Current Liabilities and Payroll Accounting Chapter 11 Power

Current Liabilities and Payroll Accounting Chapter 11 Power. Point Editor: Beth Kane, MBA, CPA Wild, Shaw, and Chiappetta Fundamental Accounting Principles 22 nd Edition Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

11 -C 1: Defining Liabilities 2

11 - 3 Defining Liabilities C 1 3

11 - 4 Classifying Liabilities C 1 Current Liabilities Long-Term Liabilities Expected to be paid within one year or the company’s operating cycle, whichever is longer. Not expected to be paid within one year or the company’s operating cycle, whichever is longer. 4

11 - 5 Current and Long-Term Liabilities Current Liabilities as a Percent of Total Liabilities C 1 5

11 - 6 Uncertainty of Liabilities Uncertainty in Whom to Pay Uncertainty in When to Pay Uncertainty in How Much to Pay C 1 6

11 -C 2: Known Liabilities 7

11 - 8 Known Liabilities Accounts Payable Sales Taxes Payable Unearned Revenues Short-Term Notes Payable Payroll Liabilities C 2 Multi-Period Known Liabilities 8

11 - 9 Sales Tax Payable On August 31, Home Depot sold materials for $6, 000 that are subject to a 5% sales tax. $6, 000 × 5% = $300 C 2 9

11 - 10 Unearned Revenues On June 30, Rihanna sells $5, 000 in tickets for eight concerts. On Oct. 31, Rihanna performs a concert. C 2 $5, 000 / 8 = $625, 000 10

11 - 11 Multi-Period Known Liabilities Includes Unearned Revenues and Notes Payable Unearned Revenues from magazine subscriptions often cover more than one accounting period. A portion of the earned revenue is recognized each period and the Unearned Revenue account is reduced. C 2 Notes Payable often extend over more than one accounting period. A threeyear note would be classified as a current liability for one year and a long-term liability for two years. 11

11 -P 1: Short-Term Notes Payable 12

11 - 13 Short-Term Notes Payable A written promise to pay a specified amount on a definite future date within one year or the company’s operating cycle, whichever is longer. P 1 13

11 - 14 Note Given to Extend Credit Period On August 23, Brady Company asks Mc. Graw to accept $100 cash and a 60 -day, 12% $500 note to replace its existing $600 Account Payable. P 1 14

11 - 15 Note Given to Extend Credit Period On October 22, Brady pays the note plus interest to Mc. Graw. Interest expense = $500 × 12% × (60 ÷ 360) = $10 P 1 15

11 - 16 Note Given To Borrow From Bank P 1 16

11 - 17 Note Given To Borrow From Bank On Sept. 30, a company borrows $2, 000 from a bank at 12% interest for 60 days. On Nov. 29, the company repays the principal of the note plus interest. P 1 Interest expense = $2, 000 × 12% × (60 ÷ 360) = $40 17

11 - 18 End-of-Period Adjustment to Notes Note Date End of Period Maturity Date An adjusting entry is required to record Interest Expense incurred to date. P 1 18

11 - 19 End-of-Period Adjustment to Notes On Dec. 16, 2015, a company borrows $2, 000 from a bank at 12% interest for 60 days. An adjusting entry is needed on December 31. On Feb. 14, 2014, the company repays this principal and interest on the note. P 1 19

NEED-TO-KNOW Part 1. A retailer sells merchandise for $500 cash on June 30 (cost of merchandise is $300). The sales tax law requires the retailer to collect 7% sales tax on every dollar of merchandise sold. Record the entry for the $500 sale and its applicable sales tax. Also record the entry that shows the remittance of the 7% tax on this sale to the state government on July 15. General Journal Jun. 30 Jul. 15 P 1 Cash Sales taxes payable Cost of goods sold Merchandise inventory Sales taxes payable Cash Debit 535 Credit 500 35 ($500 x. 07) 300 35 35 20

NEED-TO-KNOW Part 2. A ticket agency receives $40, 000 cash in advance ticket sales for a four-date tour of Haim. Record the advance ticket sales on April 30. Record the revenue earned for the first concert date of May 15, assuming it represents one-fourth of the advance ticket sales. General Journal Apr. 30 May 15 P 1 Cash Unearned ticket revenue Earned ticket revenue Debit 40, 000 Credit 40, 000 $40, 000 / 4 concerts 10, 000 21

NEED-TO-KNOW Part 3. On November 25 of the current year, a company borrows $8, 000 cash by signing a 90 -day, 5% note payable with a face value of $8, 000. (a) Compute the accrued interest payable on December 31 of the current year, (b) prepare the journal entry to record the accrued interest expense at December 31 of the current year, and (c) prepare the journal entry to record payment of the note at maturity. General Journal Nov. 25 36 days Dec. 31 54 days Feb. 23 P 1 Cash Notes payable Debit 8, 000 Credit 8, 000 Interest expense Interest payable ($8, 000 x. 05 x 36/360) Interest expense Interest payable Notes payable Cash ($8, 000 x. 05 x 54/360) ($8, 000 x. 05 x 36/360) 40 40 60 40 8, 000 8, 100 22

11 -P 2: Payroll Liabilities 23

11 - 24 Payroll Liabilities Employers incur expenses and liabilities from having employees. P 2 24

11 - 25 Employee Payroll Deductions P 2 25

11 - 26 Employee FICA Taxes Federal Insurance Contributions Act (FICA) FICA Taxes — Soc. Sec. 2014: 6. 2% of the first $117, 000 earned in the year. FICA Taxes — Medicare 2014: 1. 45% of all wages earned in the year. Employers must pay withheld taxes to the Internal Revenue Service (IRS). P 2 26

11 - 27 Employee Income Tax Federal Income Tax State and Local Income Taxes Amounts withheld depend on the employee’s earnings, tax rates, and number of withholding allowances. Employers must pay the taxes withheld from employees’ gross pay to the appropriate government agency. P 2 27

11 - 28 Employee Voluntary Deductions Amounts withheld depend on the employee’s request. Examples include union dues, savings accounts, pension contributions, insurance premiums, and charities. Employers owe voluntary amounts withheld from employees’ gross pay to the designated agency. P 2 28

11 - 29 Recording Employee Payroll Deductions An entry to record payroll expenses and deductions for an employee might look like this. *Amounts taken from employee’s employment records P 2 29

11 -P 3: Payroll Expenses 30

11 - 31 Employer Payroll Taxes FICA Taxes Medicare Taxes Federal and State Unemployment Taxes Employers pay amounts equal to that withheld from the employee’s gross pay. P 3 31

11 - 32 Federal and State Unemployment Taxes Federal Unemployment Tax (FUTA) State Unemployment Tax (SUTA) P 3 2014: 6. 2% on the first $7, 000 of wages paid to each employee. A credit up to 5. 4% is given for SUTA paid, therefore the net rate is 0. 6%. 2014: Basic rate of 5. 4% on the first $7, 000 of wages paid to each employee. Merit ratings may lower SUTA rates. 32

11 - 33 Recording Employer Payroll Taxes An entry to record the employer payroll taxes for January might look like this. SUTA: $2, 000 x 5. 4% = $108 FUTA: $2, 000 x (0. 6) = 12 P 3 FICA amounts are the same as that withheld from the employee’s gross pay. 33

NEED-TO-KNOW A company’s first weekly pay period of the year ends on January 8. On that date, the column totals in its payroll register show that sales employees earned $30, 000, and office employees earned $20, 000 in salaries. The employees are to have withheld from their salaries FICA Social Security taxes at the rate of 6. 2%, FICA Medicare taxes at the rate of 1. 45%, $9, 000 of federal income taxes, $2, 000 of medical insurance deductions, and $1, 000 of pension contributions. No employee earned more than $7, 000 in the first pay period. Part 1) Compute FICA Social Security taxes payable and FICA Medicare taxes payable. Prepare the journal entry to record the company’s January 8 (employee) payroll expenses and liabilities. Jan. 8 P 2/P 3 General Journal Sales salaries expense Office salaries expense FICA - Social security taxes payable ($50, 000 x. 062) FICA - Medicare taxes payable ($50, 000 x. 0145) Employee federal income taxes payable Employee medical insurance payable Employee pensions payable Salaries payable Debit 30, 000 20, 000 Credit 3, 100 725 9, 000 2, 000 1, 000 34, 175 34

NEED-TO-KNOW Part 2) Prepare the journal entry to record the company’s (employer) payroll taxes resulting from the January 8 payroll. Its merit rating reduces its state unemployment tax rate to 3. 4% of the first $7, 000 paid to each employee. The federal unemployment tax rate is 0. 6%. Jan. 8 P 2/P 3 General Journal Sales salaries expense Office salaries expense FICA - Social security taxes payable ($50, 000 x. 062) FICA - Medicare taxes payable ($50, 000 x. 0145) Employee federal income taxes payable Employee medical insurance payable Employee pensions payable Salaries payable Debit 30, 000 20, 000 Payroll taxes expense 5, 825 FICA - Social security taxes payable ($50, 000 x. 062) FICA - Medicare taxes payable ($50, 000 x. 0145) SUTA - State unemployment taxes payable ($50, 000 x. 034) FUTA - Federal unemployment taxes payable ($50, 000 x. 006) Credit 3, 100 725 9, 000 2, 000 1, 000 34, 175 3, 100 725 1, 700 35

11 -P 4: Estimated Liabilities 36

11 - 37 Estimated Liabilities An estimated liability is a known obligation of an uncertain amount, but one that can be reasonably estimated. P 4 37

11 - 38 Health and Pension Benefits Employer expenses for pensions or medical, dental, life, and disability insurance Assume an employer agrees to pay an amount for medical insurance equal to $8, 000, and contribute an additional 10% of the employees’ $120, 000 gross salary to a retirement program. P 4 38

11 - 39 Vacation Benefits Assume an employee earns $20, 800 per year and earns two weeks of paid vacation each year. $20, 800 ÷ 50 weeks = $416 $20, 800 ÷ 52 weeks = $400 Weekly vacation benefit $ 16 P 4 39

11 - 40 Bonus Plans Assume that a bonus will be paid to employees equal to 5% of the company’s annual net income of $210, 000. B =. 05 ($210, 000 - B) B = $10, 500 - 0. 05 B 1. 05 B = $10, 500 / 1. 05 *B = $10, 000 P 4 40

11 - 41 Warranty Liabilities Seller’s obligation to replace or correct a product (or service) that fails to perform as expected within a specified period. To comply with the full disclosure and matching principles, the seller reports expected warranty expense in the period when revenue from the sale is reported. P 4 41

11 - 42 Warranty Liabilities On Dec. 1, 2015, a dealer sells a car for $16, 000 with a maximum one-year or 12, 000 mile warranty covering parts. Past experience indicates warranty expenses average 4% of a car’s selling price. On Jan. 9, 2016, the customer returns the car for repairs. The dealer replaces parts costing $200. P 4 42

11 -C 3: Contingent Liabilities 43

11 - 44 Accounting for Contingent Liabilities C 3 44

11 - 45 Reasonably Possible Contingent Liabilities Potential Legal Claims – A potential claim is recorded if the amount can be reasonably estimated and payment for damages is probable. Debt Guarantees – The guarantor usually discloses the guarantee in its financial statement notes. If it is probable that the debtor will default, the guarantor should record and report the guarantee as a liability. C 3 45

NEED-TO-KNOW A company’s salaried employees earn two weeks vacation per year. It pays $208, 000 in total employee salaries for 52 weeks but its employees work only 50 weeks. This means its total weekly expense is $4, 160 ($208, 000 / 50 weeks) instead of the $4, 000 cash paid weekly to the employees ($208, 000 / 52 weeks). Record the company’s regular weekly vacation benefits expense. Weekly General Journal Vacation benefits expense ($4, 160 - $4, 000) Vacation benefits payable Debit 160 Credit 160 Expense recognition principle Expense is recognized in the same period as the revenue it helped generate. P 4/C 3 46

NEED-TO-KNOW For the current year ended December 31, a company has implemented an employee bonus program equal to 5% of its net income, which employees will share equally. Its net income (pre-bonus) is expected to be $840, 000, and bonus expense is deducted in computing net income. (a) Compute the bonus payable to the employees at year-end using the method described in the chapter and round to the nearest dollar; then, prepare the journal entry at December 31 of the current year to record the bonus due. (b) Prepare the journal entry at January 20 of the following year to record payment of that bonus to employees. B =. 05($840, 000 - B) B = $42, 000 -. 05 B 1. 05 B = $42, 000 B = $40, 000 Dec. 31 Jan. 20 General Journal Employee bonus expense Bonus payable Debit 40, 000 Bonus payable Cash 40, 000 Credit 40, 000 Expense recognition principle Expense is recognized in the same period as the revenue it helped generate. P 4/C 3 47

NEED-TO-KNOW On June 11 of the current year, a retailer sells a trimmer for $400 with a one-year warranty that covers parts. Warranty expense is estimated at 5% of sales. On March 24 of the next year, the trimmer is brought in for repairs covered under the warranty requiring $15 in materials taken from the Repair Parts Inventory. Prepare the (a) June 11 entry to record the trimmer sale, and (b) March 24 entry to record warranty repairs. General Journal Jun. 11 Mar. 24 Cash Sales Warranty expense Estimated warranty liability Debit 400 Credit 400 ($400 x. 05) Estimated warranty liability Repair parts inventory 20 20 15 15 Expense recognition principle Expense is recognized in the same period as the revenue it helped generate. P 4/C 3 48

NEED-TO-KNOW The following legal claims exist for a company. Identify the accounting treatment for each claim as either (i) a liability that is recorded or (ii) an item described in notes to its financial statements. If an item is to be recorded, prepare the entry. a. The company (defendant) estimates that a pending lawsuit could result in damages of $500, 000; it is reasonably possible that the plaintiff will win the case. (ii) Is reasonably estimated but not a probable loss. b. The company faces a probable loss on a pending lawsuit; the amount is not reasonably estimable. (ii) Probable loss but cannot be reasonably estimated. c. The company estimates environmental damages in a pending case at $900, 000 with a high probability of losing the case. (i) General Journal Environmental contingent expense Environmental contingent liability Debit 900, 000 Credit 900, 000 For a contingent liability to be recorded, the loss must be both probable and reasonably estimable. P 4/C 3 49

11 - 50 Global View Characteristics of Liabilities Accounting definitions and characteristics of current liabilities are similar for U. S. GAAP and IFRS. Sometimes IFRS will use the word “provision” to refer to a “liability. ” Known (Determinable) Liabilities Both U. S. GAAP and IFRS require companies to treat known (or determinable) liabilities in a similar manner. Examples would be accounts payable, unearned revenues, and payroll liabilities. Estimated Liabilities Regarding estimated liabilities, when a known current obligation that involves an uncertain amount, but one that can be reasonably estimated, both U. S. GAAP and IFRS require similar treatment. 50

11 -A 1: Times Interest Earned Ratio 51

11 - 52 Times Interest Earned Times interest = earned Income before interest and income taxes Interest expense If income before interest and taxes varies greatly from year to year, fixed interest charges can increase the risk that an owner will not earn a positive return and be unable to pay interest charges. A 1 52

11 -P 5: Payroll Reports, Records, and Procedures 53

11 - 54 Appendix 11 A: Payroll Reports, Records, and Procedures Payroll Reports IRS Form 941 IRS Form 940 Payroll Records Payroll Register Payroll Checks Employee Earnings Report W-2 Payroll Procedures Withholding Tables P 5 W-4 54

11 - 55 Appendix 11 B: Corporate Income Taxes Corporations must pay taxes on income. Deferred Income Tax Liabilities 55

11 - 56 End of Chapter 11 56