Current Liabilities and Payroll Chapter 11 Student Version These Theseslides slidesshould shouldbe beviewed viewedusing usingthe thepresentation presentation mode mode(click (clickthe the icon icontotostart startpresentation) presentation) © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Prepared by: C Douglas Cloud Professor Emeritus of Accounting Pepperdine University Learning Objectives Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Current Liabilities When a company or a bank advances credit, it is making a loan The company or bank is called a creditor (or lender) The individuals or companies receiving the loans are called debtors (or borrowers) Current Liabilities are debts that will be paid out of current assets and are due within one year © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Accounts Payable Accounts payable transactions arise from purchasing goods or services for use in a company’s operations or from purchasing merchandise for resale © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Current Portion of Long-Term Debt Long-term liabilities are often paid back in periodic payments, called installments Installments that are due within the coming year must be classified as a current liability The installments due after the coming year are classified as a long-term liability © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Short-Term Notes Payable Nature’s Sunshine Company issues a 90-day, 12% note for $1,000, dated August 1, 2011 to Murray Co for a $1,000 overdue account © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Short-Term Notes Payable When the note matures, the entry to record the payment of $1,000 plus $30 interest ($1,000 x 12% x 90/360) is as follows: Interest Expense appears on the income statement as an “Other Expense.” © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Short-Term Notes Payable Bowden Co (Borrower) Description Credit Mdse Inventory Accounts Payable 10,000 Debit On OnMay May1,1,Bowden BowdenCo Co (borrower) (borrower)purchased purchased merchandise merchandiseon onaccount account from fromCoker CokerCo Co.(creditor), (creditor), $10,000, $10,000,2/10, 2/10,n/30 n/30 The The merchandise merchandisecost costCoker Coker Co Co.$7,500 $7,500 10,000 Coker Co (Creditor) Description Credit Accounts Receivable Sales 10,000 Cost of Mdse Sold Mdse Inventory 7,500 © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Debit 10,000 7,500 LO Short-Term Notes Payable Bowden Co (Borrower) Description Credit Accounts Payable Notes Payable 10,000 Debit 10,000 Coker Co (Creditor) On OnMay May31, 31,Bowden Bowden Co Co.issued issuedaa60-day, 60-day, 12% 12%note notefor for$10,000 $10,000to to Coker CokerCo Co.on onaccount account Description Debit Credit Notes Receivable 10,000 Accounts Receivable 10,000 © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Short-Term Notes Payable Bowden Co (Borrower) On OnJuly July30, 30,Bowden Bowden Co Co.paid paidCoker CokerCo Co.the the amount amountdue dueon onthe the note noteof ofMay May31, 31,the the face faceamount amountof of$10,000 $10,000 plus plusinterest interestof of$200 $200 ($10,000 ($10,000xx12% 12%xx 60/360) 60/360) Description Credit Notes Payable Interest Expense Cash 10,200 Debit 10,000 200 Coker Co (Creditor) Description Credit Cash Interest Revenue 200 Notes Receivable 10,000 © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Debit 10,200 LO Employees’ Fringe Benefits Many companies provide their employees benefits in addition to salary and wages earned Such fringe benefits may include: Vacation pay (sometimes called compensated absences) Medical benefits Retirement benefits © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Vacation Pay Assume that employees earn one day of vacation for each month worked The estimated vacation pay for the year ending December 31 is $325,000 The adjusting entry for the accrued vacation is shown below © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Pensions A pension is a cash payment to retired employees Pension rights are accrued by employees as they work, based on the employer’s pension plan Two types of pension plans are: Defined contribution plan Defined benefit plan © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Pensions In a defined contribution plan, the company invests contributions on behalf of the employee during the employee’s working years Normally, the employee and employer contribute to the plan The employee’s pension depends on the total contributions and the investment returns earned on those contributions © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Pensions Heaven Scent Perfumes Company contributes 10% of employee monthly salaries to an employee 401K plan Assuming $500,000 of monthly salaries, the journal entry to record the monthly contribution is shown below © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Pensions In a defined benefit plan, the employer is obligated to pay for (fund) the employee’s future pension benefits Many companies are replacing their defined benefit plans with defined contribution plans A retired employee receives a specific amount based on his or her salary history and years of service © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Pensions The defined benefit plan of Hinkle Co requires an annual pension cost of $80,000 The annual contribution is based on estimates of Hinkle’s future pension liability On December 31, Hinkle Co pays $60,000 to the pension fund The entry to record the payment and unfunded liability is shown below © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Learning Objective Journalize entries for employee fringe benefits, including vacation pay and pensions Describe the accounting treatment for contingent liabilities and journalize entries for product warranties © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Contingent Liabilities Some liabilities may arise from past transactions if certain events occur in the future These potential obligations are called contingent liabilities The accounting for contingent liabilities depends on the following two factors: Likelihood of occurring: Probable, reasonably possible, or remote Measurement: Estimable or not estimable © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Contingent Liabilities During June, a company sold a product for $60,000 that includes a 36-month warranty for repairs The average cost of repairs over the warranty period is 5% of the sales price The entry to record the estimated product warranty expense for June is shown below © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Contingent Liabilities If a $200 part is replaced under warranty on August 16, the entry is as follows: © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Learning Objective Journalize entries for employee fringe benefits, including vacation pay and pensions Describe the accounting treatment for contingent liabilities and journalize entries for product warranties Describe and illustrate the use of the quick ratio in analyzing a company’s ability to pay its current liabilities © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Quick Ratio Current position analysis helps creditors evaluate a company’s ability to pay its current liabilities It is based on: Working capital, the excess of current assets over current liabilities Current ratio, determined by dividing the current assets by the current liabilities Quick ratio, an indicator of a company’s short-term liquidity © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Quick Ratio The quick ratio measures the “instant” debtpaying ability of a company and is computed as follows: Quick Assets Quick Ratio = Current Liabilities Quick assets are cash and other current assets that can be easily converted to cash © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Current Liabilities and Payroll The End Student Version Prepared by: C Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use ... Sunshine Company issues a 90-day, 12% note for $1,000, dated August 1, 2 011 to Murray Co for a $1,000 overdue account © 2 011 Cengage Learning All Rights Reserved May not be copied, scanned, or... and deductions from earnings Describe payroll accounting systems that use a payroll register, employee earnings records, and a general journal © 2 011 Cengage Learning All Rights Reserved May not... goods or services for use in a company’s operations or from purchasing merchandise for resale © 2 011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in