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CURRENT LIABILITIES ANDPAYROLL ACCOUNTINGChapter 11CURRENT LIABILITIES ANDPAYROL1PastPresentFutureDEFINING LIABILITIESBecause of apast event.Thecompanyhas a presentobligation.For futuresacrificesC 1PastPresentFutureDEFINING LIAB2Expected to be paid within one year or the companys operating cycle,whichever is longer.CLASSIFYING LIABILITIESCurrent LiabilitiesExpected not to be paid within one year or the companys operating cycle,whichever is longer.Long-Term LiabilitiesC 1Expected to be paid within one3CURRENT AND LONG-TERM LIABILITIESPercent of Total LiabilitiesCurrent Liabilities as a Percent of Total LiabilitiesC 1CURRENT AND LONG-TERM LIABILIT4UNCERTAINTY IN LIABILITIESUncertainty in Whom to PayUncertainty in When to PayUncertainty in How Much to PayC 1UNCERTAINTY IN LIABILITIESUnce5Accounts PayableSales Taxes PayableUnearned RevenuesShort-Term Notes PayableKNOWN(DETERMINABLE)LIABILITIESPayroll LiabilitiesMulti-Period Known LiabilitiesC 2Accounts PayableSales Taxes Pa6On May 15,2009,Max Hardware sold tools and supplies for$7,500 that are subject to a 6%sales tax.SALES TAXES PAYABLE$7,500 6%=$450C 2On May 15,2009,Max Hardware 7On May 1,2009,A-1 Catering received$3,000 in advance for catering a wedding party to take place on July 12,2009.UNEARNED REVENUESC 2On May 1,2009,A-1 Catering r8A written promise to pay a specified amount on a definite future date within one year or the companys operating cycle,whichever is longer.SHORT-TERM NOTES PAYABLEP 1A written promise to pay a spe9On 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 PERIODP 1On August 1,2009,Matrix,Inc10On October 30,2009,Matrix,Inc.pays the note plus interest to Carter.Interest expense=$5,000 12%(90 360)=$150NOTE GIVEN TO EXTENDCREDIT PERIODP 1On October 30,2009,Matrix,I11PROMISSORY NOTEFace Value Date after date promise to pay to the order ofAmerican BankNashville,TN Dollarsplus interest at the annual rate of .$20,000Sept.1,2009Ninety daysITwenty thousand and no/100 -6%Jackson SmithNOTE GIVEN TO BORROW FROM BANKP 1PROMISSORY NOTE$20,000Sept.1,12FACE VALUE EQUALS AMOUNT BORROWEDOn September 1,2009,Jackson Smith borrows$20,000 from American Bank.The note bears interest at 6%per year.Principal and interest are due in 90 days(November 30,2009).P 1FACE VALUE EQUALS AMOUNT BORRO13On November 30,2009,Smith wouldmake the following entry:$20,000 6%(90 360)=$300FACE VALUE EQUALS AMOUNT BORROWEDP 1On November 30,2009,Smith wo14Note DateEnd of PeriodMaturity DateAn adjusting entry is required to record Interest Expense incurred to date.END-OF-PERIOD ADJUSTMENTTO NOTESP 1Note DateEnd of PeriodMaturity15Dec.16,2009Dec.31,2009Feb.14,2010James Burrows borrowed$8,000 on Dec.16,2009,by signing a 12%,60-day note payable.Note DateEnd of PeriodMaturity DateEND-OF-PERIOD ADJUSTMENTTO NOTESP 1Dec.16,2009Dec.31,2009Feb.16On December 16,2009,James Burrows would make the following entry:On December 31,2009,the adjustment is:$8,000 12%(15 360)=$40END-OF-PERIOD ADJUSTMENTTO NOTESP 1On December 16,2009,James Bu17On February 14,2010,James Burrowswould make the following entry.$8,000 12%(45 360)=$120END-OF-PERIOD ADJUSTMENTTO NOTESP 1On February 14,2010,James Bu18 Employers incur expenses andliabilities fromhaving employees.PAYROLL LIABILITIESP 2 PAYROLL LIABILITIESP 219EMPLOYEE PAYROLL DEDUCTIONSFICA TaxesMedicare TaxesFederal Income TaxState and Local Income TaxesVoluntary DeductionsGross PayNet PayP 2EMPLOYEE PAYROLL DEDUCTIONSFIC20FICA Taxes Soc.Sec.FICA Taxes Medicare2008:6.2%of the first$102,200 earned in the year(Max=$6,324).2008:1.45%of all wages earned in the year.Employers must pay withheld taxes tothe Internal Revenue Service(IRS).EMPLOYEE FICA TAXESFederal Insurance Contributions Act(FICA)P 2FICA Taxes Soc.Sec.FICA Tax21Amounts withheld depend on the employees earnings,tax rates,and number of withholding allowances.Employers must pay the taxes withheld from employees gross pay to the appropriate government agency.Federal Income TaxState and Local Income TaxesEMPLOYEE INCOME TAXP 2Amounts withheld depend on the22Amounts withheld depend on the employees request.Employers owe voluntary amounts withheld from employees gross pay to the designated agency.Voluntary DeductionsExamples include union dues,savings accounts,pension contributions,insurance premiums,and charitiesEMPLOYEE VOLUNTARY DEDUCTIONSP 2Amounts withheld depend on the23The entry to record payroll expenses and deductions for an employee might look like this.$4,000 6.20%=$248$4,000 1.45%=$58RECORDING EMPLOYEE PAYROLL DEDUCTIONSP 2The entry to record payroll ex24FICA TaxesMedicare TaxesFederal and State Unemployment TaxesEmployers pay amounts equal to that withheld from the employees gross pay.EMPLOYER PAYROLL TAXESP 3FICA TaxesMedicare TaxesFedera252008:6.2%on the first$7,000 of wages paid to each employee(A credit up to 5.4%is given for SUTA paid,therefore the net rate is 0.8%.)Federal Unemployment 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.)State Unemployment Tax(SUTA)FEDERAL AND STATE UNEMPLOYMENT TAXESP 32008:6.2%on the first$7,00026The entry to record the employer payroll taxes for January might look like this:SUTA:$4,000 5.4%=$216FUTA:$4,000 (6.2%-5.4%)=$32FICA amounts are the same as that withheld from the employees gross pay.RECORDING EMPLOYER PAYROLL TAXESP 3The entry to record the employ27MULTI-PERIOD KNOWN LIABILITIESOften include unearned revenues and notes payable.Unearned revenues from magazine subscriptions often cover more than one accounting period.A portion of the earned revenue is recognized each period and the unearned revenue account is reduced.Notes payable often extend over more than one accounting period.A three-year note payable would be classified as a current liability for one year and a long-term liability for two years.C 2MULTI-PERIOD KNOWN LIABILITIES28 An estimated liability is a known obligation of an uncertain amount,but one that can be reasonably estimated.ESTIMATED LIABILITIESP 4 An estimated liability is a 29Employer expenses for pensions or medical,dental,life and disability insuranceHEALTH AND PENSION BENEFITSAssume an employer agrees to pay an amount for medical insurance equal to$8,000,and contribute an additional 10%of the employees$120,000 gross salary to a retirement program.P 4Employer expenses for pensions30Employer expenses for paid vacation by employeesVACATION BENEFITSAssume an employee earns$62,400 per year and earns two weeks of paid vacation each year.$62,400 52 weeks =$1,200$62,400 50 weeks =$1,248Weekly vacation benefit$48P 4Employer expenses for paid vac31Many bonuses paid to employees arebased on reported net income.BONUS PLANSAssume the annual yearly bonus to the store manager is equal to 10%of the companys annual net income minus the bonus.The store earned$100,000 net income this year.P 4Many bonuses paid to employees32BONUS PLANSAssume the annual yearly bonus to the store manager is equal to 10%of the companys annual net income minus the bonus.The store earned$100,000 net income this year.Many bonuses paid to employees arebased on reported net income.P 4BONUS PLANSAssume the annual y33WARRANTY LIABILITIESSellers obligation to replace or correct a product(or service)that fails to perform as expected within a specified period.To conform with the matching principle,the seller reports expected warranty expense in the period when revenue from the sale is reported.A dealer sells a car for$32,000,on December 1,2009,with a warranty for parts and labor for 12 months,or 12,000 miles.The dealership experiences an average warranty cost of 3%of the selling price of each car.P 4WARRANTY LIABILITIESSellers o34WARRANTY LIABILITIESOn February 15,2010,parts of$200 and laborof$250 covered under warranty were incurred.A dealer sells a car for$32,000,on December 1,2009,with a warranty for parts and labor for 12 months,or 12,000 miles.The dealership experiences an average warranty cost of 3%of the selling price of each car.P 4WARRANTY LIABILITIESOn Februar35Amount.CONTINGENT LIABILITIESPotential obligation that depends on a future event arising out of a past transaction or event.C 3Amount.CONTINGENT LIABILI36ACCOUNTING FORCONTINGENT LIABILITIESC 3ACCOUNTING FORCONTINGENT LIAB37REASONABLY POSSIBLECONTINGENT LIABILITIESPotential Legal Claims A potential claim is recorded if the amount can be reasonably estimated and payment for damages is probable.Debt Guarantees The guarantor usually discloses the guarantee in its financial statement notes.If it is probable that the debtor will default,the guarantor should record and report the guarantee as a liability.C 3REASONABLY POSSIBLECONTINGENT38If income before interest and taxes varies greatly from year to year,fixed interest charges can increase the risk that an owner will not earn a positive return and be unable to pay interest charges.TIMES INTEREST EARNEDTimes interestearnedIncome before interestand income taxesInterest expense=A 1If income before interest and 39
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