Chapter 11-1 Chapter 11 Current Liabilities and Payroll Accounting Chapter 11-2 Accounting Principles, Ninth Edition Study Study Objectives Objectives 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 Compute and record the payroll for a pay period Describe and record employer payroll taxes Discuss the objectives of internal control for payroll Chapter 11-3 Current Current Liabilities Liabilities and and Payroll Payroll Accounting Accounting Accounting Accountingfor for Current CurrentLiabilities Liabilities Notes payable Sales taxes payable Unearned revenues Current maturities of long-term debt Statement presentation and analysis Chapter 11-4 Contingent Contingent Liabilities Liabilities Recording Disclosure Payroll Payroll Accounting Accounting Determining payroll Recording payroll Employer payroll taxes Filing and remitting payroll taxes Internal control for payroll Accounting Accounting for for Current Current Liabilities Liabilities Current liability is debt with two key features: Company expects to pay the debt from existing current assets or through the creation of other current liabilities Company will pay the debt within one year or the operating cycle, whichever is longer Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes payable, salaries payable, and interest payable Chapter 11-5 SO Explain a current liability, and identify the major types of current liabilities Accounting Accounting for for Current Current Liabilities Liabilities Question 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 years d both (a) and (b) Chapter 11-6 SO Explain a current liability, and identify the major types of current liabilities Accounting Accounting for for Current Current Liabilities Liabilities Notes Payable Written promissory note Require the borrower to pay interest Issued for varying periods Chapter 11-7 SO Describe the accounting for notes payable Accounting Accounting for for Current Current Liabilities Liabilities Illustration: On March 1, 2010, Cole Williams borrows $100,000 from First National Bank on a 4-month, 12% note Instructions a) Prepare the entry on March b) Prepare the adjusting entry on June 30, assuming monthly adjusting entries have not been made c) Prepare the entry at maturity (July 1) Chapter 11-8 SO Describe the accounting for notes payable Accounting Accounting for for Current Current Liabilities Liabilities Illustration: On March 1, 2010, Cole Williams borrows $100,000 from First National Bank on a 4-month, 12% note a) Prepare the entry on March Cash 100,000 Notes payable 100,000 b) Prepare the adjusting entry on June 30 $100,000 x 12% x 4/12 = $4,000 Interest expense Chapter 11-9 4,000 Interest payable 4,000 SO Describe the accounting for notes payable Accounting Accounting for for Current Current Liabilities Liabilities Illustration: On March 1, 2010, Cole Williams borrows $100,000 from First National Bank on a 4-month, 12% note c) Prepare the entry at maturity (July 1) Notes payable Interest payable 100,000 4,000 Cash 104,000 Chapter 11-10 SO Describe the accounting for notes payable Recording Recording the the Payroll Payroll Recognizing Payroll Expenses and Liabilities Illustration: Prepare the entry Academy Company would make to record the payment of the payroll Salaries and wages payable 11,462.50 Cash 11,462.50 Chapter 11-37 SO Compute and record the payroll for a pay period Recording Recording the the Payroll Payroll Illustration 11-14 Paycheck and statement of earnings Chapter 11-38 SO Compute and record the payroll for a pay period Chapter 11-39 Employer Employer Payroll Payroll Taxes Taxes Payroll tax expense results from three taxes that governmental agencies levy on employers Same rate and maximum These taxes are: earnings as the employee’s FICA tax Federal unemployment tax State unemployment tax Chapter 11-40 In 2008, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $102,000 of gross earnings for each employee SO Describe and record employer payroll taxes Employer Employer Payroll Payroll Taxes Taxes Payroll tax expense results from three taxes that governmental agencies levy on employers FUTA tax rate is 6.2% of These taxes are: FICA Federal unemployment tax State unemployment tax Chapter 11-41 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% SO Describe and record employer payroll taxes Employer Employer Payroll Payroll Taxes Taxes Payroll tax expense results from three taxes that governmental agencies levy on employers These taxes are: FICA Federal unemployment tax State unemployment tax Chapter 11-42 SUTA basic rate is usually 5.4% on the first $7,000 of wages paid SO Describe and record employer payroll taxes Employer Employer Payroll Payroll Taxes Taxes 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 FICA tax payable 1,376.80 State unemployment tax payable 929.34 Federal unemployment tax payable 137.68 * $ 17,210.00 x 8% = $1,376.80 ** $17,210.00 x 5.4% = $929.34 Chapter 11-43 * ** *** *** $17,210 x 8% = $137.68 SO Describe and record employer payroll taxes Employer Employer Payroll Payroll Taxes Taxes Question Employer payroll taxes not include: a Federal unemployment taxes b State unemployment taxes c Federal income taxes d FICA taxes Chapter 11-44 SO Describe and record employer payroll taxes Filing Filing and and Remitting Remitting Payroll Payroll Taxes Taxes Companies must report FICA taxes and federal income taxes withheld no later than one month following the close of each quarter Companies generally file and remit federal unemployment taxes annually on or before January 31 of the subsequent year Companies usually file and pay state unemployment taxes by the end of the month following each quarter Employers must provide each employee with a Wage and Tax Statement (Form W-2) by January 31 Chapter 11-45 SO Describe and record employer payroll taxes Internal Internal Control Control for for Payroll Payroll As applied to payroll, the objectives of internal control are to safeguard company assets against unauthorized payments of payrolls, and to ensure the accuracy and reliability of the accounting records pertaining to payrolls Chapter 11-46 SO Discuss the objectives of internal control for payroll Additional Additional Fringe Fringe Benefits Benefits APPENDIX 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 Chapter 11-47 SO Identify additional fringe benefits associated with employee compensation Paid Paid Absences Absences APPENDIX 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 Chapter 11-48 SO Identify additional fringe benefits associated with employee compensation Post-Retirement Post-Retirement Benefits Benefits APPENDIX Post-retirement benefits are benefits that employers provide to retired employees for pensions and health care and life insurance Companies account for post-retirement benefits on the accrual basis Chapter 11-49 SO Identify additional fringe benefits associated with employee compensation Pensions Pensions APPENDIX A pension plan is an agreement whereby employers provide benefits to employees after they retire Two types of pension plans: 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 In a defined-benefit plan, the employer agrees to pay a defined amount to retirees, based on employees meeting certain eligibility standards Chapter 11-50 SO Identify additional fringe benefits associated with employee compensation Copyright Copyright “Copyright © 2009 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 permission 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 11-51 .. .Chapter 11 Current Liabilities and Payroll Accounting Chapter 11- 2 Accounting Principles, Ninth Edition Study Study Objectives Objectives... objectives of internal control for payroll Chapter 11- 3 Current Current Liabilities Liabilities and and Payroll Payroll Accounting Accounting Accounting Accountingfor for Current CurrentLiabilities... remits the collections to the state’s department of revenue Chapter 11- 11 SO Explain the accounting for other current liabilities Accounting Accounting for for Current Current Liabilities Liabilities