Current Liabilities and Payroll
Chapter 11
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Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
Learning Objectives
1. Describe and illustrate current liabilities
related to accounts payable, current portion
of long-term debt, and notes payable.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Current Liabilities
 When a company or a bank advances
credit, it is making a loan.
 The company or bank is called a creditor
(or lender).
 The individuals or companies receiving the
loans are called debtors (or borrowers).
 Current Liabilities are debts that will be paid
out of current assets and are due within one
year.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Accounts Payable
 Accounts payable transactions arise from
purchasing goods or services for use in a
company’s operations or from purchasing
merchandise for resale.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Current Portion of Long-Term Debt
 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.
 The installments due after the coming year
are classified as a long-term liability.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Short-Term Notes Payable
Note may be issued to purchase merchandise or other
assets. Note may also be issued to creditor to satisfy an
account payable.
Example: Nature’s Sunshine Company issues a 90-day,
12% note for $1,000, dated August 1, 2011 to Murray
Co. for a $1,000 overdue account.
The entry to record the issuance of the note:
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LO 1
Short-Term Notes Payable
When the note matures, the entry to record the
payment of $1,000 plus $30 interest ($1,000 x 12%
x 90/360) is as follows:
Interest Expense appears
on the income statement
as an “Other Expense.”
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Short-Term Notes Payable
The following illustrations show how same transactions are
recorded by the debtor (borrower) and creditor (lender)
Bowden Co. (Borrower)
On May 1, Bowden Co.
(borrower) purchased
merchandise on account from
Coker Co. (creditor), $10,000,
2/10, n/30. The merchandise
cost Coker Co. $7,500.
Description
Debit Credit
Mdse. Inventory
10,000
Accounts Payable
10,000
Coker Co. (Creditor)
Description
Debit Credit
Accounts Receivable 10,000
Sales
10,000
Cost of Mdse. Sold
Mdse. Inventory
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7,500
7,500
LO 1
Short-Term Notes Payable
Bowden Co. (Borrower)
Description
Accounts Payable
Notes Payable
Debit
Credit
10,000
10,000
Coker Co. (Creditor)
On May 31, Bowden
Co. issued a 60-day,
12% note for $10,000 to
Coker Co. on account.
Description
Debit Credit
Notes Receivable
10,000
Accounts Receivable
10,000
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LO 1
Short-Term Notes Payable
Bowden Co. (Borrower)
On July 30, Bowden
Co. paid Coker Co. the
amount due on the
note of May 31, the
face amount of $10,000
plus interest of $200
($10,000 x 12% x
60/360).
Description
Debit
Notes Payable
Interest Expense
Cash
10,000
200
Credit
10,200
Coker Co. (Creditor)
Description
Cash
Interest Revenue
Notes Receivable
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Debit
Credit
10,200
200
10,000
LO 1
Short-Term Notes Payable
Example 2: On September 19, Iceburg Company
borrowed cash from First National Bank by issuing a
$4,000, 90-day, 15% note to the bank.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Short-Term Notes Payable
On December 18, Iceburg Company paid First
National Bank $4,000 plus interest of $150 ($4,000
x 15% x 90/360).
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Short-Term Notes Payable
 A discounted note has the following
characteristics:
1. The interest rate on the note is called the
discount rate.
2. The amount of interest on the note,
called the discount, is computed by
multiplying the discount rate times the
face amount of the note.
(continued)
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LO 1
Short-Term Notes Payable
3. The debtor (borrower) receives the face
amount of the note less the discount,
called the proceeds.
4. The debtor must repay the face amount
of the note on the due date.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Short-Term Notes Payable
On August 10, Cary Company issues a $20,000, 90day discounted note to Western National Bank. The
discount rate is 15%, and the amount of the discount
is $750 ($20,000 x 15% x 90/360).
proceeds
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LO 1
Short-Term Notes Payable
The entry when Cary Company pays the discounted
note on November 8 is as follows:
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Learning Objectives
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.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Payroll and Payroll Taxes
 In accounting, payroll refers to the amount
paid to employees for services they
provided during the period. A company’s
payroll is important for the following reasons:
 Payroll and related payroll taxes significantly
affect the net income of most companies.
 Payroll is subject to federal and state
regulations.
 Good employee morale requires payroll to
be paid timely and accurately.
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LO 2
Liability for Employee Earnings
 Salary usually refers to payment for
managerial and administrative services.
Salary is normally expressed in terms of a
month or a year.
 Wages usually refers to payment for
employee manual labor. The rate of wages
is normally stated on an hourly or weekly
basis.
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LO 2
Liability for Employee Earnings
John T. McGrath is employed by McDermott Supply
Co. at the rate of $34 per hour, plus 1.5 times the
normal hourly rate for hours over 40 per week. For
the week ended December 27, McGrath worked 42
hours. His earnings are computed as follows:
Earnings at regular rate (40 x $34)
Earnings at overtime rate (2 x $51)
Total earnings
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$1,360
102
$1,462
LO 2
Deductions from Employee Earnings
 The total earnings of an employee for a
payroll period, including any overtime pay,
are called gross pay.
 From this amount is subtracted one or more
deductions to arrive at the net pay.
The deductions normally include income taxes,
medical insurance, and pension contributions.
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LO 2
Deductions from Employee Earnings
 The Federal Insurance Contributions Act
(FICA) tax withheld contributes to the
following two federal programs.
 Social security, which provides payments
for retirees, survivors, and disability
insurance. (Assume 6% on all earnings.)
 Medicare, which provides health
insurance benefits for senior citizens.
(Assume 1.5% on all earnings.)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Deductions from Employee Earnings
John T. McGrath’s earnings for the week ending
December 27 are $1,462. Total FICA tax to be
withheld is calculated as follows:
Earnings subject to 6%
social security tax
Social security tax rate
Social security tax
Earnings subject to 1.5%
Medicare tax
Medicare tax rate
Medicare tax
Total FICA tax
$1,462
x 6%
$ 87.72
$1,462
x 1.5%
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21.93
$109.65
LO 2
Computing Employee Net Pay
John T. McGrath’s Net Pay
Gross earnings for the week
Deductions:
Social security tax
Medicare tax
Federal income tax
Retirement savings
United Fund
Total deductions
Net pay
$1,462.00
$ 87.72
21.93
258.90
20.00
5.00
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393.55
$1,068.45