11-1 CHAPTER11 Current Liabilities and Payroll Accounting 11-2 PreviewofCHAPTER11 11-3 Accounting for Current 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 11-4 SO Explain a current liability, and identify the major types of current liabilities Accounting for Current 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) 11-5 SO Explain a current liability, and identify the major types of current liabilities Accounting for Current Liabilities Notes Payable 11-6 Written promissory note Requires the borrower to pay interest Issued for varying periods SO 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 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) 11-7 SO 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 a) Prepare the entry on Sept 1st Cash 100,000 Notes payable 100,000 b) Prepare the adjusting entry on Dec 31st Interest expense 4,000 Interest payable 4,000 $100,000 x 12% x 4/12 = $4,000 11-8 SO 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 c) Prepare the entry at maturity Notes payable Interest payable Cash 11-9 100,000 4,000 104,000 SO Describe the accounting for notes payable Accounting for Current Liabilities Sales Tax Payable 11-10 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 SO Explain the accounting for other current liabilities Internal Control for 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 11-46 SO Discuss the objectives of internal control for payroll 11-47 APPENDIX11A APPENDIX Additional Fringe Benefits In addition to the three payroll-tax fringe benefits, employers incur other substantial fringe benefit costs Two important fringe benefits include: 11-48 Paid absences Post-retirement benefits SO Identify additional fringe benefits associated with employee compensation Paid Absences 11-49 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 SO Identify additional fringe benefits associated with employee compensation Post-Retirement 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 11-50 SO Identify additional fringe benefits associated with employee compensation Post-Retirement Benefits Pensions 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 11-51 SO Identify additional fringe benefits associated with employee compensation Key Points 11-52 The basic definition of a liability under GAAP and IFRS is very 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 11-53 IFRS requires that companies classify liabilities as current or 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 Under IFRS, liabilities are classified as current if they are expected to be paid within 12 months Companies sometimes show liabilities before assets Also, they will sometimes show long-term liabilities before current liabilities Key Points 11-54 Under IFRS, companies sometimes will net current liabilities 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.) Under GAAP, some contingent liabilities are recorded in the 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 Key Points 11-55 For those items that GAAP would treat as recordable contingent liabilities, IFRS instead uses the term provisions Provisions are defined as liabilities of uncertain timing or amount Examples of provisions would be provisions for warranties, employee vacation pay, or anticipated losses Under IFRS, the measurement of a provision related to a uncertain obligation is based on the best estimate of the expenditure required to settle the obligation IFRS and GAAP separate plans into defined benefit and defined contribution The IASB and FASB are working on a joint project on pensions that will dramatically change the approach used by both Looking to the Future The FASB and IASB are currently involved in two projects, each of which has implications for the accounting for liabilities One project is investigating approaches to differentiate between debt and equity instruments The other project, the elements phase of the conceptual framework project, will evaluate the definitions of the fundamental building blocks of accounting The results of these projects could change the classification of many debt and equity securities 11-56 IFRS Self-Test Questions Which of the following is false? a) Under IFRS, current liabilities must always be presented before non-current liabilities b) Under IFRS, an item is a current liability if it will be paid within the next 12 months c) Under IFRS, current liabilities are shown in order of liquidity d) Under IFRS, a liability is only recognized if it is a present obligation 11-57 IFRS Self-Test Questions Under IFRS, a contingent liability is: a) disclosed in the notes if certain criteria are met b) reported on the face of the financial statements if certain criteria are met c) the same as a provision d) not covered by IFRS 11-58 IFRS Self-Test Questions Under IFRS, obligations related to warranties are considered: a) contingent liabilities b) provisions c) possible obligations d) None of these 11-59 Copyright “Copyright © 2011 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.” 11-60 .. .CHAPTER1 1 Current Liabilities and Payroll Accounting 11- 2 PreviewofCHAPTER11 11- 3 Accounting for Current Liabilities Current liability is... entry required SO Explain the accounting for other current liabilities Accounting for Current Liabilities Statement Presentation and Analysis 11- 15 Illustration 11- 3 SO Accounting for Current Liabilities... journal entry is: Cash 10,600 Sales revenue Sales tax payable 11- 11 10,000 600 SO Explain the accounting for other current liabilities Accounting for Current Liabilities Unearned Revenue Revenues