Current Liabilities
and Payroll
Chapter 10
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1
Objective 1
Account for current liabilities
of known amount
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2
Accounts Payable
• Amounts owed for products or services
purchased on account
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3
Short-Term Notes Payable
• Promissory notes payable due within one
year
• Interest expense is recognized
• If interest expense is accrued at the end of
the period, interest payable must also be
recorded
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4
E10-14
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
2002
May 1 Equipment
Note Payable
Dec 31 Interest Expense
Interest Payable
(15,000 x .08 x 8/12)
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15,000
15,000
800
800
5
E10-14
Interest expense for 2003 =
15,000 x .08 x 4/12
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
2003
May 1 Note Payable
Interest Expense
Interest Payable
Cash
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15,000
400
800
16,200
6
Sales Tax Payable
E10-14
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Mar 31 Cash
Sales Revenue
Sales Tax Payable
Apr
6 Sales Tax Payable
Cash
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DEBIT
CREDIT
216,000
200,000
16,000
16,000
16,000
7
Other Current Liabilities
• Current portion of long-term note payable
• Accrued Expenses (Liabilities)
– Expenses that have been incurred but not yet
paid
– Salaries Payable
– Interest Payable
– Utilities Payable
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8
Unearned Revenue
E10-15
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Mar 31 Cash
Unearned Subscription
Revenue
Sales Tax Payable
Nov 15 Sales Tax Payable
Cash
Dec 31 Unearned Subscription
Revenue
Subscription Revenue
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DEBIT
CREDIT
218
200
18
18
18
150
150
9
Objective 2
Account for current liabilities that
must be estimated
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10
Estimated Warranty Payable
• Record warranty expense in same period
as the revenue
– Warranty expense
– Estimated warranty payable
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11
E10-16
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
2006
Warranty Expense
Estimated Warranty
Payable
6,000
Estimated Warranty Payable
Cash
7,000
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6,000
7,000
12
E10-16
Estimated Warranty Payable
Balance 3,000
7,000
6,000
Balance 2,000
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13
Contingent Liabilities
• Potential liability
• Depends on a future event
• Accounting treatment depends on
likelihood that the future event will create a
liability
– Remote – ignore
– Reasonably possible – in notes to financial
statements
– Probable – estimate and record expense and
liability
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14
Objective 3
Compute payroll amounts
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15
Payroll
• Salary – pay stated at annual, monthly, or
weekly rate
• Wages – pay stated at an hourly rate
• Commission – pay stated as percentage of
sales amount
• Bonus – pay over and above base salary
• Benefits – extra compensation not paid in
cash, such as health insurance, retirement
contributions
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16
Payroll
• Straight time - base rate paid for a set
number of hours
• Overtime - additional time worked for
which employees receive a higher rate
(usually 1.5 times the straight time rate)
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17
Gross Pay and Net Pay
Gross Pay
Net Pay
Employee
Income Tax
FICA
OASD
FICA
Medicare
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Optional
Deductions
18
FICA Tax
Note: Your text instructs you to assume
an
8% taxFICA
on income
earned
up components:
to
• The
tax has
two
$90,000 for FICA. That’s just to simplify
1 Oldforage,
survivors’, and disability
things
the course
insurance (6.2% applied to the first
$90,000 of employee earnings in a
calendar year)
2 Health insurance (1.45% applied to all
employee earnings)
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19
Employers match the FICA tax
withheld from employees
Employer Payroll Taxes
• Social Security (FICA) tax
• State unemployment compensation tax
• Federal unemployment compensation tax
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20
Unemployment Compensation
Taxes
• Employers pay 5.4% to the state and 0.8%
to the federal government on the first
$7,000 of each employee’s annual
earnings
• Provides for workmen’s compensation for
people laid off from work
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21
Objective 4
Record basic payroll transactions
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22
Gross amount
Salary Expense
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Sep 30 Salary Expense
Employee Income Tax
Payable
FICA Tax Payable
United Fund Payable
Salary Payable
Take home pay
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23
Remember, the employer
pay the unemployment
taxes, not the employees
Payroll Tax Expense
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Sep 30 Payroll Tax Expense
FICA Tax Payable
State Unemployment Tax
Payable
Federal Unemployment
Tax Payable
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24
Benefits
Expense
Fringe benefits are an
expense to the employer
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Sep 30 Health Insurance Expense
Life Insurance Expense
Retirement Plan Expense
Employee Benefits Payable
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25
E10-17
Base salary
Commission
Gross pay for December
Charitable contribution
Income taxes
Health insurance
FICA (on $3,000)
$750
8,000
$8,750
(25)
(875)
(50)
(240)
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(1,190)
$7,560
26
E10-18
Gross pay:
Regular hours (40 x $10)
Overtime (10 x $10 x 1.5)
Gross pay
Deductions:
Income tax
FICA
Charitable contribution
Net pay
$400.00
150.00
$550.00
(49.50)
(44.00)
(5.00)
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(98.50)
$451.50
27
E10-18
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Dec 31 Salary Expense
Employee Income Tax
Payable
FICA Tax Payable
United Fund Contribution
Payable
Salary Payable
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DEBIT
CREDIT
550.00
49.50
44.00
5.00
451.50
28
E10-19
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Dec 31 Payroll Tax Expense
FICA Tax Payable
State Unemployment Tax
Payable
Federal Unemployment
Tax Payable
DEBIT
CREDIT
6,068
5,200
756
112
FICA – 65,000 x .08
State Unemployment Tax – 14,000 x .054
Federal Unemployment Tax – 14,000 x .008
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29
E10-19
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Dec 31 Health Insurance Expense
Life Insurance Expense
Pension Expense
Employee Benefits Payable
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DEBIT
CREDIT
2,060
350
3,900
6,310
30
Objective 5
Use a payroll system
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31
Components
• Payroll Record
• Payroll Check
• Earnings Reports
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32
Payroll Record
Payroll Record
GROSS
DEDUCTIONS PAY
GROSS PAY
HR
EMPLOYEE
NAME
S STRAIGHT
.
TIME
TOTA
L
FED.
INCOME
TAX
HEALTH
INS.
TOTA
L
NET PAY
CHECK
NO.
EMPLOYEE
STRAIGHTSara Canne
42
400
22
422
63
37
15
115
307
166
DEDUCTIONS
NET
PAY
NAME
HRS.
TIME
OVERTIME
TOTAL
Jim Lake
40
480
0
480
72
38
22
132
348
167
Kyle Metz
48
800
160
960
144
77
40
261
699
168
Sara
Canne
42
400
22
422
Total
1,680
182
1,862
279
152
77
508
1,354
FED.
Jim Lake
40
480
0
480
INCOME
HEALTH
CHECK
INS.
TOTAL
AMOUNT
NO.
KyleTAX
Metz FICA48
160
960
800
63
37
15
115
307
166
Total
1,680
182
1,862
72
38
22
132
348
167
OVERTIME
FICA
AMOUNT
144
77
40
261
699
279
152
77
508
1,354
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168
33
Payroll Checks
Stile's
Payroll Account
166
Baltimore, MD
Sep. 30, 2007
Pay to the
Order of
$307.00
Dollars
Sara Canne
Three hundred seven & 00/100's
First Bank
Baltimore
James Carn
Maryland 21244
Treasurer
A1119000031A 0787C50000454C
Pay
STRAIGHT
TIME
OVERTIME
400
22
Deductions
TOTAL
INCOME
TAX
422
63
FICA
HEALTH
INS.
37
15
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TOTAL
Net
Pay
Check
No.
115
307
166
34
Earnings Report
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35
Earnings Report
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36
Internal Control over Payroll
• Efficiency controls
– Keep two payroll accounts
– Computerize
• Controls to safeguard payroll
disbursements
– Separate hiring and firing function from
accounting and from passing out paychecks
– Photo ID’s for employees
– Employees clock in and out
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37
Objective 6
Report current liabilities on the
balance sheet
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38
Warranties payable (200,000 x .03)
Employee income tax (90,000 x .09)
FICA (90,000 x .08 x 2)
State unemployment
(90,000
x .054)
Oriental
Rug Company
E10-22
Federal unemployment
(90,000
x .008)
Balance Sheet
(partial)
December 31, 2004
Current liabilities:
Estimated warranty payable
Unearned sales revenue
Employee withheld income tax payable
FICA tax payable
State unemployment tax payable
Federal unemployment tax payable
Total current liabilities
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$6,000
15,000
8,100
14,400
4,860
720
$49,080
39
End of Chapter 10
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40
