Current Liabilities and Payroll

1. 11 Current Liabilities and Payroll

2. Define and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. 1 Determine employer liabilities for payroll, including liabilities arising from employer earnings and deductions from savings. 2 Learning Objective 1 Learning Objective 1 Current Liabilities and Payroll 3-1 3-1 After studying this chapter, you should be able to: Insert Chapter Objectives Describe the nature of the adjusting process. Describe the nature of the adjusting process. 9-2 11-2

3. Describe payroll accounting systems that use a payroll register, employee earnings records, and a general journal. 3 Journalize entries for employee fringe benefits, including vacation pay and pensions. 4 Describe the accounting treatment for contingent liabilities and journalize entries for product warranties. 5 Current Liabilities and Payroll (continued) 11-3

4. 1 Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. 11-4

5. 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

6. 1 Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale.

7. 1 Accounts Payable as a Percent of Total Current Liabilities Exhibit 1

8. 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. 1 The total amount of the installments due after the coming year is classified as a long-term liability.

10. 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.

11. 1 On October 30, when the note matures, the firm pays the $1,000 principal plus $30 interest ($1,000 × 12% × 90/360). Interest Expense appears on the income statement as an “Other Expense.”

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

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 1 On May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.

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 1 On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest: $10,000 × 12% × 60/360.

16. 1 On September 19, Iceburg Company issues a $4,000, 90-day, 15% note to First National Bank.

17. 1 On the due date of the note (December 18), Iceburg Company owes $4,000 plus interest of $150 ($4,000 × 15% × 90/360).

18. 1 Discounting a Note A discounted note has the following characteristics: • The creditor (lender) requires an interest rate, called the discount rate. • Interest, called the discount, is computed on the face amount of the note. • The debtor (borrower) receives the face amount of the note less the discount, called the proceeds. • The debtor pays the face amount of the note on the due date.

19. 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 × .15 × 90/360 Discount rate

20. The amount paid is the face amount of the note. 1 On November 8 the note is paid in full.

21. Follow My Example 11-1 Follow My Example 6-1 a. $60,000 1 Example Exercise 11-1 Example Exercise 10-2 Proceeds from Notes Payable On July 1, Bella Salon Company issued a 60-day note with a face amount of $60,000 to Delilah Hair Product 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%. b. $59,400 [$60,000 – ($60,000 × 6% × 60/360)] 11-21 For Practice: PE 11-1A, PE 11-1B

22. 2 Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings. 11-22

23. 2 Payroll refers to the amount paid to employees for the services they provide during a period. A company’s payroll is important for the following reasons: • Employees are sensitive to payroll errors and irregularities. • Good employee morale requires payroll to be paid timely and accurately. • Payroll is subject to various federal and state regulations. • Payroll and related payroll taxes significantly affect the net income of most companies.

24. 2 Salary usually refers to payment for managerial and administrative services. Salary is normally expressed in terms of a month or a year.

25. 2 Wages usually refers to payment for employee manual labor. The rate of wages is normally stated on an hourly or weekly basis.

26. 2 Computing Employee’s Earnings 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 regular rate (40 × $34) $1,360 Earnings at overtime rate (2 × $51) 102 Total earnings $1,462

27. 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.

28. Exhibit 2 2 Employee’s Withholding Allowance Certificate (W-4 Form)

29. 2 Deductions from Employee’s Earnings: McGrath Example McGrath made $1,462 for the week ending December 27. Since McGrath’s W-4 (Slide28) claims one withholding allowance, $67 (the assumed standard withholding allowance) is deducted from his gross pay to arrive at $1,395 ($1,462 – $67).

30. Exhibit 3 2 Wage Bracket Withholding Table Table for Percentage Method of Withholding WEEKLY Payroll Period Source: Publication 15, Employer’s Tax Guide, Internal Revenue Service, 2008

31. 2 McGrath Example (continued) Initial withholding (Slide 30) $ 82.95 Plus [25% × ($1,395 – $653)] 185.50 Total federal income taxes withheld $268.45

32. 2 Example Exercise 11-2 Federal Income Tax Withholding 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 30) with a $67 standard withholding allowance for each exemption, what is Dunn’s federal income tax withholding? 11-32

33. Follow My Example 11-2 For Practice: PE 11-2A, PE 11-2B 2 Example Exercise 11-2 (continued) Total wage payment $2,250 One allowance (provided by IRS) $67 Multiplied by allowances claimed on W-4 × 2 134 Amount subject to withholding $2,116 Initial withholding from wage bracket in Exh. 3 $302.96 Plus additional withholding: 28% of excess over $1,533 163.24* Federal income tax withholding $466.20 *28% × ($2,116 – $1,533) 11-33

34. 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, provides health insurance for senior citizens.

35. 2 John T. McGrath’s FICA Tax John T. Mcgrath’s annual earnings prior to the payroll period ending on December 27 total $99,038. Earnings subject to 6% social security tax ($100,000 – $99,038) $ 962 Social security tax rate × 6% Social security tax $57.72 Earnings subject to 1.5% Medicare tax $1,462 Medicare tax rate × 1.5% Medicare tax 21.93 Total FICA tax $79.65

36. 2 John T. McGrath’s Net Pay Gross earnings for the week $1,462.00 Deductions: Social security tax (Slide 35) $ 57.72 Medicare tax (Slide 35) 21.93 Federal income tax (Slide 31) 268.45 Retirement savings 20.00 United Way 5.00 Total deductions 373.10 Net pay $1,088.90

37. 2 Example Exercise 11-3 Employee Net Pay Karen Dunn’s weekly gross earnings for the week ending Dec. 3rd were $2,250, and her federal income tax withholding was $466.19. 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? 11-37

38. For Practice: PE 11-3A, PE 11-3B Follow My Example 11-3 2 Example Exercise 11-3 (continued) Total wage payment $2,250.00 Less: Federal income tax withholding 466.19 Earnings subject to social security tax ($100,000 – $98,000) $2,000 Social security tax rate × 6% Social security tax 120.00 Medicare tax ($2,250 × 1.5%) 33.75 Net pay $1,630.06 11-38

39. 2 Liability for Employer’s Payroll Taxes Employers are subject to the following payroll taxes for amounts paid their employees: • FICA tax • Federal Unemployment Compensation Tax (FUTA) • State Unemployment Compensation Tax (SUTA)

40. 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. 2 Employer’s Federal Unemployment Taxes A FUTA tax of 6.2% is levied on employers onlyto 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. 2 Employer’s State Unemployment Taxes This employer tax also provides temporary payments to those who become unemployed. The FUTA and SUTA programs are closely coordinated, with the states distributing the unemployment checks. SUTA tax rates and earnings subject to tax vary by state.

43. Exhibit 4 2 Responsibility for Tax Payments

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

45. 3 Payroll systems should be designed to: • Pay employees accurately and timely. • Meet regulatory requirements of federal, state, and local agencies. • Provide useful data for management decision-making needs.

46. 3 Payroll Register The payroll register is a multicolumn report used for summarizing the data for each payroll period. The right hand columns of the payroll register indicate the accounts debited for the payroll expense. These columns are often referred to as the payroll distribution.

47. Exhibit 5 3 Payroll Register (left side)

48. Exhibit 5 3 3 Payroll Register (right side)

49. 3 The entry based on the payroll register in Exhibit 5 (Slides 47 and 48) is shown below.

50. Follow My Example 11-4 Follow My Example 6-1 Salaries Expense……………………………… 15,000 Social Security Tax Payable………........ 900 Medicare Tax Payable………………….... 225 Federal Withholding Tax Payable……… 2,925 Salaries Payable………………………….. 10,950 3 Example Exercise 11-4 Example Exercise 10-2 Journalize Period Payroll 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. 11-50 For Practice: PE 11-4A, PE 11-4B