Accounting Principles, 7th Edition Weygandt • Kieso • Kimmel Chapter 11 Current Liabilities and Payroll Accounting Prepared by Naomi Karolinski Monroe Community College and Marianne Bradford Bryant College John Wiley & Sons, Inc © 2005 CHAPTER 11 CURRENT LIABILITIES AND PAYROLL ACCOUNTING After studying this chapter, you should be able to: Explain a current liability, and identify the major types of current liabilities Describe the accounting for notes payable Explain the accounting for other current liabilities Explain the financial statement presentation and analysis of current liabilities Describe the accounting and disclosure requirements for contingent liabilities CHAPTER 11 CURRENT LIABILITIES AND PAYROLL ACCOUNTING After studying this chapter, you should be able to: Discuss the objectives of internal control for payroll Compute and record the payroll for a pay period Describe and record employer payroll taxes ACCOUNTING FOR CURRENT LIABILITIES • A Current Liability is a OBJECTIVE debt with1two key features: STUDY 1) expected to be paid from existing currents assets or through the creation of other current liabilities 2) paid within one year or the operating cycle, whichever is longer • Current liabilities include: 1) Notes Payable 2) Accounts Payable 3) Unearned Revenues 4) Accrued Liabilities The time period for classifying a liability as current is one year or the operating cycle, whichever is: a longer b shorter c probable d possible The time period for classifying a liability as current is one year or the operating cycle, whichever is: a longer b shorter c probable d possible NOTES PAYABLE STUDY OBJECTIVE • Obligations in the form of written promissory notes are recorded as notes payable • Those notes due for payment within one year of the balance sheet date are usually classified as current liabilities NOTES PAYABLE General Journal Date Account Titles March Cash Notes Payable Debit Credit 100,000 100,000 When an interest-bearing note is issued, the assets received generally equal the face value of the note Assume First National Bank agrees to lend $100,000 on March 1, 2005, if Cole Williams Co signs a $100,000, 12%, 4-month note Cash is debited and Notes Payable is credited Formula for computing interest The formula for computing interest and its application to Cole Williams Co are shown below: Face Value of Note $100,000 x Annual Interest Rate 12% Time in Terms of One Year x 4/12 = Interest $4,000 NOTES PAYABLE General Journal Date Account Titles June 30 Interest Expense Interest Payable Debit Credit 4,000 4,000 Interest accrues over the life of the note and must be recorded periodically If Cole Williams Co prepares financial statements semiannually, an adjusting entry is required to recognize interest expense and interest payable of $4,000 at June 30 RECOGNIZING PAYROLL EXPENSES AND LIABILITIES General Journal Date Jan 14 Account Titles Office Salaries Expense Wages Expense FICA Taxes Payable Federal Income Taxes Pay State Income Taxes Pay United Fund Pay Union Dues Pay Salaries and Wages Pay Debit Credit 5,200.00 12,010.00 1,376.80 3,490.00 344.20 421.50 115.00 11,462.50 Academy Company records its payroll for the week ending January 14, 2005 with the journal entry above Office Salaries Expense ($5,200) and Wages Expense ($12,010) are debited in total for $17,210 in gross earnings Specific liability accounts are credited for the deductions made during the pay period Salaries and Wages Payable is credited for $11,462.50 in net earnings RECORDING PAYMENT OF THE PAYROLL General Journal Date Account Titles Jan 14 Salaries and Wages Pay Cash Debit Credit 11,462.50 11,462.50 The entry to record payment of the Academy Company payroll is a debit to Salaries and Wages Payable and a credit to Cash When currency is used in payment, one check is prepared for the amount of net earnings ($11,462.50) EMPLOYER PAYROLL TAXES STUDY OBJECTIVE Payroll Tax Expense- three taxes levied on employers by governmental agencies Employer must match each employee’s FICA contribution Federal unemployment taxes (FUTA) State unemployment taxes (SUTA) RECORDING EMPLOYER PAYROLL TAXES The entry to record the payroll tax expense associated with the Academy Company payroll results in a debit to Payroll Tax Expense for $2,443.82, a credit to FICA Taxes Payable for $1,376.80 ($17,210 X 8%), a credit to FUTA Payable for $137.68 ($17,210 X 0.8%), and a credit to SUTA Payable for $929.34 ($17,210 X 5.4%) General Journal Date Jan 14 Account Titles Debit Payroll Tax Expense FICA Taxes Payable Fed Unemployment Taxes Pay State Unemployment Taxes Pay 2,443.82 Credit 1,376.80 137.68 929.34 EMPLOYER PAYROLL TAXES • • • • • • FILING AND REMITTING PAYROLL TAXES Preparation of payroll tax returns is the responsibility of the payroll department Payment of the taxes is made by the treasurer’s department FICA taxes and Federal income taxes (FIT) withheld are combined for reporting and remitting purposes The taxes are reported quarterly – no later than one month after the close of each quarter FUTA taxes are generally filed and remitted annually on or prior to January 31 of the subsequent year SUTA taxes must be filed and paid by the end of the month following each quarter The employer is required to provide each employee with a Wage and Tax Statement (Form W-2) by January 31 following the end of the calendar year Appendix Additional Fringe Benefits ADDITIONAL FRINGE BENEFITS PAID ABSENCES Employees often are given rights to receive compensation for absences when certain conditions of employment are met Such compensation may relate to 1) paid vacations, 2) sick pay benefits, and 3) paid holidays A liability should be accrued for paid future absences if 1) its payment is probable and 2) the amount can be reasonably estimated Academy Company employees are entitled to one day’s vacation for each month worked If 30 employees earn an average of $110 per day in a given month, the accrual for vacation benefits for January is $3,300 ($110 X 30) The liability is recognized at January 31 by the following adjusting entry: General Journal Date Jan 31 Account Titles Vacation Benefits Expense Vacation Benefits Payable Debit Credit 3,300 3,300 ADDITIONAL FRINGE BENEFITS PAID ABSENCES When vacation benefits are paid, Vacation Benefits Payable is debited and Cash is credited If Academy Company pays such benefits for 10 employees in July, the journal entry to record the payment is for $1,100 ($110 X 10) General Journal Date Account Titles July 31 Vacation Benefits Pay Cash Debit Credit 1,100 1,100 POSTRETIREMENT BENEFITS • Postretirement benefits are benefits provided by employers to retired employees for: health care and life insurance pensions • Both types of postretirement benefits are accounted for on the accrual basis PENSION PLANS • • A pension plan is an agreement whereby an employer provides benefits to employees after they retire Three parties are generally involved in a pension plan 1) The employer sponsors the pension plan 2) The plan administrator receives the contributions from the employer, invests the pension assets, and makes the benefit payments 3) The retired employees receive the pension payments PARTIES IN A PENSION PLAN Employer Benefits Plan Administrator Pension Recipients Contributions The department that should pay the payroll is the: a timekeeping department b human resources department c payroll department d treasurer’s department The department that should pay the payroll is the: a timekeeping department b human resources department c payroll department d treasurer’s department COPYRIGHT Copyright © 2005 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein .. .CHAPTER 11 CURRENT LIABILITIES AND PAYROLL ACCOUNTING After studying this chapter, you should be able to: Explain a current liability,... Describe the accounting for notes payable Explain the accounting for other current liabilities Explain the financial statement presentation and analysis of current liabilities Describe the accounting. .. accounting and disclosure requirements for contingent liabilities CHAPTER 11 CURRENT LIABILITIES AND PAYROLL ACCOUNTING After studying this chapter, you should be able to: Discuss the objectives of internal