Current Liabilities and Payroll
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Transcript of Current Liabilities and Payroll
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Current Liabilitiesand Payroll
Chapter 11
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Objective 1
Account for current liabilities
of known amount.
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Accounts Payable...
…are amounts owed to suppliers for goods or services purchased on account.
• Accounts payable do not bear interest expense for the debtor.
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Accounts Payable Example
• Suppose that on June 3, Lloyd’s Sporting Store purchased $1,000 of goods on account from Patti Wholesaler.
• What is the journal entry?
Inventory 1,000 Accounts Payable 1,000
Purchase on account
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Short-Term Notes Payable...
…are promissory notes payable due within one year.
• In addition to recording the note payable, the business must also pay interest expense.
• If interest expense is accrued at the end of the period, interest payable must also be recorded.
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Short-Term Notes Payable Example
• On April 30, Patti purchased inventory for $10,000 by issuing a 90-day, 10% note payable.
• What is the journal entry?
Inventory 10,000Notes Payable 10,000
Purchase inventory on a 90-day, 10% note
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Short-Term Notes Payable Example
• Assume the accounting period ended May 31.
• How much interest was accrued as of May 31?
• $10,000 × 10% × 31/360 = $86.11
• How does Patti record the payment at maturity?
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Short-Term Notes Payable Example
July 29Note Payable 10,000.00Interest Payable 86.11Interest Expense 163.89
Cash10,250.00
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Sales Tax Payable Example
• Most states levy a sales tax on retail sales.
• Suppose that a store sold $3,000 worth of merchandise on a given Saturday.
• The business collected an additional 5% in sales tax.
• How much is the sales tax liability?
• $150
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Accrued Expenses (Liabilities)...
– are expenses that have been incurred but not recorded.
– salaries
– taxes withheld
– interest
– utilities
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Payroll Liabilities
Salary Expense 10,000Employee Income Tax Payable 1,200FICA Tax Payable 800Employee Union Dues Payable 140Salary Payable 7,860
To record salary expense
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Unearned Revenue Example
• Assume that on June 1, Dennis’s Landscaping collected $1,500 for services to be provided during the months of June, July, and August.
June 1Cash 1,500
Unearned Revenue 1,500Received cash in advance
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Unearned Revenue Example
• What entry does Dennis record on June 30?
June 30Unearned Revenue 500
Service Revenue 500Earned service revenue that was collectedin advance
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Objective 2
Account for Current Liabilities
That Must be Estimated.
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Estimated Warranty Payable
• The matching principle demands that the company record the warranty expense in the same period that the business recognizes sales revenue.
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Estimated Warranty Payable Example
• Patti Wholesaler made sales of $1,000,000 subject to product warranties.
• In the past years, claims have averaged 2%.
Warranty Expense 20,000Estimated Warranty Payable 20,000
To accrue warranty expense
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Estimated Warranty Payable Example
• On January 28, a customer returned a defective product and was given a $300 refund.
Estimated Warranty Payable 300Cash 300
To record refund under warranty
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Estimated Vacation PayLiability Example
• Suppose Lloyd’s Sporting Store has a March payroll of $10,000 and vacation pay adds 4% (2 weeks of annual vacation divided by 50 workweeks each year).
• How much vacation pay should be accrued?
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Estimated Vacation PayLiability Example
March 31Vacation Pay Expense 400
Estimated Vacation Pay Liability 400To accrue vacation expense
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Contingent Liability
• Report a contingent liability in the notes to the financial statement if it is reasonably possible that a loss or expense will occur.
• The FASB says to record an actual liability if it is probable that the business has suffered a loss and its amount can be reasonably estimated.
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Contingent vs. Current Liability
• Suppose a hospital has lost a court case for uninsured malpractice.
• The hospital estimates that the liability will fall between $1.5 and $2.5 million.
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Contingent vs. Current Liability
• The hospital must record a loss and a liability of $1.5 million.
• The hospital must disclose in a note the possibility of an additional $1.0 million loss.
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Objective 3
Compute Payroll Amounts.
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Payroll
• Straight time is the base rate paid to employees for a set number of hours.
• Overtime is additional time worked by employees for which they received a higher rate (usually 1.5 times the straight time rate).
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Gross Pay and Net Pay
Gross Pay Deductions Net Pay
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FICA Tax
• The FICA tax has two components:
1 Old age, survivors’, and disability insurance (6.2% applied to the first $87,000 of employee earnings in a year)
2 Health insurance (1.45% applied to all employee earnings)
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Employer Payroll Taxes
• Social Security (FICA) tax
• State unemployment compensation tax
• Federal unemployment compensation tax
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Unemployment Compensation Taxes
• Employers paid 5.4% to the states and 0.8% to the federal government on the first $7,000 of each employee’s annual earnings.
• The state government uses the money to pay unemployment benefits to people who are out of work.
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Breakdown of Payroll Costs
Employer disburses $1,200
Employer cost of healthcare to insurance co.
$90
Employer payroll taxesto government
$110
Net pay toemployee
$750
Employee payrolltaxes to government
$230
Employeeunion dues
$20
Employee Gross Pay – $1,000
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Objective 4
Record Basic Payroll Transactions.
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Salary Expense
• Salary expense to the employer is the gross salary of all employees.
• Employees pay their own income and FICA taxes as well as union dues.
• The employer serves as a collecting agent and sends these amounts to the government and union.
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To Record Salaries Expense:
Salary ExpenseEmployee Income Tax PayableFICA Tax PayableEmployees Union Dues PayableSalary Payable to Employees (take-home
pay)
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To Record Salaries Expense:
Payroll Tax ExpenseFICA Tax PayableState Unemployment Tax PayableFederal Unemployment Tax
Payable
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To Record Salaries Expense:
Health Insurance Expense for Employees
Life Insurance Expense for EmployeesPension Expense
Employee Benefits Payable
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Objective 5
Use a Payroll System.
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Payroll System Components
– payroll record
– special payroll bank account
– payroll checks
– earnings record for each employee
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Payroll Record...
– is also referred to as the payroll journal.
• It lists payroll data for each employee.
• It serves as a check register.
• It provides information for recording payroll expenses and related withholdings.
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Payroll Bank Account
• When companies use a payroll bank account, the company draws a check for the net amount of salary payable to employees on its regular bank account.
• The company deposits this check in the special payroll bank account.
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Payroll Bank Account
• The company writes paychecks to employees out of the payroll account.
• When the paychecks clear the bank, the payroll account has a zero balance.
• Disbursing paychecks from a separate bank account isolates net pay for analysis and control.
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Recording Cash Disbursements
• When the employer pays the employees, the company debits Salary Payable to Employees and credits Cash.
• The liabilities to the government, unions, and other parties is also debited when cash is paid.
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Recording Cash Disbursements
• Assume the following journal entry was made at the end of an accounting period:
Salary Expense 180,000Employee Income Tax Payable 45,000FICA Tax Payable 11,160Employee Union Dues Payable 840Salary Payable to Employees 123,000
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Recording Cash Disbursements
• What is the journal entry when the employer pays these liabilities?
Employee Income Tax Payable 45,000FICA Tax Payable 11,160Employee Union Dues Payable 840Salary Payable to Employees 123,000
Cash 180,000
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Internal Control over Payrolls
– controls for efficiency
– controls for safeguarding payroll disbursements
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Controls for Efficiency
– making payroll disbursements from one payroll account in one month and from another the next
– following established policies for hiring and firing employees
– complying with government regulations– testing employees for their interest in the
job and their skills to perform the job
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Controls for SafeguardingPayroll Disbursements
• Large organizations must establish controls to ensure that payroll disbursements are made only to legitimate employees.
• Duties of hiring and firing should be separated from the duties of accounting for payroll and distributing paychecks.
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Controls for SafeguardingPayroll Disbursements
• Requiring an identification badge bearing an employee’s photograph also helps internal control.
• A formal time-keeping system helps ensure that employees have actually worked.
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Objective 6
Report Current Liabilities
on the Balance Sheet.
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Report Current Liabilities
• Companies report current liabilities on the balance sheet.
– Current liabilities of known amount (payroll)
– Current liabilities that must be estimated (warranties)
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Report Current Liabilities
• At the end of the year, companies report the amount of payroll liabilities owed to all parties.
• The liability at year end is the amount of the payroll expense that is still unpaid.
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Liabilities KnownWhen Recorded
– accounts payable
– short-term notes payable
– sales tax payable
– current portion of long-term debt
– accrued expenses payable
– unearned revenues
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Liabilities EstimatedWhen Recorded
– warranty payable
– income tax payable
– vacation pay liability
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End of Chapter 11