Current Liabilities and Payroll Accounting

11-111-2Current Liabilities and Payroll Accounting11Learning ObjectivesExplain how to account for current liabilities.Discuss how current liabilities arereported and analyzed.Explain how to account for payroll.32111-3A debt that aucompany expects to pay within one year or uthe operating cycle,whichever is longer.Current liabilities include notes payable,accounts payable,unearned revenues,and accrued liabilities such as taxes payable,salaries and wages payable,and interest payable.LO 1LEARNINGOBJECTIVEExplain how to account for current liabilities.1What Is a Current Liability?11-4To be classified as a current liability,a debt must be expected to be paid within:a.one year.b.the operating cycle.c.2 years.d.(a)or(b),whichever is longerQuestionWhat Is a Current Liability?LO 111-5Notes PayableuWritten promissory note.uFrequently issued to meet short-term financing needs.uRequires the borrower to pay interest.uIssued for varying periods.Current LiabilitiesLO 111-6Illustration:First National Bank agrees to lend$100,000 on September 1,2021,if Cole Williams Co.signs a$100,000,12%,four-month note maturing on January 1.InstructionsPrepare the entry on September 1st.Prepare the adjusting entry on December 31st,assuming monthly adjusting entries have not been made.Prepare the entry required on January 1,2021,the maturity date.Notes PayableLO 111-7Notes Payable100,000Cash100,000Interest Payable4,000Interest Expense4,000$100,000 x 12%x 4/12=$4,000b)Prepare the adjusting entry on December 31st.Illustration:First National Bank agrees to lend$100,000 on September 1,2021,if Cole Williams Co.signs a$100,000,12%,four-month note maturing on January 1.a)Prepare the entry on September 1st.LO 1Notes Payable11-8Cash104,000Illustration:First National Bank agrees to lend$100,000 on September 1,2021,if Cole Williams Co.signs a$100,000,12%,four-month note maturing on January 1,2021.c)Prepare the entry at maturity.Interest Payable4,000Notes Payable100,000LO 1Notes Payable11-9Sales Taxes PayableCurrent LiabilitiesLO 1uSales taxes are expressed as a stated percentage of the sales price.uSelling company(retailer)collects tax from the customer.enters tax separately in cash register or includes in total receipts.remits the collections to the states department of revenue.11-10Illustration:The March 25 cash register reading for Cooley Grocery shows sales of$10,000 and sales taxes of$600(sales tax rate of 6%),the journal entry is:Mar.25Sales Revenue10,000Cash10,600Sales Tax Payable600Sales Taxes PayableLO 111-11Illustration:Cooley Grocery enters total receipts of$10,600.Because the amount received from the sale is equal to the sales price 100%plus 6%of sales,(sales tax rate of 6%),the journal entry is:Mar.25Sales revenue10,000Cash10,600Sales tax payable600Sometimes companies do not enter sales taxes separately in the cash register.*=$10,000*Sales Taxes PayableLO 111-12Unearned RevenueRevenues received before the company udelivers goods or uprovides services.Current LiabilitiesLO 1Illustration 11-2Unearned revenue and revenue accounts11-13Illustration:Superior University sells 10,000 season football tickets at$50 each for its five-game home schedule.The entry for the sale of season tickets is:Unearned Ticket Revenue500,000Cash 500,000Aug.6Ticket Revenue100,000Unearned Ticket Revenue 100,000Sept.7As each game is completed,Superior records the recognition of revenue with the following entry.Unearned RevenueLO 111-14Illustration:Wendy Construction issues a five-year,interest-bearing$25,000 note on January 1,2021.This note specifies that each January 1,starting January 1,2021,Wendy should pay$5,000 of the note.When the company prepares financial statements on December 31,2021,What amount should be reported as a current liability?_What amount should be reported as a long-term liability?_Current Maturities of Long-Term DebtuPortion of long-term debt that comes due in the current year.uNo adjusting entry required.$5,000$20,000Current LiabilitiesLO 111-15You and several classmates are studying for the next accounting examination.They ask you to answer the following questions.1.If cash is borrowed on a$50,000,6-month,12%note on September 1,how much interest expense would be incurred by December 31?Solution DO IT!Current Liabilities1$50,000 x 12%x 4/12=$2,000LO 111-16You and several classmates are studying for the next accounting examination.They ask you to answer the following questions.2.How is the sales tax amount determined when the cash register total includes sales taxes?Solution First,divide the total cash register receipts by 100%plus the sales tax percentage to find the sales revenue amount.Second,subtract the sales revenue amount from the total cash register receipts to determine the sales taxes.DO IT!Current Liabilities1LO 111-17You and several classmates are studying for the next accounting examination.They ask you to answer the following questions.3.If$15,000 is collected in advance on November 1 for 3 months rent,what amount of rent revenue should be recognized by December 31?Solution$15,000 x 2/3=$10,000DO IT!Current Liabilities1LO 111-18Contingent liability-Potential liability that may become an actual liability in the future.Three levels of probability:uProbableuReasonably possibleuRemoteLEARNINGOBJECTIVEDiscuss how current liabilities are reported and analyzed.2LO 2Reporting Uncertainty11-19AccountingProbabilityAccrueFootnoteIgnoreProbableReasonablyPossibleRemoteReporting UncertaintyLO 211-20A contingent liability should be recorded in the accounts when:a.it is probable the contingency will happen,but the amount cannot be reasonably estimated.b.it is reasonably possible the contingency will happen,and the amount can be reasonably estimated.c.it is probable the contingency will happen,and the amount can be reasonably estimated.d.it is reasonably possible the contingency will happen,but the amount cannot be reasonably estimated.QuestionReporting UncertaintyLO 211-21Contingencies:How Big Are They?Contingent liabilities abound in the real world.Consider Manville Corp.,which fi led for bankruptcy when it was hit by billions of dollars in asbestos product-liability claims.Companies having multiple toxic waste sites are faced with cleanup costs that average$10 to$30 million and can reach as high as$500 million depending on the type of waste.For life and health insurance companies and their stockholders,the cost of diseases such as diabetes,Alzheimers,and AIDS is like an iceberg:Everyone wonders how big such costs really are and what damage they might do in the future.And frequent-flyer programs are so popular that airlines at one time owed participants more than 3 million round-trip domestic tickets.Thats enough to fly at least 5.4 billion milesfree for the passengers,but at what future cost to the airlines?Accounting Across the OrganizationLO 211-22Product WarrantiesPromise made by a seller to a buyer to make good on a deficiency of quantity,quality,or performance in a product.Estimated cost of honoring product warranty contracts should be recognized as an expense in the period in which the sale occurs.Reporting a Contingent LiabilityLO 211-23Illustration:Denson Manufacturing Company sells 10,000 washers and dryers at an average price of$600 each.The selling price includes a one-year warranty on parts.Denson expects that 500 units(5%)will be defective and that warranty repair costs will average$80 per unit.In 2021,the company honors warranty contracts on 300 units,at a total cost of$24,000.At December 31,compute the estimated warranty liability.Illustration 11-3Computation of estimatedproduct warranty liabilityReporting a Contingent LiabilityLO 211-24Warranty Expense 40,000Warranty Liability 40,000Illustration:Denson Manufacturing Company sells 10,000 washers and dryers at an average price of$600 each.The selling price includes a one-year warranty on parts.Denson expects that 500 units(5%)will be defective and that warranty repair costs will average$80 per unit.In 2021,the company honors warranty contracts on 300 units,at a total cost of$24,000.At December 31,compute the estimated warranty liability.Make the required adjusting entry.Reporting a Contingent LiabilityLO 211-25Illustration:Prepare the entry to record the repair costs incurred in 2021 to honor warranty contracts on 2021 sales.Warranty Liability24,000Repair Parts 24,000Assume that the company replaces 20 defective units in January 2021,at an average cost of$80 in parts and labor.Warranty Liability1,600Repair Parts 1,600Reporting a Contingent LiabilityLO 211-26Illustration 11-4Balance sheet reporting of current liabilitiesLO 211-27Liquidity refers to the ability to pay maturing obligations and meet unexpected needs for cash.Current ratio permits us to compare the liquidity of different-sized companies and of a single company at different times.Illustration 11-6 Illustration 11-5 Analysis of Current LiabilitiesLO 211-28Lepid Company has the following account balances at December 31,2021.Notes payable($80,000 due after 12/31/18)$200,000,unearned service revenue$75,000,other long-term debt($30,000 due in 2021)$150,000,salaries and wages payable$22,000,other accrued expenses$15,000,and accounts payable$100,000.In addition,Lepid is involved in a lawsuit.Legal counsel feels it is probable Lepid will pay damages of$38,000 in 2021.Prepare the current liabilities section of Lepids December 31,2021,balance sheet.Lepids current assets are$504,000.Compute Lepids working capital and current ratio.LO 2DO IT!Reporting and Analyzing211-29a.Prepare the current liabilities section of Lepids December 31,2021,balance sheet.LO 2DO IT!Reporting and Analyzing2Current liabilitiesNotes payable$120,000Accounts payable 100,000Unearned service revenue 75,000Lawsuit liability 38,000Salaries and wages payable 22,000Other accrued expenses 15,000Long-term debt due within one year 30,000Total current liabilities$400,00011-30b.Lepids current assets are$504,000.Compute Lepids working capital and current ratio.LO 2DO IT!Reporting and Analyzing2Working capital=Current assets-Current liabilities=$504,000-$400,000=$104,000Current ratio=Current assets Current liabilities=$504,000$400,000=1.26:111-31“Payroll pertains to both:Salaries-managerial,administrative,and sales personnel(monthly or yearly rate).Wages-store clerks,factory employees,and manual laborers(rate per hour).Involves computing three amounts:(1)gross earnings,(2)payroll deductions,and(3)net pay.Determining the PayrollLO 3LEARNINGOBJECTIVEExplain how to account for payroll.311-32Total compensation earned by an employee(wages or salaries,plus any bonuses and commissions).GROSS EARNINGSDetermining the PayrollIllustration 11-7Computation of total wagesLO 311-33PAYROLL DEDUCTIONSIllustration 11-8Payroll deductionsLO 311-34Mandatory:uFICA taxuFederal income taxuState income taxPAYROLL DEDUCTIONSVoluntary:uCharityuInsuranceuUnion dues uPension plansDetermining the PayrollLO 311-35Mandatory:uFICA taxuFederal income taxuState income taxSocial Security and Medicare taxSupplemental retirement,employment disability,and medical benefits.Determining the PayrollPAYROLL DEDUCTIONSIllustration 11-9FICA tax rate and tax baseLO 311-36uEmployers are required to withhold income taxes from employees pay.uWithholding amounts are based on gross wages and the number of allowances claimed.Determining the PayrollMandatory:uFICA taxuFederal income taxuState income taxPAYROLL DEDUCTIONSLO 311-37Most states(and some cities)require employers to withhold income taxes from employees earnings.Determining the PayrollMandatory:uFICA taxuFederal income taxuState income taxPAYROLL DEDUCTIONSLO 311-38Gross earnings minus payroll deductions.NET PAYDetermining the PayrollIllustration 11-12Computation of net payLO 311-39Illustration 11-13Employee earnings recordRecording the PayrollLO 311-40Illustration 11-14Payroll registerRecording the PayrollLO 311-41Illustration:Prepare the entry Academy Company would make to record the payroll for the week ending January 14.RECOGNIZING PAYROLL EXPENSES AND LIABILITIESRecording the PayrollLO 311-42Illustration:Prepare the entry Academy Company would make to record the payment of the payroll.RECORDING PAYMENT OF THE PAYROLLRecording the PayrollLO 311-43Illustration 11-15Paycheck and statement ofearningsRECORDING PAYMENT OF THE PAYROLLLO 311-44In January,gross earnings in Ramirez Company were$40,000.All earnings are subject%FICA taxes.Federal income tax withheld was$9,000,and state income tax withheld was$1,000.(a)Calculate net pay for January,and(b)record the payroll.DO IT!Payroll3a(a)Net pay:$40,000-(7.65%x$40,000)-$9,000-$1,000=$26,940(b)Salaries and Wages Expense 40,000FICA Taxes Payable 3,060Federal Income Taxes Payable 9,000State Income Taxes Payable 1,000Salaries and Wages Payable 26,940LO 311-45These taxes are:uFICA taxesuFederal unemployment taxuState unemployment taxSame rate and maximum earnings as the employees.Payroll tax expense results from three taxes that governmental agencies levy on employers.Employer Payroll TaxesLO 311-46uFUTA tax rate is 6.2%of first$7,000 of taxable wages.uEmployers 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%.Employer Payroll TaxesThese taxes are:uFICA taxuFederal unemployment taxuState unemployment taxPayroll tax expense results from three taxes that governmental agencies levy on employers.LO 311-47SUTA basic rate is usually 5.4%on the first$7,000 of wages paid.Employer Payroll TaxesPayroll tax expense results from three taxes that governmental agencies levy on employers.These taxes are:uFICA taxuFederal unemployment taxuState unemployment taxLO 311-48Illustration 11-16Employer payroll taxesRecording Employer Payroll TaxesLO 311-49Illustration:Academy records the payroll tax expense associated with the January 14 payroll(Illustration 11-14)with the following entry.Use the following rates:FICA 8%,state unemployment 5.4%,federal unemployment 0.8%.Payroll Tax ExpenseState Unemployment Tax PayableFICA Tax Payable*$*$Federal Unemployment Tax Payable*Recording Employer Payroll TaxesLO 311-50Employer payroll taxes do not include:a.Federal unemployment taxes.b.State unemployment taxes.c.Federal income taxes.d.FICA taxes.QuestionRecording Employer Payroll TaxesLO 311-51LO 3It Cost$74,000 to Put$44,000 in Sallys PocketSally works for Bogan Communications,a small company in New Jersey that provides audio systems.She makes$59,000 a year but only nets$44,000.What happened to the other$15,000?Well,$2,376 goes for Sallys share of the medical and dental insurance that Bogan provides,$126 for state unemployment insurance,$149 for disability insurance,and$856 for Medicare.New Jersey takes$1,893 in income taxes,and the federal government gets$3,658 for Social Security and another$6,250 for income tax withholding.All of this adds up to some 22%of Sallys gross pay going to Washington or Trenton.Employing Sally costs Bogan plenty too.Bogan has to write checks for$74,000 so Sally can receive her$59,000 in base pay.Health insurance is the biggest cost.While Sally pays nearly$2,400 for coverage,Bogan pays the rest$9,561.Then,the federal and state governments take$56 for federal unemployment coverage,$149 for disability insurance,$300 for workers comp,and$505 for state unemployment insurance.Finally,the government requires Bogan to pay$856 for Sallys Medicare and$3,658 for her Social Security.When you add it all up,it costs$74,000 to put$44,000 in Sallys pocket and to give her$12,000 in benefits.Source:Michael P.Fleischer,“Why Im Not Hiring,Wall Street Journal(August 9,2021),p.A17.Accounting Across the Organization11-52Companies 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.Filing and Remitting Payroll TaxesLO 311-53APPENDIXFiling and Remitting Payroll TaxesIllustration 11-17LO 311-54THE MISSING CONTROLSHuman resource controls.Thorough background checks should be performed.No employees should begin work until they have been approved by the Board ofEducation and entered into the payroll system.No employees should be enteredinto the payroll system until they have been approved by a supervisor.All paychecksshould be distributed directly to employees at the official school locations by designatedemployees.Independent internal verification.Budgets should be reviewed monthly to identifysituations where actual costs significantly exceed budgeted amounts.Source:Adapted from Wells,Fraud Casebook(2007),pp.164171.Total take:$150,000ANATOMY OF A FRAUDArt was a custodial supervisor for a large school district.The district was supposed to employ between 35 and 40 regular custodians,as well as 3 or 4 substitute custodians to fill in when regular custodians were absent.Instead,in addition to the regular custodians,Art“hired 77 substitutes.In fact,almost none of these people worked for the district.Instead,Art submitted time cards for these people,collected their checks at the district office,and personally distributed the checks to the“employees.If a substitutes check was for$1,200,that person would cash the check,keep$200,and pay Art$1,000.Advance slide in slide show to reveal missing controls.LO 311-55As applied to payrolls,the objectives of internal control are 1.to safeguard company assets against unauthorized payments of payrolls,and 2.to ensure the accuracy and reliability of the accounting records pertaining to payrolls.Internal Control for PayrollLO 311-56APPENDIXIllustration 11-18Internal control for payrollInternal Control for PayrollLO 311-57In January,the payroll supervisor determines that gross earnings for Halo Company are$70,000.All earnings are subject to 7.65%FICA taxes,5.4%state unemployment taxes,and 0.8%federal unemployment taxes.Halo asks you to record the employers payroll taxes.DO IT!Employers Payroll Taxes3bThe entry to record the employers payroll taxes is:Payroll Tax Expense 9,695FICA Taxes Payable%)5,355Federal Unemployment Taxes Payable%)560State Unemployment Taxes Payable%)3,780LO 311-58Paid absences for vacation,illness,and holidays.Accrue a liability if:uPayment of the compensation is probable.uThe amount can be reasonably estimated.Paid AbsencesLO 4LEARNINGOBJECTIVEAPPENDIX 11A:Discuss additional fringe benefits associated with employee compensation.411-59 Vacation Benefits Expense 3,300Vacation Benefits Liability3,300Illustration:Academy Company employees are entitled to onedays vacation for each month worked.If 30 employees earn an average of$110 per day in a given month record the adjusting entry to record accrued vacation for the month.Vacation Benefits Liability1,100Cash1,100Academy pays vacation benefits for 10 employees.Paid AbsencesLO 411-60Postretirement BenefitsPost-retirement benefits are benefits that employers provide to retired employees for 1.health care and life insurance 2.pensions.Companies account for post-retirement benefits on the accrual basis.LO 411-61POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFITSuCompanies estimate and expense postretirement costs during the working years of the employee.uCompanies rarely sets up funds to meet the cost of the future benefits.Pay-as-you-go basis for these costs.Major reason is that the company does not receive a tax deduction until it actually pays the medical bill.Postretirement BenefitsLO 411-62An arrangement whereby an employer provides benefits to employees after they retire for services they provided while they were working.Pension PlanAdministratorContributionsEmployerRetired EmployeesBenefit PaymentsAssets&LiabilitiesPENSION PLANSPostretirement BenefitsLO 411-63Defined-Contribution PlanDefined-B