Current Liabilities and Payroll

1. Current Liabilities and Payroll Chapter 10

2. Current Liabilities of Known Amount • Current liabilities must be paid in a year or less • Accounts payable • Short-term notes payable • Sales tax payable • Current portion of long-term notes payable • Accrued liabilities • Unearned revenues

3. Accounts Payable • For products and services purchased on account • Integrated accounts payable and inventory systems • Paid later within a discount period or not • Usually due in 30 days

5. Short-Term Notes Payable • Common form of financing • Incurs interest expense which is paid later

6. Sales Tax Payable • Tax levied by state on retail sales • Record sales, with the taxes, as follows: • Record and forward the sales tax to the state

8. Current Portion of Long-Term Notes Payable • Initially note recorded as long-term • Second entry needed to record current portion • Principal portion of long-term debt due currently • Does not change total amount due • Interest still accrues

11. Accrued Expenses • Expense incurred, but not yet paid • Often an adjusting entry • Debit expense and credit an accrued liability • Examples: • Salaries • Interest payable

12. Incurred $1,500 wages/salaries expense which has not been paid

13. Unearned Revenues • Cash received in advance of performing work • Obligation to provide goods or services • Revenue earned as goods delivered or work performed • Debit liability and credit revenues as earned

15. S10-1: Accounting for a note payable On December 31, 2012, Edgmont, Co., purchased $10,000 of inventory on a one-year, 10% note payable. Edgmont uses a perpetual inventory system. • Journalize the company’s accrual of interest expense on June 30, 2013, its fiscal year-end.

17. S10-1: Accounting for a note payable (Continued) 2. Journalize the company’s payment of the note plus interest on December 31, 2013

19. Estimated Liabilities • Warranty Payable • Guarantee that products are free of defects • Recorded in the same period as sales • As sales are incurred and inventory updated, also record estimated warranty expense • Remove payable as warranty claims honored • Liability balance equals expected future claims

20. Dell Warranty Disclosure

22. Contingent Liabilities • Potential liability • May or may not become actual liability • Depends on a future event • Accounting treatment dependson likelihood of actual loss

23. Accounting for Contingent Liabilities • How to report based upon likelihood

24. Eastman Footnote Disclosure

25. S10-2: Accounting for warranty expense and warranty payable Trekster Corporation guarantees its snowmobiles for three years. Company experience indicates that warranty costs will add up to 4% of sales. Assume that the Trekster dealer in Colorado Springs made sales totaling $533,000 during 2012. The company received cash for 30% of the sales and notes receivable for the remainder. Warranty payments totaled $17,000 during 2012. Requirements: 1. Record the sales, warranty expense, and warranty payments for the company. 2. Post to the Estimated warranty payable T-account. At the end of 2012, how much in Estimated warranty payable does the company owe?

26. S10-2: Accounting for warranty expense and warranty payable 1. Record the sales, warranty expense, and warranty payments for the company.

28. S10-2: Accounting for warranty expense and warranty payable 1. Record the sales, warranty expense, and warranty payments for the company.

29. S10-2: Accounting for warranty expense and warranty payable 1. Record the sales, warranty expense, and warranty payments for the company.

30. S10-2: Accounting for warranty expense and warranty payable 2. Post to the Estimated warranty payable T-account. At the end of 2012, how much in Estimated warranty payable does the company owe? Estimated warranty payable

31. 3 Calculate payroll and payroll tax amounts

32. Payroll Labels

33. Payroll Terms • Straight time • Base rate paid for a set period • Overtime • Additional time worked over straight time • Higher pay rate • Depends upon job classification and wage and hour laws • Gross pay • Total amount earned during a pay period • Expense to the employer • Net pay • Take-home pay • The amount the employee keeps

34. Payroll Withholding Deductions • Required deductions from employees’ gross pay • Federal income tax • State income tax • Social Security (FICA) tax • Amount depends on: • Gross pay • Withholding allowances–Form W-4 • Optional deductions–at employee’s request • Insurance • Retirement • Charitable gifts

35. Withholding for Employee Social Security (FICA) Tax • Program to provide retirement, disability, and medical benefits • Two components: • Old age, survivors’ and disability insurance (OASDI) • 6.2% of pay up to a wage base • In 2010, wage base = $106,800 • Health insurance (Medicare) • 1.45% of pay, no maximum wage base

36. Social Security (FICA) Calculation • An employee earned $99,800 prior to December and $10,000 for December • Total of $109,800 for the year * Assume that the 2012 FICA tax rate is 7.65%.

37. Employer Payroll Taxes • Employers must pay additional payroll taxes • These are not employee deductions • Employer (FICA) tax • Employer matches amount withheld from employees’ pay • SS system is funded by equal contributions • State, federal unemployment compensation taxes • Finances workers’ compensation for people laid off • SUTA (State unemployment tax) • Usually 5.4% of first $7,000 paid to each employee • FUTA (Federal unemployment tax • Usually 0.8% of the first $7,000 paid to each employee

38. Breakdown of Payroll Costs for One Employee(illustration) • Payroll costs for an employee who earns a weekly salary of $1,000

39. S10-4: Computing an employee’s total pay Gloria Traxell is paid $800 for a 40-hour workweek and time-and-a-half for hours above 40. Requirements: 1. Compute Traxell’s gross pay for working 48 hours during the first week of February. Carry amounts to the nearest cent.

40. S10-4: Computing an employee’s total pay 2. Traxell is single, and her income tax withholding is 10% of total pay. Traxell’s only payroll deductions are payroll taxes. Compute Traxell’s net (take-home) pay for the week. Use a 7.65% FICA tax rate, and carry amounts to the nearest cent.

41. S10-5: Computing the payroll expense of an employer Return to the Gloria Traxell payroll situation in Short Exercise 10-4. Traxell’s employer, College of San Bernardino, pays all the standard payroll taxes plus benefits for the employee retirement plan (5% of total pay), health insurance ($113 per employee per month), and disability insurance ($8 per employee per month). Requirements: 1. Compute College of San Bernardino’s total expense of employing Gloria Traxell for the 48 hours that she worked during the first week of February. Carry amounts to the nearest cent.

42. S10-5: Computing the payroll expense of an employer

43. 4 Journalize basic payroll transactions

44. Payroll Entries • 1. Record the payroll expense and payment • Record total payroll expense as a liability • Record payment of salaries with deductions recorded as liabilities. Liabilities to be paid by employer to the respective agencies on behalf of the employee.

45. Payroll Entries • 2. Record any employee benefits paid by the employer • Record total benefit expense as a liability • Record the benefits paid as expenses

46. Payroll Entries • 3. Record the employer payroll tax expense and payment • Record payroll tax expense as a liability • Record payment of employee withholdings and the matching portion of FICA **No FUTA or SUTA tax is due in December as most entities are over the maximum wage base.

47. Internal Control over Payroll • Controls for efficiency • Use of two payroll bank accounts • Use of computer processing • Use of direct deposits to facilitate reconciliation • Controls to safeguard payroll disbursements • Hiring and firing separate from accounting • Use of photo IDs and time clocks

48. Separation of Duties • Companies have separate departments for payroll functions: • Human Resources Department hires and fires • Payroll Department maintains employee records • Accounting Department records transactions • The Treasurer (or bursar) distributes paychecks

49. S10-7: Journalizing payroll Consult your solutions for Short Exercises 10-4 and 10-5. 1. Journalize salary expense for College of San Bernardino related to the employment of Gloria Traxell.