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Current Liabilities and Payroll

Current Liabilities and Payroll. Chapter 11. Objective 1. Account for current liabilities of known amount. Accounts Payable. Amounts owed for products or services purchased on account. Short-Term Notes Payable. Promissory notes payable due within one year Interest expense is recognized

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Current Liabilities and Payroll

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  1. Current Liabilitiesand Payroll Chapter 11

  2. Objective 1 Account for current liabilities of known amount

  3. Accounts Payable • Amounts owed for products or services purchased on account

  4. Short-Term Notes Payable • Promissory notes payable due within one year • Interest expense is recognized • If interest expense is accrued at the end of the period, interest payable must also be recorded

  5. E11-14 2002 May 1 Equipment 15,000 Note Payable 15,000 Dec 31 Interest Expense 800 Interest Payable 800 (15,000 x .08 x 8/12)

  6. E11-14 2003 May 1 Note Payable 15,000 Interest Expense 400 Interest Payable 800 Cash 16,200

  7. Sales Tax PayableE11-14 Mar 31 Cash 216,000 Sales Revenue 200,000 Sales Tax Payable 16,000 Apr 6 Sales Tax Payable 16,000 Cash 16,000

  8. Other Current Liabilities • Current portion of long-term note payable • Accrued Expenses (Liabilities) • Expenses that have been incurred but not yet paid • Salaries Payable • Interest Payable • Utilities Payable

  9. Unearned RevenueE11-15 Mar 31 Cash 218 Unearned Subscription Revenue 200 Sales Tax Payable 18 Nov 15 Sales Tax Payable 18 Cash 18 Dec 31 Unearned Subscription Revenue 150 Subscription Revenue 150

  10. Objective 2 Account for current liabilities that must be estimated

  11. Estimated Warranty Payable • Record warranty expense in same period as the revenue • Warranty expense • Estimated warranty payable

  12. E11-16 2006 Warranty Expense 6,000 Estimated Warranty Payable 6,000 Estimated Warranty Payable 7,000 Cash 7,000

  13. E11-16 Estimated Warranty Payable Balance 3,000 7,000 6,000 Balance 2,000

  14. Contingent Liabilities • Potential liability • Depends on a future event • Accounting treatment depends on likelihood that the future event will create a liability • Remote – ignore • Reasonably possible – in notes to financial statements • Probable – estimate and record expense and liability

  15. Objective 3 Compute payroll amounts

  16. Payroll • Salary – pay stated at annual, monthly, or weekly rate • Wages – pay stated at an hourly rate • Commission – pay stated as percentage of sales amount • Bonus – pay over and above base salary • Benefits – extra compensation not paid in cash, such as health insurance, retirement contributions

  17. Payroll • Straight time - base rate paid for a set number of hours • Overtime - additional time worked for which employees receive a higher rate (usually 1.5 times the straight time rate)

  18. Employee Income Tax FICA OASD FICA Medicare Optional Deductions Gross Pay and Net Pay Gross Pay Net Pay

  19. FICA Tax • The FICA tax has two components: • Old age, survivors’, and disability insurance (6.2% applied to the first $90,000 of employee earnings in a calendar year) • Health insurance (1.45% applied to all employee earnings)

  20. Employer Payroll Taxes • Social Security (FICA) tax • State unemployment compensation tax • Federal unemployment compensation tax

  21. Unemployment Compensation Taxes • Employers pay 5.4% to the state and 0.8% to the federal government on the first $7,000 of each employee’s annual earnings • Provides for workmen’s compensation for people laid off from work

  22. Objective 4 Record basic payroll transactions

  23. Salary Expense Sep 30 Salary Expense Employee Income Tax Payable FICA Tax Payable United Fund Payable Salary Payable

  24. Payroll Tax Expense Sep 30 Payroll Tax Expense FICA Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable

  25. Benefits Expense Sep 30 Health Insurance Expense Life Insurance Expense Retirement Plan Expense Employee Benefits Payable

  26. E11-17 Base salary $750 Commission 8,000 Gross pay for December $8,750 Charitable contribution (25) Income taxes (875) Health insurance (50) FICA (on $3,000) (240) (1,190) $7,560

  27. E11-18 Gross pay: Regular hours (40 x $10) $400.00 Overtime (10 x $10 x 1.5) 150.00 Gross pay $550.00 Deductions: Income tax (49.50) FICA (44.00) Charitable contribution (5.00) (98.50) Net pay $451.50

  28. E11-18 Dec 31 Salary Expense 550.00 Employee Income Tax Payable 49.50 FICA Tax Payable 44.00 United Fund Contribution Payable 5.00 Salary Payable 451.50

  29. E11-19 Dec 31 Payroll Tax Expense 6,068 FICA Tax Payable 5,200 State Unemployment Tax Payable 756 Federal Unemployment Tax Payable 112

  30. E11-19 Dec 31 Health Insurance Expense 2,060 Life Insurance Expense 350 Pension Expense 3,900 Employee Benefits Payable 6,310

  31. Objective 5 Use a payroll system

  32. Components • Payroll Record • Payroll Check • Earnings Reports

  33. Payroll Record

  34. Payroll Checks

  35. Earnings Report

  36. Earnings Report

  37. Internal Control over Payroll • Efficiency controls • Keep two payroll accounts • Computerize • Controls to safeguard payroll disbursements • Separate hiring and firing function from accounting and from passing out paychecks • Photo ID’s for employees • Employees clock in and out

  38. Objective 6 Report current liabilities on the balance sheet

  39. E11-22 Oriental Rug Company Balance Sheet (partial) December 31, 2004 Current liabilities: Estimated warranty payable $6,000 Unearned sales revenue 15,000 Employee withheld income tax payable 8,100 FICA tax payable 14,400 State unemployment tax payable 4,860 Federal unemployment tax payable 720 Total current liabilities $49,080

  40. End of Chapter 11

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