Current Liabilities and Payroll

1. 0 11 Current Liabilities and Payroll

2. 0 After studying this chapter, you should be able to: • Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. • Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings.

3. 0 After studying this chapter, you should be able to: • Describe the payroll accounting systems that use a payroll register, employee earnings records, and a general journal. • Journalize entries for employee fringe benefits, including vacation pay and pensions.

4. 0 After studying this chapter, you should be able to: • Describe the accounting treatment for contingent liabilities and journalize entries for product warranties.

5. 0 11-1 Objective 1 Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable.

6. 0 11-1 Liabilities that are to be paid out of current assets and are due within a short time, usually within one year, are called current liabilities. • Accounts payable • Current portion of long-term debt • Notes payable

7. 0 11-1 Accounts Payable Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale.

8. 0 11-1 Current Portion of Long-Term Debt Long-term liabilities are often paid back in periodic payments, called installments. Installmentsthat are due within the coming year must be classified as a current liability.

9. 0 11-1 The total amount of the installments due after the coming year is classified as a long-term liability.

10. 0 11-1 Short-Term Notes Payable A firm issues a 90-day, 12% note for $1,000, dated August 1, 2008 to Murray Co. for a $1,000 overdue account. Aug. 1 Accounts Payable—Murray Co. 1 000 00 Notes Payable 1 000 00 Issued a 90-day, 12% note on account. 10

11. Oct. 30 Notes Payable 1 000 00 Interest Expense 30 00 Cash 1 030 00 Paid principal and interest on note. 0 11-1 On October 30, when the note matures, the firm pays the $1,000 principal plus $30 interest ($1,000 x 12% x 90/360). Appears on the income statement as an “Other Expense.” 11

12. 0 11-1 On May 1, Bowden Co. (borrower) purchased merchandise on account from Coker Co. (creditor), $10,000, 2/10, n/30. The merchandise cost Coker Co. $7,500.

13. Bowden Co. (Borrower) Description Debit Credit Mdse. Inventory 10,000 Accounts Payable 10,000 Coker Co. (Creditor) Description Debit Credit Accounts Receivable 10,000 Sales 10,000 Cost of Mdse. Sold 7,500 Mdse. Inventory 7,500 0 11-1 13

14. Bowden Co. (Borrower) Description Debit Credit Accounts Payable 10,000 Notes Payable 10,000 Coker Co. (Creditor) Description Debit Credit Notes Receivable 10,000 Accounts Receivable 10,000 0 11-1 On May 3, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account. 14

15. Bowden Co. (Borrower) Description Debit Credit Notes Payable 10,000 Interest Expense 200 Cash 10,200 Coker Co. (Creditor) Description Debit Credit Cash 10,200 Interest Revenue 200 Notes Receivable 10,000 0 11-1 On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest: $10,000 x 12% x 60/360. 15

16. 0 11-1 On September 19, a firm borrows $4,000 from First National Bank by giving the bank a 90-day, 15% note. Sept. 19 Cash 4 000 00 Notes Payable 4 000 00 Issued a 90-day, 15% note to the bank. 16

17. 0 11-1 On the due date of the note (December 18), the borrower owes $4,000 plus interest of $150 ($4,000 x 15% x 90/360). Dec. 18 Notes Payable 4 000 00 Interest Expense 150 00 Cash 4 150 00 Paid principal and interest due on note. 17

18. 0 11-1 Discounting a Note The interest set by the creditor when a note does not specify the rate is called the discount. The rate used in computing the discount is called the discount rate. The borrower is given the remainder (face – discount), called the proceeds.

19. 0 11-1 On August 10, Cary Company issues a $20,000, 90-day note to Rock Company in exchange for inventory. Rock discounts the note at 15%. Aug. 10 Merchandise Inventory 19 250 00 Interest Expense 750 00 Notes Payable 20 000 00 Issued a 90-day note to Rock Co., discounted at 15%. 19

20. Aug. 10 Merchandise Inventory 19 250 00 Interest Expense 750 00 Notes Payable 20 000 00 Issued a 90-day note to Rock Co., discounted at 15%. 0 11-1 On August 10, Cary Company issues a $20,000, 90-day note to Rock Company in exchange for inventory. Rock discounts the note at 15%. Proceeds Discount: $20,000 x .15 x 90/360 Discount rate 20

21. 0 11-1 On November 8 the note is paid in full. Nov. 8 Notes Payable 20 000 00 Cash 20 000 00 Paid note due. 21

22. Example Exercise 11-1 0 11-1 On July 1, Bella Salon Company issued a 60-day note with a face amount of $60,000 to Delilah Hair Products Company. for merchandise inventory. • Determine the proceeds of the note assuming the note carries an interest rate of 6%. • Determine the proceeds of the note assuming the note is discounted at 6%. 22

23. Follow My Example 11-1 0 11-1 • $60,000 • $59,400 [$60,000 – ($60,000 x 6% x 60/360)] For Practice: PE 11-1A, PE 11-1B 23

24. 0 11-2 Objective 2 Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings.

25. 0 11-2 11-2 Payroll refers to the amount paid to employees for the services they provide during a period. It is usually significant for several reasons. • Employees are sensitive to payroll errors and irregularities. • The payroll is subject to various federal and state regulations. • The payroll and related payroll taxes have a significant effect on the net income of most businesses.

26. 0 11-2 Wages usually refers to payment for manual labor, both skilled and unskilled. The rate of wages is normally stated on an hourly or weekly basis.

27. 0 11-2 Salary usually refers to payment for managerial, administrative, or similar services, normally expressed in terms of a month or a year.

28. 0 11-2 The total earnings of an employee for a payroll period are called gross pay. From this is subtracted one or more deductions to arrive at the net pay. Net pay is the amount that the employer must pay the employee.

29. 0 11-2 McGrath Illustration John T. McGrath is employed by McDermott Supply Co. at the rate of $34 per hour, plus 1.5 times the normal hourly rate for hours over 40 per week. For the week ended December 27, McGrath worked 42 hours. Earnings at base rate (40 x $34) $1,360 Earnings at overtime rate (2 x $51) 102 Total earnings $1,462 29

30. 0 11-2 For this illustration assume the standard withholding allowance of $63*. Thus, the wages used in determining McGrath’s withholding for the week are $1,399 ($1,462 – $63). *The actual IRS standard withholding allowance changes every year and was $63.46 for 2006.

31. 0 11-2 Wage Bracket Withholding Table McGrath wage bracket Source: Publication 15, Employer’s Tax Guide, Internal Revenue Service, 2006 31

32. 0 11-2 McGrath Example (Continued) Initial withholding $ 78.30 Plus ($1,399 – $620) x 25% 194.75 Total federal income taxes withheld $273.05 32

33. Example Exercise 11-2 0 11-2 Karen Dunn’s weekly gross earnings for the present week were $2,250. Dunn has two exemptions. Using the wage bracket withholding table in Exhibit 3 (Slide 31) with a $63 standard withholding allowance for each exemption, what is Dunn’s federal income tax withholding? 33

34. Follow My Example 11-2 Total wage payment $2,250 One allowance (provided by IRS) $63 Multiplied by allowances claimed on W-4 x 2 126 Amount subject to withholding $2,124 0 11-2 Initial withholding from wage bracket $275.55 Plus additional withholding: 28% of excess over $1,409 200.20* Federal income tax withholding $475.75 *28% x ($2,124 – $1,409) 34 For Practice: PE 11-2A, PE 11-2B

35. 0 11-2 FICA Tax The amount of FICA tax withheld is the employees’ contribution to two federal programs. The first program, called social security, is for old age, survivors, and disability insurance (OASDI). The second program, called Medicare, is health insurance for senior citizens.

36. 0 11-2 John T. McGrath’s FICA Tax Earnings subject to 6% social security tax ($100,000 – $99,038) $ 962 Social security tax rate x 6% Social security tax $57.72 Earnings subject to 1.5% Medicare tax $1,462 Medicare tax rate x 1.5% Medicare tax 21.93 Total FICA tax $79.65 36

37. 0 11-2 11-2 Computing McGrath’s Net Pay John T. McGrath’s net pay: Gross earnings for the week $1,462.00 Deductions: Social security tax (Slide 37) $ 57.72 Medicare tax (Slide 33) 21.93 Federal income tax (Slide 33) 273.05 Retirement savings 20.00 United Way 5.00 Total deductions 377.70 Net pay $1,084.30 37

38. Example Exercise 11-3 0 11-2 Karen Dunn’s weekly gross earnings for the week ending Dec. 3rd were $2,250, and her federal income tax withholding was $475.75. Prior to this week Dunn had earned $98,000 for the year. Assuming the social security rate is 6% on the first $100,000 of annual earnings and Medicare is 1.5% of all earnings, what is Dunn’s net pay? 38

39. Follow My Example 11-3 0 11-2 Total wage payment $2,250.00 Less: Federal income tax withholding 475.75 Earnings subject to social security tax ($100,000 – $98,000) $2,000 Social security tax rate x 6% Social security tax 120.00 Medicare tax ($2,250 x 1.5%) 33.75 Net pay $1,620.50 For Practice: PE 11-3A, PE 11-3B 39

40. 0 11-2 11-2 Employer’s Federal Payroll Taxes Employers are required to contribute to the social security and Medicare programs for each employee. The employer must match the employee’s contribution to each program.

41. 0 11-2 11-2 Employer’s Federal Unemployment Taxes A FUTA tax of 6.2% is levied on employersonlyto provide for temporary unemployment to those who become unemployed as a result of layoffs due to economic causes beyond their control. This tax applies to only the first $7,000 of the earnings of each covered employee during a calendar year.

42. 0 11-2 11-2 Employer’s State Unemployment Taxes Employers in most states also must pay a state unemployment tax for unemployed workers. A few states require employee contributions. The state plan is designed to reward firms with stable employment, so the tax rate varies from state to state and employer to employer.

43. 0 11-2 11-2 43

44. 0 11-3 Objective 3 Describe payroll accounting systems that use a payroll register, employee earnings records, and a general journal.

45. 0 11-3 Payroll Register The payroll register is a multicolumn report used for summarizing the data for each payroll period. The last two columns of the payroll register are used to accumulate the total wages or salaries to be debited to various expense accounts. The process is usually called payroll distribution.

46. 0 11-3 Payroll Register 46 (Continued)

47. 0 11-3 (Concluded) 47

48. 0 11-3 Recording Employees’ Earnings Dec. 27 Sales Salaries Expense 11 122 00 Office Salaries Expense 2 780 00 Social Security Tax Payable 643 07 Medicare Tax Payable 208 53 Employees’ Federal Inc. Tax Pay. 3 332 00 Retirement Savings Ded. Payable 680 00 United Way Deductions Payable 470 00 Accounts Receivable—Fred Elrod 50 00 Salaries Payable 8 518 40 Payroll for week ended December 27. 48

49. Example Exercise 11-4 0 11-3 The payroll register of Chen Engineering Services indicates $900 of social security withheld and $225 of Medicare tax withheld on total salaries of $15,000 for the period. Federal withholding for the period totaled $2,925. Provide the journal entry for the period’s payroll. 49

50. Follow My Example 11-4 0 11-3 Salaries Expense 15,000 Social Security Tax Payable 900 Medicare Tax Payable 225 Federal Withholding Tax Payable 2,925 Salaries Payable 10,950 For Practice: PE 11-4A, PE 11-4B 50