

SO 9 Identify additional fringe benefits associated

with employee compensation.

Post-retirement benefits are benefits that employers provide

to retired employees for

1 pensions and

2 health care and life insurance

Companies account for post-retirement benefits on the

accrual basis

APPENDIX

SO 9 Identify additional fringe benefits associated

with employee compensation.

Post-Retirement Benefits

A pension plan is an agreement whereby employers provide

benefits to employees after they retire.

Two types of pension plans:

1 In a defined-contribution plan, the plan defines the

contribution that an employer will make but not the benefit that the employee will receive at retirement This is often referred

to as a 401 (k) plan

2 In a defined-benefit plan, the employer agrees to pay a

defined amount to retirees, based on employees meeting certain eligibility standards.

SO 9 Identify additional fringe benefits associated

with employee compensation.

Pensions

Post-Retirement Benefits

Key Points

similar In a more technical way, liabilities are defined by the IASB as a present obligation of the entity arising from past events, the settlement of which is expected to result in an out flow from the entity of resources embodying economic benefits Liabilities may be legally enforceable via a contract or law but need not be; that is, they can arise due to normal business practice or customs.

Key Points

noncurrent on the face of the statement of financial position (balance sheet), except in industries where a presentation based on liquidity would be considered to provide more useful information (such as financial institutions) When current

liabilities (also called short-term liabilities) are presented, they are generally presented in order of liquidity

expected to be paid within 12 months.

will sometimes show long-term liabilities before current liabilities.

Key Points

against current liabilities to show working capital on the face of the statement of financial position (This is evident in the Zetar financial statements in Appendix C.)

financial statements, others are disclosed, and in some cases

no disclosure is required Unlike GAAP, IFRS reserves the use

of the term contingent liability to refer only to possible obligations that are not recognized in the financial statements but may be disclosed if certain criteria are met