Current Liabilities &
Payroll
BY RACHELLE AGATHA, CPA, MBA
Slides by Rachelle Agatha, CPA,
with excerpts from Warren, Reeve, Duchac
Objectives
1. Describe and illustrate current
liabilities related to accounts
payable, current portion of longterm debt, and notes payable.
2. Determine employer liabilities for
payroll, including liabilities
arising from employee earnings
and deductions from earnings.
2
Objectives:
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
Objectives
5. Describe the accounting treatment
for contingent liabilities and
journalize entries for product
warranties.
4
Objective 1
Describe and illustrate
current liabilities
related to accounts
payable, current
portion of long-term
debt, and notes
payable.
5
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
Accounts Payable
Accounts payable arise from
purchasing goods or services for
use in a company’s operations or
for purchasing merchandise for
resale.
7
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.
8
The total amount of the
installments due after the
coming year is classified as a
long-term liability.
9
Short-Term Notes Payable
A firm issues a 90-day, 12% note for
$1,000, dated August 1, 2008 to
Murray Co. for a $1,000 overdue
account.
Aug. 1 Accounts Payable—Murray Co.
Notes Payable
Issued a 90-day, 12% note
on account.
10
1 000 00
1 000 00
On October 30, when the note matures,
the firm pays the $1,000 principal plus
$30 interest ($1,000 x 12% x 90/360).
Oct.30 Notes Payable
Interest Expense
Cash
Paid principal and
1 000 00
30 00
1 030 00
Appears on theinterest
income on note.
statement as an “Other
Expense.”
11
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.
12
Bowden Co. (Borrower)
Description
Debit
Mdse. Inventory
10,000
Accounts Payable
Credit
10,000
Coker Co. (Creditor)
Description
Accounts Receivable
Sales
Cost of Mdse. Sold
Mdse. Inventory
13
Debit
Credit
10,000
10,000
7,500
7,500
Bowden Co. (Borrower)
Description
Accounts Payable
Notes Payable
Debit
Credit
10,000
10,000
Coker Co. (Creditor)
On May 3, 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
14
Bowden Co. (Borrower)
Description
Debit
Credit
Notes Payable 10,000
Interest Expense
200
Cash
10,200
On July 30, Bowden
Co. paid Coker Co. the
amount due on the
note of May 31.
Interest: $10,000 x
12% x 60/360.
Coker Co. (Creditor)
Description
Debit
Cash
10,200
Interest Revenue
Notes Receivable
Credit
200
10,000
15
On September 19, a firm borrows $4,000
from First National 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 00
4 000 00
16
On the due date of the note (December 18),
the borrower owes $4,000 plus interest of
$150 ($4,000 x 15% x 90/360).
Dec. 18 Notes Payable
Interest Expense
Cash
Paid principal and
interest due on note.
4 000 00
150 00
4 150 00
17
Discounting a Note
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
On August 10, Cary Company issues a $20,000, 90day note to Rock Company 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 00
750 00
20 000 00
19
On August 10, Cary Company issues a $20,000, 90day note to Rock Company in exchange for
inventory. Rock discounts the note at 15%.
Aug. 10 Merchandise Inventory
19 250 00
Interest Expense
750 00
Proceeds 20 000 00
Notes Payable
Issued a 90-day note to Rock Discount: $20,000 x
.15 x 90/360
Co., discounted at 15%.
Discount rate
20
On November 8 the note is paid in full.
Nov. 8 Notes Payable
Cash
Paid note due.
20 000 00
20 000 00
21
On July 1, Bella Salon Company issued a 60-day
note with a face amount of $60,000 to Delilah 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
a. $60,000
b. $59,400 [$60,000 – ($60,000 x 6% x 60/360)]
23
Objective 2
Determine employer
liabilities for payroll,
including liabilities
arising from employee
earnings and
deductions from
earnings.
24
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
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
Salary usually refers to
payment for managerial,
administrative, or similar
services, normally
expressed in terms of a
month or a year.
27
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
McGrath Illustration
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.
Earnings at base rate (40 x $34)
Earnings at overtime rate (2 x $51)
Total earnings
29
$1,360
102
$1,462
For this illustration assume the
standard withholding allowance of
$63*. Thus, the wages used in
determining McGrath’s withholding
for the week are $1,399 ($1,462 –
$63).
*The actual IRS standard withholding allowance
changes every year and was $63.46 for 2006.
30
Wage Bracket Withholding
Table
McGrath
wage
bracket
Source: Publication 15, Employer’s Tax Guide, Internal Revenue Service, 2006
31
McGrath Example (Continued)
Initial withholding
$ 78.30
Plus ($1,399 – $620) x 25% 194.75
Total federal income taxes
withheld
$273.05
32
Karen Dunn’s weekly gross earnings for the present
week were $2,250. Dunn has two exemptions.
Using the wage bracket withholding table in
Exhibit 3 (Slide 31) with a $63 standard
withholding allowance for each exemption, what is
Dunn’s federal income tax withholding?
33
Total wage payment
$2,250
One allowance (provided by IRS)
$63
Multiplied by allowances claimed on W-4 x 2
126
Amount subject to withholding
$2,124
Initial withholding from wage bracket
$275.55
Plus additional withholding: 28% of excess
over $1,409
200.20*
Federal income tax withholding
$475.75
*28% x ($2,124 – $1,409)
34
FICA Tax
The amount of FICA tax withheld is
the employees’ contribution to two
federal programs. The first program,
called social security, is for old age,
survivors, and disability insurance
(OASDI). The second program, called
Medicare, is health insurance for
senior citizens.
35
John T. McGrath’s FICA Tax
Earnings subject to 6% social
security tax ($100,000 – $99,038)$ 962
Social security tax rate
x 6%
Social security tax
$57.72
Earnings subject to 1.5%
Medicare tax
$1,462
Medicare tax rate
x 1.5%
Medicare tax
21.93
Total FICA tax
$79.65
36
Computing McGrath’s Net Pay
John T. McGrath’s net
pay:
Gross earnings for the week
$1,462.00
Deductions:
Social security tax (Slide 37) $ 57.72
Medicare tax (Slide 33)
21.93
Federal income tax (Slide 33) 273.05
Retirement savings
20.00
United Way
5.00
Total deductions
377.70
Net pay
$1,084.30
37
Karen Dunn’s weekly gross earnings for the week
ending Dec. 3rd were $2,250, and her federal
income tax withholding was $475.75. Prior to this
week Dunn had earned $98,000 for the year.
Assuming the social security rate is 6% on the first
$100,000 of annual earnings and Medicare is 1.5%
of all earnings, what is Dunn’s net pay?
38
Total wage payment
$2,250.00
Less: Federal income tax withholding
475.75
Earnings subject to social security
tax ($100,000 – $98,000)
$2,000
Social security tax rate
x 6%
Social security tax
120.00
Medicare tax ($2,250 x 1.5%)
33.75
Net pay
$1,620.50
39
Employer’s Federal Payroll Taxes
11-2
Employers are required to
contribute to the social
security and Medicare
programs for each employee.
The employer must match the
employee’s contribution to
each program.
40
Employer’s Federal Unemployment
Taxes
11-2
A FUTA tax of 6.2% is levied on
employers only to provide for
temporary unemployment to those who
become unemployed as a result of
layoffs due to economic causes beyond
their control. This tax applies to only
the first $7,000 of the earnings of each
covered employee during a calendar
year.
41
Employer’s State Unemployment
Taxes
Employers in most states also
must pay a state unemployment
tax for unemployed workers. A
few states require employee
contributions. The state plan is
designed to reward firms with
stable employment, so the tax
rate varies from state to state and
employer to employer.
42
43
Objective 3
Describe payroll
accounting systems that
use a payroll register,
employee earnings
records, and a general
journal.
44
Payroll Register
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.
45
Payroll Register
(Continued)
46
(Concluded)
47
Recording Employees’ Earnings
Dec. 27 Sales Salaries Expense
Office Salaries Expense
Social Security Tax Payable
Medicare Tax Payable
Employees’ Federal Inc. Tax Pay.
Retirement Savings Ded. Payable
United Way Deductions Payable
Accounts Receivable—Fred Elrod
Salaries Payable
Payroll for week ended
December 27.
11 122 00
2 780 00
643
208
3 332
680
470
50
8 518
07
53
00
00
00
00
40
48
The payroll register of Chen Engineering Services
indicates $900 of social security withheld and $225
of Medicare tax withheld on total salaries of
$15,000 for the period. Federal withholding for
the period totaled $2,925.
Provide the journal entry for the period’s payroll.
49
Salaries Expense
15,000
Social Security Tax Payable
Medicare Tax Payable
Federal Withholding Tax Payable
Salaries Payable
900
225
2,925
10,950
50
Recording and Paying Payroll Taxes
Everson Company’s fiscal year ends on April
30. Everson Company owes it employees
$26,000 of wages on December 31. The
following portion of the $26,000 of wages are
subject to payroll taxes on December 31:
Earnings Subject
to Payroll Taxes
Social Security Tax (6.0%)
$18,000
Medicare Tax (1.5%)
26,000
State and Federal Unemployment
Compensation Tax
1,000
51
Data for McDermott Supply Co. payroll for the
week ending December 27:
Social security tax
Medicare tax
State unemployment compensation
tax (5.4% x $2,710)
Federal unemployment compensation
tax (0.8% x $2,710)
Total payroll tax expense
$ 643.07
208.53
146.34
21.68
$1,019.62
52
McDermott Supply Co.’s payroll entry on December 27 is
recorded as follows:
Dec. 27 Payroll Tax Expense
Social Security Tax Payable
Medicare Tax Payable
State Unemployment Tax Payable
Federal Unemployment Tax Pay.
Payroll taxes for week
ended December 27.
1 019 62
643
208
146
21
07
53
34
68
53
The payroll register of Chen Engineering
Services indicates $900 of social security
withheld and $225 of Medicare tax withheld
on total salaries of $15,000 for the period.
Assume earnings subject to state and federal
unemployment compensation taxes are
$5,250, at the federal rate of 0.8% and state
tax of 5.4%.
Provide the journal entry to record the payroll
tax expense for the period.
54
Payroll Tax Expense
1,450.50
Social Security Tax Payable
900.00
Medicare Tax Payable
225.00
State Unemployment Tax Payable
283.50*
Federal Unemployment Tax Payable
42.00**
*$5,250 x 5.4% **$5,250 x 0.8%
55
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.
56
Employee’s
Earnings Record
(Continued)
57
(Concluded)
(Concluded)
58
Payroll Check
59
60
11-4
Objective 4
Employee fringe
benefits, including
vacation pay and
pensions.
61
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.
62
Benefit Dollars as a
Percent of Payroll Costs
63
Vacation Pay
Most employers grant vacation rights, sometimes
called compensated absences, to their
employees. The estimated vacation pay for the
payroll period ending May 5 is $2,000.
May 5 Vacation Pay Expense
Vacation Pay Payable
Vacation pay for
week ended May 5.
2 000 00
2 000 00
64
Pensions
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.
65
In a defined
contribution plan, a
fixed amount of money is
invested on the employee’s
behalf during the
employee’s working years.
66
Pensions
In a defined benefit plan,
employers promise employees a
fixed annual pension benefit at
retirement, based on years of
service and compensation
levels.
67
Pension accounting is quite
complex – covered in
advanced accounting
68
Objective 5
Describe the
accounting treatment
for contingent
liabilities and
journalize entries for
product warranties.
69
Some past transactions will
result in liabilities if certain
events occur in the future.
These potential obligations
are called contingent
liabilities.
70
Contingent Liabilities
During June, a company sells a product for
$60,000 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 30Product Warranty Expense
Product Warranty Payable
Warranty expenses
projected for June, 5% of
$60,000.
71
3 000 00
3 000 00
If a customer required a $200 part replacement on
August 16, the entry would be:
Aug. 16 Product Warranty Payable
Supplies
200 00
200 00
Replaced defective part
under warranty.
72
Accounting Treatment of
Contingent Liabilities
Likelihood
of Occurring
Accounting
Treatment
Measurement
Probable
Contingency
Estimable
Record and
Disclose
Liability
Not
Estimable
Disclose
Liability
Disclose
Liability
Possible
73
Cook-Rite Inc. sold $140,000 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 $200 part replacement, plus $90 labor
under the warranty.
Provide the journal entries for (a) the
estimated warranty expense on August 31
and (b) the September 11 warranty work.
74
a. Product Warranty Expense
8,400
Product Warranty Payable
To record warranty expense
for August, 6% x $140,000.
b. Product Warranty Payable
290
Supplies
Wages Payable
Replaced defective part under
warranty.
8,400
200
90
75
Quick Ratio
Noble Co. Hart Co.
Quick assets:
Cash
$147,000 $120,000
Accounts receivable (net)
84,000
472,000
Total
$231,000 $592,000
Current liabilities
$220,000 $740,000
Quick Ratio =
Quick assets
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.
76
Quick Ratio
Noble Co. Hart Co.
Quick assets:
Cash
$147,000 $120,000
Accounts receivable (net)
84,000
472,000
Total
$231,000 $592,000
Current liabilities
$220,000 $740,000
Quick Ratio =
Noble Company =
Quick assets
Current liabilities
$231,000
$220,000
= 1.05
77
Noble Co. Hart Co.
Quick assets:
Cash
$147,000 $120,000
Accounts receivable (net)
84,000 472,000
Total
$231,000$592,000
Current liabilities
$220,000$740,000
Quick Ratio =
Hart Company =
Quick assets
Current liabilities
$592,000
$740,000
= 0.80
83
78
Interpretation
Noble Company is in a better
quick ratio position than Hart
Company. By having a quick
ratio in excess of 1, Noble
Company has quick assets
sufficient to cover the company’s
current liabilities. This is not
true for Hart Company.
79
Summary
 Current Liabilities
 A/P, Cur Portion LTD
 Payroll Liabilities
 Payroll taxes
 Payroll Systems
 Contingent Liabilities