1
Click to edit Master title style 11
Current Liabilities
and Payroll
1
2
Click
to
edit
Master
title
style
After studying this chapter, you should
be able to:
1. Describe and illustrate current
liabilities related to accounts payable,
current portion of long-term debt, and
notes payable.
2. Determine employer liabilities for
payroll, including liabilities arising
from employee earnings and
deductions from earnings.
2
3
Click
to
edit
Master
title
style
After studying this chapter, you should
be able to:
3. Describe the payroll accounting
systems that use a payroll register,
employee earnings records, and a
general journal.
4. Journalize entries for employee
fringe benefits, including vacation
pay and pensions.
3
4
Click
to
edit
Master
title
style
After studying this chapter, you should
be able to:
5. Describe the accounting treatment for
contingent liabilities and journalize
entries for product warranties.
4
5
Click to edit Master title style
Objective 1
11-1
Describe and illustrate
current liabilities related to
accounts payable, current
portion of long-term debt,
and notes payable.
5
6
Click to edit Master title style
11-1
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
7
Accounts Payable
Click to edit Master title style
11-1
Accounts payable arise from
purchasing goods or services for use
in a company’s operations or for
purchasing merchandise for resale.
7
8
Current Portion of Long-Term Debt
Click to edit Master title style
11-1
Long-term liabilities are often paid
back in periodic payments, called
installments. Installments that are
due within the coming year must be
classified as a current liability.
8
9
Click to edit Master title style
11-1
The total amount of the
installments due after the
coming year is classified as a
long-term liability.
9
10
Short-Term Notes Payable
Click to edit Master title style
11-1
A firm issues a 90-day, 12% note for
Rp1,000,000 dated August 1, 2008 to PT
Murni Hati. for a Rp1,000,000 overdue
account.
Aug. 1 Accounts Payable—PT Murni Hati.
Notes Payable
Issued a 90-day, 12% note on
1 000 000
1 000 000
account.
10
10
11
Click to edit Master title style
11-1
On October 30, when the note matures, the
firm pays the Rp1,000,000 principal plus
Rp30,000 interest (Rp1,000,000 x 12% x
90/360).
Oct. 30 Notes Payable
Interest Expense
Cash
Paid principal and
Appears on
the on note.
interest
income statement as
an “Other Expense.”
1 000 000
30 000
1 030 000
11
11
12
Click to edit Master title style
11-1
On May 1, PT Budi Jaya.
(borrower) purchased
merchandise on account from PT
Citra Permai. (creditor),
Rp10,000,000, 2/10, n/30. The
merchandise cost PT Citra
Permai. Rp7,500,000.
12
13
Click to edit Master title style
PT Budi Jaya. (Borrower)
Description
11-1
Debit Credit
Mdse. Inventory 10,000,000
Accounts Payable
10,000,000
PT Citra Permai. (Creditor)
Description
Debit Credit
Accounts Receivable 10,000,000
Sales
10,000,000
Cost of Mdse. Sold 7,500,000
Mdse. Inventory
7,500,000
13
13
14
Click to edit Master title style
PT Budi Jaya (Borrower)
Description
Debit
11-1
Credit
Accounts Payable 10,000,000
Notes Payable
10,000,000
PT Citra Permai (Creditor)
Debit Credit
On May 3, PT Budi Jaya Description
issued a 60-day, 12%
note for Rp10,000,000 to Notes Receivable 10,000,000
Accounts Receivable
10,000,000
PT Citra Permai. on
account.
14
14
15
11-1
Click
Master title style
PT Budito
Jayaedit
(Borrower)
Description
Debit
Credit
Notes Payable 10,000,000
Interest Expense 200,000
Cash
10,200,000
PT Citra Permai (Creditor)
On July 30, PT Budi
Jaya. paid PT Citra
Permai. the amount due
on the note of May 31.
Interest: Rp10,000,000
x 12% x 60/360.
Description
Debit
Credit
Cash
10,200,000
Interest Revenue
200,000
Notes Receivable
10,000,000
15
15
16
Click to edit Master title style
11-1
On September 19, a firm borrows
Rp4,000,000 from Mandiri Bank by giving
the bank a 90-day, 15% note.
Sept. 19 Cash
Notes Payable
Issued a 90-day, 15% note
to the bank.
4 000 000
4 000 000
16
16
17
11-1
Click to edit Master title style
On the due date of the note (December 18), the
borrower owes RP4,000,000 plus interest of
Rp150,000 (Rp4,000,000 x 15% x 90/360).
Dec. 18 Notes Payable
Interest Expense
Cash
Paid principal and interest
due on note.
4 000 000
150 000
4 150 000
17
17
18
Discounting a Note
Click to edit Master title style
11-1
The interest set by the creditor when
a note does not specify the rate is
called the discount. The rate used in
computing the discount is called the
discount rate. The borrower is given
the remainder (face – discount),
called the proceeds.
18
19
Click to edit Master title style
11-1
On August 10, PT Cika issues a Rp20,000,000,
90-day note to PT Koko in exchange for
inventory. Rock discounts the note at 15%.
Aug. 10 Merchandise Inventory
Interest Expense
Notes Payable
Issued a 90-day note to Rock
Co., discounted at 15%.
19 250 000
750 000
20 000 000
19
19
20
Click to edit Master title style
11-1
On August 10, PT Cika issues a Rp20,000,000, 90day note to PT Koko in exchange for inventory. PT
Koko discounts the note at 15%.
Aug. 10 Merchandise Inventory
19 250 000
Interest Expense
750 000
Notes Payable
Proceeds20 000 000
Discount:
Issued a 90-day note to PT
Rp20,000,000 x .15
Koko, discounted at 15%.
x 90/360
Discount rate
20
20
21
Click to edit Master title style
11-1
On November 8 the note is paid in full.
Nov. 8 Notes Payable
Cash
Paid note due.
20 000 000
20 000 000
21
21
22
11-1
Click to edit Master title style
Example Exercise 11-1
On July 1, Bella Salon Company issued a 60-day note
with a face amount of $60,000 to Jamilah Hair Products
Company. for merchandise inventory.
a. Determine the proceeds of the note assuming the
note carries an interest rate of 6%.
b. Determine the proceeds of the note assuming the
note is discounted at 6%.
22
22
23
11-1
Click to edit Master title style
Follow My Example 11-1
a. Rp60,000,000
b. Rp59,400,000 [Rp60,000,000 –
(Rp60,000,000 x 6% x 60/360)]
For Practice: PE 11-1A, PE 11-1B
23
24
Click to edit Master title style
Objective 2
11-2
Determine employer
liabilities for payroll,
including liabilities arising
from employee earnings and
deductions from earnings.
24
25
Click to edit Master title style
11-2
Payroll refers to the amount paid to employees
for the services they provide during a period.
It is usually significant for several reasons.
1) Employees are sensitive to payroll errors and
irregularities.
2) The payroll is subject to various federal and
state regulations.
3) The payroll and related payroll taxes have a
significant effect on the net income of most
businesses.
25
26
Click to edit Master title style
11-2
Wages usually refers to
payment for manual labor, both
skilled and unskilled. The rate
of wages is normally stated on
an hourly or weekly basis.
26
27
Click to edit Master title style
11-2
Salary usually refers to
payment for managerial,
administrative, or similar
services, normally expressed
in terms of a month or a year.
27
28
Click to edit Master title style
11-2
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
29
Faisal Illustration
Click to edit Master title style
11-2
Akhmad Faisal is employed by PT Swabahagia at the
rate of Rp30,000 per hour, plus 2 time the normal
hourly rate for the first hour overtime and 1.5 time the
normal hourly rate for the next hours. For the week
ended December 27, Faisal worked 42 hours.
Earnings at base rate (40 x Rp30,000)
Earnings at OT rate-first hour (1.5 x Rp30,000)
Earnings at OT rate-next hours (2xRp30,000)
Total earnings
Rp1,200,000
Rp45,000
Rp60,000
Rp1,305,000
29
29
30
Click to from
edit Master
title
style
Deduction
Employee
Earnings
• Old Age Security (Jaminan Hari Tua/JHT)
– A series of periodic money payment as anticipation
to an employee who retires from employment
because of age, disability of the completion of an
agreed span of service.
• Health Maintenance Security (Jaminan
Kesehatan)
– It is optional under Jamsostek program
• Income Taxes
30
31
Wage Bracket Withholding
Table
Click to edit Master title style
11-2
McGrath
wage
bracket
Source: Income Tax Law No. 17/2000
31
31
32
New
Click
Wage
to edit
TaxMaster
Brackettitle style
People earning:
• Up to Rp50 million: 5%
• Between Rp50 million and Rp250 million: 15%
• Between Rp250 million and Rp500 million: 25%
• More than Rp500 million: 30%
With PTKP: Rp15.86 million and the treshold for
married tax payers: Rp1.32 million
Source: The 2008 amendment on Income Tax Law
32
33
Tommy Gunawan Example
Click to edit Master title style
11-2
Tomy Gunawan (married with 3 dependents known as
m/3) working for PT Banyugeni earns monthly salary
with the amount of Rp2,000,000. PT Banyugeni
participates on the Jamsostek and pays the monthly
insurance premium of occupational accident security
and death benefit security with the amount of Rp4,800
(0.24% of monthly salary) and 6,000 (0.3% of monthly
salary).
33
32
34
Tommy Gunawan Example
(continued)
Click to edit Master title style
The monthly contributions for JHT is borne by PT
Banyugeni with the amount of Rp74,000 (3.7% from
monthly salary) and Tomy himself pays for the JHT
with the amount of Rp40,000 (2% from monthly
salary).
Furthermore, the company participates on the pension
program for its employees. The company pays the
monthly contributions for pension to the approved
pension funds with the amount of Rp60,000 and Tomy
himself pays the contributions with the amount of
Rp25,000.
34
35
The Calculation of Article 21 Income
Tax is:
Click to edit Master title style
• Copy dari halaman 487, “the calculation of
Article 21 Income Tax”
35
36
Computing Tommy’s Net Pay
Click to edit Master title style
11-2
Tommy’s net pay:
Gross earnings for the month
Rp2,000,000
Deductions:
Contribution for old age security (Slide 35) Rp 40,000
Contribution for pension (Slide 35)
Rp 25,000
Income tax (Slide 35)
Rp20,550
Cooperative Fund
Rp25,000
Total deductions
Rp110,550
Net pay
Rp1,889,450
36
37
37
Employer’s Payroll Liabilities
Click to edit Master title style
11-2
Under Jamsostek Program Employers are
required to contribute to the old age
security/JHT, Occupational Accident Security
and Death Benefit Security for each
employee. The employer must contribute
based on the Jamsostek’s predetermined rate.
37
38
Occupational Accident Security/JKK
Click to edit Master title style
11-2
Occupational accidents that injure employees are
the responsibility of the employer and are covered
by occupational accident security. Such benefit
provides payments for work-related accident.
There are five classifications by industry with
contributions for accident security ranging from
0.24% to 1.74% of wage depending on the
classification of the employer’s type of business.
38
39
Death Benefit Security/JK
Click to edit Master title style
11-2
Death benefit is a payment that may be
made in a variety of circumstances
because of the death of the employees. The
employers are required to contribute 0.3%
from employees’ income for this benefit
contribution.
39
40
Click to edit Master title style
11-2
40
43
41
Click to edit Master title style
Objective 3
11-3
Describe payroll accounting
systems that use a payroll
register, employee earnings
records, and a general journal.
41
42
Payroll Register
Click to edit Master title style
11-3
The payroll register is a multicolumn
report used for summarizing the data for
each payroll period. The last two
columns of the payroll register are used
to accumulate the total wages or salaries
to be debited to various expense
accounts. The process is usually called
payroll distribution.
42
43
Payroll Register
Click to edit Master title style
(Continued)
11-3
43
46
44
(Concluded)
Click to edit Master title style
11-3
44
47
45
Recording Employees’ Earnings
Click to edit Master title style
Dec. 27 Sales Salaries Expense
11-3
6,805,000
Office Salaries Expense
6,650,000
Old Age Security Contribution Payable
261,000
Pension Contribution Payable
163,125
Income Tax Article 21 Payable
137,990
Cooperative Fund Payable
250,000
Account Receivable – Samsuar Sinaga (emp.)
100,000
Salaries Payable
12,542,885
Payroll for week ended
December 27.
45
48
46
11-3
Click to edit Master title style
Example Exercise 11-4
The payroll register of Nikko Engineering
Services indicates Rp900,000 of old age
security withheld and Rp225,000 of Medical
maintenance security contribution withheld on
total salaries of Rp15,000,000 for the period.
Income tax article 21 for the period totaled
Rp2,925,000.
Provide the journal entry for the period’s
payroll.
46
49
47
11-3
Click to edit Master title style
Follow My Example 11-4
Salaries Expense
15,000,000
Old Age Security Cont. Payable
900,000
Medical Maintenance Security Payable
225,000
Income Tax Article 21 Payable
2,925,000
Salaries Payable
10,950,000
For Practice: PE 11-4A, PE 11-4B
50
47
48
Recording and Paying Payroll Taxes
Click to edit Master title style
11-3
To illustrate, assume that PT Eliyana owes its
employees Rp260,000,000 of wages on December
31. Also, assume that PT Eliyana participates in
Jamsostek program. The following portions of the
Rp260,000,000 of wages are subject to employee’s
payroll liabilities on December 31:
Earnings Subject to
Payroll Taxes
Old Age Security Cont (3.7%)
Rp11,024,000
Occupational acc. Security cont (0.24%)
Rp624,000
Death Benefit Security contribution (0.3%) Rp780,000
48
51
49
Click to edit Master title style
11-3
PT Eliyana’s payroll entry on December 31 is recorded as
follows:
Dec. 31 Payroll Tax Expense
11 024 000
Old Age Security Contribution Payable
9 620 000
Occupational accident security Payable
624 000
Death Benefit Security Payable
780 000
Payroll taxes for week ended
December 27.
49
53
50
Click to edit Master title style
11-3
A detailed payroll record is maintained for
each employee. This record is called an
employee’s earnings record.
At the end of each pay period, payroll
checks are prepared. Each check includes
a detachable statement showing the details
of how the net pay was computed.
50
51
Employee’s
Earnings Record
Click to edit Master title style
11-3
(Continued)
51
57
52
Click to edit Master title style
(Concluded)
11-3
(Concluded)
52
58
53
Click to edit Master title style
11-3
53
60
54
Click to edit Master title style
Objective 4
11-4
Journalize entries for
employee fringe benefits,
including vacation pay
and pensions.
54
55
Click to edit Master title style
11-4
Many companies provide their
employees a variety of benefits in
addition to salary and wages
earned. Such fringe benefits may
take many forms, including
vacations, medical, and
postretirement benefits, such as a
pension plan.
55
56
Vacation Pay
Click to edit Master title style
11-4
Most employers grant vacation rights, sometimes
called compensated absences, to their
employees. The estimated vacation pay for the
payroll period ending May 5 is Rp2,000,000.
May 5 Vacation Pay Expense
Vacation Pay Payable
Vacation pay for week
ended May 5.
2 000 000
2 000 000
56
64
57
Pensions
Click to edit Master title style
11-4
A pension represents a cash payment
to retired employees. Rights to
pension payments are earned by
employees during their working
years, based on the pension plan
established by the employer.
57
58
Click to edit Master title style
11-4
In a defined contribution
plan, a fixed amount of
money is invested on the
employee’s behalf during the
employee’s working years.
58
59
Click to edit Master title style
11-4
The pension plan of Aroma
Perfumes Company requires an
employer contribution of 10% of
employee monthly salaries.
December salaries totaled
Rp500,000,000, so Rp50,000,000
was sent to the employees’ plan
administrator.
59
60
Defined Contribution Plan
Click to edit Master title style
11-4
The entry to record the payment to the plan
administrator is—
Dec. 31 Pension Expense
Cash
Contributed 10% of
monthly salaries to
pension plan.
50 000 000
50 000 000
60
68
61
Pensions
Click to edit Master title style
11-4
In a defined benefit plan,
employers promise employees a
fixed annual pension benefit at
retirement, based on years of
service and compensation levels.
61
62
11-4
Defined Benefit Plan
Click to edit Master title style
Assume that PT Hasil Jaya requires an annual
pension cost of Rp80,000,000 based on an estimate
of the future benefit obligation. PT Hasil Jaya pays
Rp60,000,000 into the pension fund.
Dec. 31 Pension Expense
Cash
Unfunded Pension Liability
To record annual
pension cost and
contribution to pension
plan.
80 000 000
60 000 000
20 000 000
62
70
63
Postretirement Benefits Other
Than Pensions
Click to edit Master title style
11-4
Employees may earns rights to
other postretirement benefits,
such as dental care, eye care,
medical care, life insurance,
tuition assistance, tax services,
and legal services.
63
64
11-4
Click
to
edit
Master
title
style
Example Exercise 11-6
Manunggal Service provides their employees
vacation benefits and a defined contribution
pension plan. Employees earned vacation pay of
Rp44,000,000 for the period. The pension plan
requires a contribution to the plan administrator
equal to 8% of employee salaries. Salaries were
Rp450,000,000 during the period.
Provide the journal entry for (a) the vacation pay
and (b) pension benefit.
64
72
65
11-4
Click to edit Master title style
Follow My Example 11-6
a. Vacation Pay Expense
44,000,000
Vacation Pay Payable
44,000,000
Vacation pay accrued for
the period.
b. Pension Expense
36,000,000
Cash
36,000,000
Pension contribution, 8% of
Rp450,000,000 salary.
For Practice: PE 11-6A, PE 11-6B
73
65
66
Click to edit Master title style
Objective 5
11-5
Describe the accounting
treatment for contingent
liabilities and journalize
entries for product
warranties.
66
67
Click to edit Master title style
11-5
Some past transactions will result
in liabilities if certain events
occur in the future. These
potential obligations are called
contingent liabilities.
67
68
11-5
Contingent Liabilities
Click to edit Master title style
During June, a company sells a product for
Rp60,000,000 on which there is a 36-month warranty.
Past experience indicates that the average cost to repair
defects is 5% of the sales price over the warranty price.
June 30 Product Warranty Expense
Product Warranty Payable
3 000 000
3 000 000
Warranty expenses projected
for June, 5% of Rp60,000,000.
68
76
69
Click to edit Master title style
11-5
If a customer required a Rp200,000 part
replacement on August 16, the entry would be:
Aug. 16 Product Warranty Payable
Supplies
200 000
200 000
Replaced defective part under
warranty.
69
77
70
10
11-5
Accounting Treatment of
Contingent Liabilities
Click to edit Master title style
Likelihood of
Occurring
Probable
Contingency
Possible
Accounting
Treatment
Measurement
Estimable
Record and
Disclose
Liability
Not
Estimable
Disclose
Liability
Disclose
Liability
70
78
71
11-5
Click
to
edit
Master
title
style
Example Exercise 11-7
PT Ratu Mas sold Rp140,000,000 of kitchen
appliances during August under a 6 month
warranty. The cost to repair defects under the
warranty is estimated at 6% of the sales price. On
September 11, a customer required a Rp200,000
part replacement, plus Rp90,000 labor under the
warranty.
Provide the journal entries for (a) the estimated
warranty expense on August 31 and (b) the
September 11 warranty work.
71
79
72
11-5
Click to edit Master title style
Follow My Example 11-7
a. Product Warranty Expense
8,400,000
Product Warranty Payable
8,400,000
To record warranty expense
for August, 6% x Rp140,000,000.
b. Product Warranty Payable
290,000
Supplies
200,000
Wages Payable
90,000
Replaced defective part under
warranty.
For Practice: PE 11-7A, PE 11-7B
80
72
73
Quick Ratio
Click
to
edit
Master
title
style
In ‘000 Rp
PT Nirina
Quick assets:
Cash
Accounts receivable (net)
Total
Current liabilities
11-5
PT Haryadi
Rp147,000 Rp120,000
84,000
472,000
Rp231,000 Rp592,000
Rp220,000 Rp740,000
Quick assets
Quick Ratio =
Current liabilities
The quick ratio or acid-test ratio can be used
to evaluate a firm’s ability to pay its current
liabilities within a short period of time.
73
81
74
Quick Ratio
Click
to
edit
Master
title
style
In ‘000 Rp
11-5
PT Nirina PT Haryadi
Quick assets:
Cash
Accounts receivable (net)
Total
Current liabilities
Quick Ratio =
PT Nirina =
Rp147,000 Rp120,000
84,000
472,000
Rp231,000 Rp592,000
Rp220,000 Rp740,000
Quick assets
Current liabilities
Rp231,000
= 1.05
Rp220,000
74
82
75
Click
to
edit
Master
title
style
In ‘000 Rp
11-5
PT Nirina PT Haryadi
Quick assets:
Cash
Accounts receivable (net)
Total
Current liabilities
Quick Ratio =
PT Haryadi =
Rp147,000 Rp120,000
84,000
472,000
Rp231,000 Rp592,000
Rp220,000 Rp740,000
Quick assets
Current liabilities
Rp592,000
= 0.80
Rp740,000
75
83
76
Interpretation
Click to edit Master title style
11-5
PT Nirina is in a better quick ratio
position than PT Haryadi. By
having a quick ratio in excess of 1,
PT Nirina has quick assets sufficient
to cover the company’s current
liabilities. This is not true for PT
Haryadi
76