Accounting 21th waren reeve fess chapter 11

Prepare journal entries for short-term notes payable and disclosure for the current portion of long-term debt.. Determine employer liabilities for payroll, including liabilities arisin

Chapter 11

Current Liabilities

Accounting, 21 st Edition Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud

Professor Emeritus of Accounting

Pepperdine University

© Copyright 2004 South-Western, a division

of Thomson Learning All rights reserved

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1 Define and give examples of current liabilities.

2 Prepare journal entries for short-term notes

payable and disclosure for the current portion of long-term debt.

3 Describe the accounting treatment for contingent liabilities and journalize entries for product

warranties.

4 Determine employer liabilities for payroll,

including liabilities arising from employee

earnings and deductions from earnings

5 Describe payroll accounting systems that use a payroll register, employee earnings record, and a general journal.

benefits, including vacation pay and pensions.

ability of a business to pay its current liabilities.

Objectives

Objectives

The Nature of Current Liabilities

The Nature of Current Liabilities

Liabilities that are to be paid out of current assets and are due within a short time, usually within one

year, are called current liabilities.

Liabilities that are to be paid out of current assets and are due within a short time, usually within one

year, are called current liabilities.

Short-Term Notes Payable

Short-Term Notes Payable

A firm issues a 90-day, 12% note for

$1,000, dated August 1, 2006 to Murray

Co for a $1,000 overdue account.

A firm issues a 90-day, 12% note for

$1,000, dated August 1, 2006 to Murray

Co for a $1,000 overdue account.

On October 30, when the note matures, the

firm pays the $1,000 principal plus $30

interest ($1,000 x 12 x 90/360).

On October 30, when the note matures, the

firm pays the $1,000 principal plus $30

Short-Term Notes Payable

Short-Term Notes Payable

10,000 Cost of Mdse Sold 7,500 Mdse Inventory

7,500

May 31 Bowden Co purchased merchandise on

account from Coker Co., $10,000, 2/10, n/30

May 31 Bowden Co purchased merchandise on

account from Coker Co., $10,000, 2/10, n/30

The merchandise cost Coker Co $7,500

Short-Term Notes Payable

Short-Term Notes Payable

Description Debit

Credit

Accounts Receivable 10,000 Sales

10,000 Cost of Mdse Sold 7,500 Mdse Inventory

7,500

Bowden Co (Borrower) Coker Co (Creditor)

May 31 Bowden Co issued a 60-day, 12%

note for $10,000 to Coker on account

May 31 Bowden Co issued a 60-day, 12%

note for $10,000 to Coker on account

Accounts Payable 10,000

Notes Payable 10,000 Notes Receivable 10,000

Accounts Receivable 10,000

10,000 Cost of Mdse Sold 7,500 Mdse Inventory

7,500

Short-Term Notes Payable

Short-Term Notes Payable

10,000 Cost of Mdse Sold 7,500 Mdse Inventory

Short-Term Notes Payable

Short-Term Notes Payable

Discounted Notes Payable

Discounted Notes Payable

On August 10, Cary Company issues a $20,000,

90-day note to Rock Company in exchange for

inventory Rock discounts the note at 15%

On August 10, Cary Company issues a $20,000,

90-day note to Rock Company in exchange for

inventory Rock discounts the note at 15%

Discounted Notes Payable

Discounted Notes Payable

Contingent Liabilities

Product Liability

Product Liability

On June 30, a company sells a product for $60,000

on which there is a 36-month warranty Past

experience indicates that repairs of defects cost 5%

of the sales price over the warranty period.

On June 30, a company sells a product for $60,000

on which there is a 36-month warranty Past

experience indicates that repairs of defects cost 5%

of the sales price over the warranty period.

June 30 Product Warranty Expense 3 000 00

Warranty expenses projected for June, 5% of $60,000.

Product Warranty Liability

3 000 00

On August 16, a customer needed a defective part replaced Cost to the company was $200 for the part

On August 16, a customer needed a defective part replaced Cost to the company was $200 for the part

Probable Estimable Record

Liability

Not Estimable Disclose Liability

Disclose Contingency

Possible

Payroll and

Payroll Taxes

Liability for Employee Earnings

Liability for Employee Earnings

1 Good employee relations demand that payrolls be calculated

accurately and paid as scheduled.

2 Payroll expenditures are subject to a variety of federal, state, and local taxes.

3 Total payroll expense (gross payroll plus payroll taxes) has a major impact on net income

Payroll is the amount paid to employees for

services provided Payrolls are important

because Gross Pay Calculation

Gross Pay Calculation

John T McGrath is employed by McDermott Supply Co at the rate of $34 per hour, plus 1.5

times the normal hourly rate for hours over 40

per week For the week ended December 27,

McGrath worked 42 hours

John T McGrath is employed by McDermott

Supply Co at the rate of $34 per hour, plus 1.5

times the normal hourly rate for hours over 40

per week For the week ended December 27,

McGrath worked 42 hours

Earnings at base rate (40 x $34)

FICA Tax

FICA Tax

Employers are required to withhold a portion of the earnings of each of the employees The amount is matched by the employer and serves to provide the

employee with social security and

Medicare benefits upon retirement.

Employers are required to withhold a portion of the earnings of each of the employees The amount is matched by the employer and serves to provide the

employee with social security and

Medicare benefits upon retirement.

Earnings subject to 6% social security tax

Social security tax

$57.72

FICA Tax Calculation

FICA Tax Calculation

Assume that John T McGrath’s annual earnings prior to the current period total $99,038 His

current period earnings are $1,462

Earnings subject to 1.5% Medicare tax

Withholding Taxes, Other Deductions

Withholding Taxes, Other Deductions

 Employers are required to withhold federal

income tax from each employee based on the

withholding table and information provided by

the employee’s W-4 form

 Federal income tax and FICA tax must be

withheld from the pay of each employee

 Deductions for other purposes may be withheld

by mutual agreement

Gross earnings for the week

$1,462.00

Deductions:

Social security tax tax $ 57.72 Medicare tax 21.93 Federal income tax 279.51 Retirement savings 20.00 United Way 5.00 Total deductions 384.16

Net pay

$1,077.84

John T McGrath is single, has declared one withholding allowance, and had gross pay of

$1,462 for the week ended December 27

Employee Net Pay Calculation

Responsibility for Tax

Federal withholding tax

Social security tax Medicare tax Federal unemployment compensation tax State unemployment compensation tax

Federal Income

Personal income tax

46%

Estate, gift, and other

8%

Corporate income tax

38%

Federal Outlays

Social security and

Social programs 24%

National

Law enforcement and general

3%

It’s a multicolumn form used to help assemble and summarize the data needed for each payroll period.

Regular $13,328.00 Overtime 574.00

5,383.60 Net amount paid $ 8,518.40

Accounts debited:

Sales Salaries Expense

$11,122.00 Office Salaries Expense 2,780.00

Payroll Register Summary

Recording Employees’ Earnings

Recording Employees’ Earnings

Dec 27 Sales Salaries Expense 11 122 00

Office Salaries Expense 2 780 00

Payroll for week ended December 27.

Social Security Tax Payable

8 518 40

Recording Employer’s Payroll Taxes

Recording Employer’s Payroll Taxes

Employer Taxes for the Week Ended December 27

Social security tax

Total payroll tax expense

Social security tax

Recording Employer’s Payroll Taxes

Recording Employer’s Payroll Taxes

Dec 27 Payroll Tax Expense 1 019 62

Payroll taxes for week ended December 27.

Social Security Tax Payable

21 68

Wage and Tax Statements

Payroll Tax Returns

Financial Statements

PAYROLL REGISTER

GENERAL LEDGER

EMPLOYEES’

EARNINGS RECORDS

Employees’ Fringe Benefits

Benefit Dollars as a Percent of Total Benefit Dollars as a Percent of Total

26%

Vacation and sick pay 29%

Medical

2%

Other 18%

Employees’ Fringe Benefits

Vacation pay Vacation pay becomes the employer’s liability as the employee earns vacation rights.

Pensions Cash payment to retired employees Could

be a defined contribution plan or a defined benefit plan

Postretirement Benefits In addition to pension benefits, employees may earn rights to other postretirement benefits such as dental care, eye care, life insurance, etc Amount is recorded by debiting Postretirement Benefits

Expense and crediting cash.

fixed amount of money is invested on the employee’s

behalf during the employee’s working years Example: 401K

benefits are based on a formula and the employer bears the investment risk in funding a future retirement income benefit.

Solvency Measures — Quick Ratio

Noble Co Hart Co.

Solvency Measures — Quick Ratio

Noble Co Hart Co.

Solvency Measures — Quick Ratio

Noble Co Hart Co.

The End

Chapter 11