Chapter 11 Cont

8/8/2019 Chapter 11 Cont

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2009 The McGraw-HillCompanies, Inc.,

CURRENT LIABILITIES ANDPAYROLL ACCOUNTING

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McGraw-Hill/Irwin Slide 2McGraw-Hill/Irwin Slide 2

Past Present Future

DEFINING LIABILITIES

Because of apast event . . .

Because of apast event . . .

The

companyhas a

presentobligation

The

companyhas a

presentobligation

. . . For futuresacrifices

. . . For futuresacrifices

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Expected to bepaid within one

year or thecompanys

operating cycle,whichever is

longer.

CLASSIFYING LIABILITIES

CurrentLiabilities

Expected not to bepaid within one

year or thecompanys

operating cycle,whichever is

longer.

Long-TermLiabilities

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CURRENT AND LONG-TERM

LIABILITIES

Percent of Total Liabilities

Current Liabilities as a Percent of Total Liabilities

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UNCERTAINTY IN LIABILITIES

Uncertainty inWhom to Pay

Uncertainty inWhen to Pay

Uncertainty in HowMuch to Pay

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Accounts Payable

Sales Taxes Payable

Unearned Revenues

Short-Term Notes Payable

KNOWN (DETERMINABLE)

LIABILITIES

Payroll Liabilities

Multi-Period Known Liabilities

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7/37McGraw-Hill/Irwin Slide 7McGraw-Hill/Irwin Slide 7

On May 15, 2009, Max Hardware sold toolsand supplies for $7,500 that are subject to a

6% sales tax.

SALES TAXES PAYABLE

DR CR

May 15 Cash 7,950

Sales 7,500

Sales Taxes Payable 450

To record cash sales and 6% sales tax.

$7,500 6% = $450

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On May 1, 2009, A-1 Catering received$3,000 in advance for catering a wedding

party to take place on July 12, 2009.

UNEARNED REVENUES

DR CR

May 1 Cash 3,000

Unearned Revenue - Catering 3,000

To record advance payment.

DR CR

Jul 12 Unearned Revenue - Catering 3,000

Revenue - Catering 3,000

To recognize revenue earned.

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A written promise to pay a specifiedamount on a definite future date within one

year or the companys operating cycle,

whichever is longer.

SHORT-TERM NOTES PAYABLEP 1



On August 1, 2009, Matrix, Inc. asked Carter, Co.to accept a 90-day, 12% note to replace its

existing $5,000 account payable to Carter. Matrix

would make the following entry:

NOTE GIVEN TO EXTENDCREDIT PERIOD

DR CR

Aug 1 Accounts Payable - Carter 5,000

Notes Payable - Carter 5,000

To replace customer a ccount with note.

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On October 30, 2009, Matrix, Inc. paysthe note plus interest to Carter.

Oct 30 Notes payable - Carter 5,000

Interest expense 150

Cash 5,150

To record payment of note and

interest

Interest expense = $5,000 12% (90 360) = $150

NOTE GIVEN TO EXTENDCREDIT PERIOD

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PROMISSORY NOTE

Face Value Date

after date promise to pay to the order of

American Bank

Nashville, TN

Dollarsplus interest at the annual rate of .

PROMISSORY NOTE

Face Value Date

after date promise to pay to the order of

American Bank

Nashville, TN

Dollarsplus interest at the annual rate of .

$20,000 Sept. 1, 2009

Ninety days I

Twenty thousand and no/100 - - - - - - - - - - - - - - - -- 6%

Jackson

NOTE GIVEN TO BORROW FROMBANK

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FACE VALUE EQUALS AMOUNTBORROWED

On September 1, 2009, Jackson Smith borrows$20,000 from American Bank. The note bearsinterest at 6% per year. Principal and interest

are due in 90 days (November 30, 2009).

DR CR

Sep 1 Cash 20,000

Notes payable 20,000

To record note to American Bank .

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On November 30, 2009, Smith wouldmake the following entry:

DR CR

Notes payable 20,000

Interest expense 300Cash 20,300

To record payment of note and interest

$20,000 6% (90 360) = $300

FACE VALUE EQUALS AMOUNTBORROWED

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NoteDate

End ofPeriod

MaturityDate

An adjusting entryis required torecord Interest

Expense incurredto date.

An adjusting entryis required torecord Interest

Expense incurredto date.

END-OF-PERIOD ADJUSTMENTTO NOTES

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Dec. 16,2009

Dec. 31,2009 Feb. 14,

2010

James Burrows borrowed $8,000 on Dec. 16,2009, by signing a 12%, 60-day note payable.

NoteDate

End ofPeriod

MaturityDate


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On December 16, 2009, James Burrowswould make the following entry:

Dec 16 Cash 8,000

Notes payable 8,000

To record a mount borrowed

from bank

On December 31, 2009, the adjustment is:DR CR

Dec 31 Interest expense 40

Interest payable 40

To accrue interest on note

$8,000 12% (15 360) = $40


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On February 14, 2010, James Burrowswould make the following entry.

DR CR

Feb 14 Notes payable 8,000Interest payable 40

Interest expense 120

Cash 8,160

To record payment of note

$8,000 12% (45 360) = $120


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McGraw-Hill/Irwin Slide 19

Employers incur

expenses andliabilities from

having employees.

PAYROLL LIABILITIESP 2


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EMPLOYEE PAYROLLDEDUCTIONS

FICA TaxesMedicare

TaxesFederal

Income TaxState and LocalIncome Taxes

VoluntaryDeductions

Gross Pay

Net Pay

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FICA Taxes Soc. Sec. FICA Taxes Medicare

2008: 6.2% of the first$102,200 earned in theyear ( Max = $6,324).

2008: 1.45% ofallwages earned in the

year.

Employers must pay withheld taxes tothe Internal Revenue Service (IRS).

EMPLOYEE FICA TAXES

Federal Insurance Contributions Act (FICA)

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Amounts withheld depend on the employees earnings,tax rates, and number of withholding allowances.

Employers must pay the taxes withheld from employeesgross pay to the appropriate government agency.

FederalIncome Tax

State andLocal Income

Taxes

EMPLOYEE INCOME TAXP 2


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Amounts withheld depend on the employees request.

Employers owe voluntary amounts withheld fromemployees gross pay to the designated agency.

Voluntary Deductions

Examples include union dues, savings accounts, pensioncontributions, insurance premiums, and charities

EMPLOYEE VOLUNTARYDEDUCTIONS

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The entry to record payroll expenses anddeductions for an employee might look like this.

DR CR

Jan. 31 Salaries Expense 4,000

FICA - Social Security Tax Payable 248FICA - Medicare Tax Payable 58

Employee Federal Income Tax Payable 420

Employee Medical Insurance Payable 48

Employee Union Dues Payable 100

Accrued Salaries Payable 3,126

To record accrued payroll for January

$4,000 6.20% =$248

=

RECORDING EMPLOYEE PAYROLLDEDUCTIONS

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FICA TaxesMedicare

TaxesFederal and

StateUnemployment

Taxes

Employers pay amounts equal to thatwithheld from the employees gross pay.

Employers pay amounts equal to thatwithheld from the employees gross pay.

EMPLOYER PAYROLL TAXESP 3


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2008: 6.2% on the first$7,000 of wages paidto each employee (Acredit up to 5.4% is

given for SUTA paid,therefore the net rate

is 0.8%.)

FederalUnemployment Tax

(FUTA)

2008: Basic rate of

5.4% on the first$7,000 of wages paid

to each employee(Merit ratings may

lower SUTA rates.)

StateUnemployment Tax

(SUTA)

FEDERAL AND STATEUNEMPLOYMENT TAXES

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The entry to record the employer payrolltaxes for January might look like this:

SUTA: $4,000 5.4% = $216

FUTA: $4,000 (6.2% - 5.4%) =$32

FICA amounts are the same asthat withheld from the

employees gross pay.

RECORDING EMPLOYERPAYROLL TAXES

DR CR

Jan. 31 Payroll Taxes expense 554

FICA Social Security Tax Payable 248

FICA Medicare Tax Payable 58State Unemployment Taxes Payable 216

Fe de ral Unem ployment Tax es Paya ble 32

To record employer payrol l taxes for Janua ry

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MULTI-PERIOD KNOWNLIABILITIES

Often include unearned revenues and notes payable.

Unearned revenues frommagazine subscriptionsoften cover more than

one accounting period. Aportion of the earnedrevenue is recognized

each period and theunearned revenue

account is reduced.

Notes payable oftenextend over more thanone accounting period.

A three-year notepayable would be

classified as a current

liability for one year anda long-term liability for

two years.

Notes payable oftenextend over more thanone accounting period.

A three-year notepayable would be

classified as a current

liability for one year anda long-term liability for

two years.

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An estimatedliability is a known

obligation of anuncertain amount,but one that can

be reasonablyestimated.

ESTIMATED LIABILITIESP 4


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Employer expenses for pensions or medical,dental, life and disability insurance

HEALTH AND PENSION BENEFITS

Assume an employer agrees to pay an amount for

medical insurance equal to $8,000, and contribute anadditional 10% of the employees $120,000 gross

salary to a retirement program.

DR CR

Jan. 31 Employee Benefits Expense 20,000

Employee Medical Insurance Payable 8,000

Employee Retirement Program Payable 12,000

To record employee benefit costs

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Employer expenses for paid vacation by employees

VACATION BENEFITS

Assume an employee earns $62,400 per year andearns two weeks of paid vacation each year.

$62,400 52 weeks = $1,200$62,400 50 weeks = $1,248

Weekly vacation benefit $ 48

Jan. 5 Vacation Benefits Expense 48

Vacation Benefits Payable 48

To record weekly vacation for one

employee

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WARRANTY LIABILITIES

Sellers obligation to replace or correct a product (orservice) that fails to perform as expected within aspecified period. To conform with the matching

principle, the seller reports expected warranty expensein the period when revenue from the sale is reported.

A dealer sells a car for $32,000, on December 1, 2009, witha warranty for parts and labor for 12 months, or 12,000

miles. The dealership experiences an average warrantycost of 3% of the selling price of each car.

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WARRANTY LIABILITIES

DR CR

Dec. 1 Warranty Expense 960Estimated Warranty Liability 960

To accrue estimated warranty expense

On February 15, 2010, parts of $200 and labor

of $250 covered under warranty were incurred.DR CRFeb. 15 Estimated Warranty Liability 450

Auto Parts Inventory 200

Salaries Payable 250

To record warranty costs

A dealer sells a car for $32,000, on December 1, 2009, with

a warranty for parts and labor for 12 months, or 12,000miles. The dealership experiences an average warranty

cost of 3% of the selling price of each car.

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Probability of future sacrifice . . .

Reasonably

Probable Possible Remote

Record the Disclose the

Can be contingent liability in the No

Estimated liability. notes to the action.

financial stmts.

Disclose the Disclose the

Cannot be liability in the liability in the No

Estimated notes to the notes to the action.financial stmts. financial stmts.

Amount...

CONTINGENT LIABILITIES

Potential obligation that depends on a future eventarising out of a past transaction or event.

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ACCOUNTING FORCONTINGENT LIABILITIES

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REASONABLY POSSIBLECONTINGENT LIABILITIES

Potential Legal Claims A potential claim isrecorded if the amount can be reasonably estimatedand payment for damages is probable.

Debt Guarantees The guarantor usuallydiscloses the guarantee in its financial statement

notes. If it is probable that the debtor will default, theguarantor should record and report the guarantee asa liability.

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END OF CHAPTER 11

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Chapter 11 Cont