Accounting Chapter 11
Current Liabilities:
Two types:
1. Accounts Payable
2. Unearned revenue
SHORT-TERM NOTES PAYABLE:
Aug 1
Acct payable- Cybex Co.
Notes Payble
Issued 90 day not at 12%
On account
Oct 30 Notes payable
1000
Interest Expense
30
Cash
Paid principal and interest
On note due.
1000
1000
1030
Interest expense is record in the other expense section of the income statement.
Notes payable are often used to temporarily satisfy an account payable created earlier.
BORROWING MONEY FROM a BANK
Sept 19 Cash
$4000
Notes Payable
Issued 90 day not at 15%
To bank.
Dec 18 Notes Payable
$4000
nterest Expense
Cash
$4150
Paid principal and interest on notes
$4000
$150
DISCOUNT NOTES:
Discount notes don’ have an interest rate set, instead the creditor sets an interest rate and
deducts the interest from the face of the note.
*** When recording notes issued at a discount, remember that the interest is recored when the
note is issued.
Aug 10
Merchandise Inventory
$19250
Interest Expense
$750
Notes Payable
$20,000
Issued 90 day not to Cybex Co. discounted at 15%
Nov 8
Notes Payable
Cash
Pad note due.
$20,000
$20,000
CONTINGENT LIABILITIES:
Includes items like warranty payable.
June 30 Product Warranty Expense
Product Warranty Payable
$3000
$3000
Warranty Expense for june 5% x
$60,000
Aug 16. Customer needs a $200 part replaced.
Aug 16
Product Warranty Payable
Supplies
Replaced defective part under warranty
$200
$200
*** Professional judgment is necessary to determine which liabilities are contingent and which
ones are probable.
PAYROLL and PAYROLL TAXES
There is no need to record each payroll check separately in the journal because all details are
provided in the payroll register.
**the reason for using a separate bank account for payroll is that it makes reconcillzation much
easier. A payroll bank account establishes control over payroll checks by preventing theft,
misuse, or uncashed payroll checks.
FRINGE BENEFITS
Vacation Pay.
May 5 Vacation Pay Expense
Vacation Pay Payable
Vacation pay for week ended May 5
$2000
$2000
Pensions
**defined contribution plan=requires that a fixed amount of money be invested for the employees
behalf during the employees working years. The employee bears the investment risk for a
defined contribution plan.
The amount the employer contributes is a fixed percentage and is debited to Pension Expense
and credited to CASH.
Dec 31
Pension Expense
Cash
Contributed 10% of annual salaries to pension
Plan.
$50000
$50,000
Defined Benefit Plan= the employer bears the investment risk of a defined benefit plan and
therefore most companies are switching to a defined contribution plan.
Dec 31
Pension Expense
Cash
Unfunded Pension Liability
To record annual pension cost and contribution
To pension plan
$80,000
$60,000
$20,000
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
Financial statements should include footnotes as to what these other benefits are.
FINANCIAL ANALYSIS and INTERPRETATION
Quick Ratio= quick assets/ current liabilities
The quick ratio is also known as the acid test. When the ratio approaches less than one that
indicates that a company cannot cover its current liabilities with cash and near cash assets..
One way a company can change this ratio is to work with their bank to change short term debt
into long term debt.
Quick ratio is based on assets that can be converted to cash in 90 days
Payroll taxes become a liability to the employer when the payroll is paid.
When the employee earns the right to vacation, it becomes a current liability
QUESTIONS
The two types of transactions that cause the most current liabilities are;
A. Receiving goods or services prior to making payment
B. Receiving payment prior to delivering goods or services
Short term notes Payable may be issued when:
A. When merchandise is purchased
B. Can also be issued to creditors to temporarily satisfy an account payable created earlier.
Product warranty should be recorded in the accounts when the liability is both probable and can
be reasonably estimated.
What programs are funded by the FICA tax? They include”
A. Social security for the aged and disabled
B. Medicare for health care for senior citizens
What are the federal taxes that most employers are required to hold from employees?
Income, Social security, Medicare, unemployment
The title of the accounts are:
Social security tax payable
Medicare tax payable
Employees Federal Income tax payable
Retirement Deduction payable
United Way deductions payable
The taxes on employee payroll are considered operating expenses for the employer.
Payroll taxes become a liability for the employer when the payroll is paid.
If an employer has the option to hire 1 person full time at $25000 or two part time people for a
total of $25000 a year what payroll taxes would have a impact?
Unemployment compensation at the federal and state level + anything else?
What are the principal reasons for using a separate payroll account.
A. Makes reconciliation easier
B. Acts as an internal control that helps to prevent thief or misuse of checks.
Constants a payroll data include: name, ss, marital status, income tax withholdings, srate of pay,
payroll category
Variables included: hours worked, days of sick leave with pay, vacation credits cumulative
earnings and taxes withheld.
To match revenues with expenses vacation should be expensed when it is earned not when it is
taken.
Factors of defined benefits plan include, employee life expectancy, employee turnover, expected
employee compensation levels, and investment income on pension contributions.
Unfunded pension liability may be located in two places on the balance sheet, the part to come
do with in the year will be current liability, the part due past one year will be long term liability.
Postreitirement benefits:
Medical, dental, eye, life insurance, tuition assistance, tax services, legal services.