Chapter

11-1
 CHAPTER 11
CURRENT LIABILITIES
AND PAYROLL
ACCOUNTING
Chapter
11-2
 Accounting for Current Liabilities
Current liability is debt with two key features:
1. Company expects to pay the debt from existing
current assets or through the creation of
other current liabilities.
2. Company will pay the debt within one year or
the operating cycle, whichever is longer.

Current liabilities include notes payable, accounts payable,

unearned revenues, and accrued liabilities such as taxes
payable, salaries payable, and interest payable.

Chapter
11-3
 Accounting for Current Liabilities
Notes Payable
Written promissory note.
Require the borrower to pay interest.
Issued for varying periods.

Chapter
11-4
 Accounting for Current Liabilities
Illustration: On March 1, 2014, Cole Williams borrows
$100,000 from First National Bank on a 4-month, 12% note.
Instructions
a) Prepare the entry on March 1.
b) Prepare the adjusting entry on June 30, assuming
monthly adjusting entries have not been made.
c) Prepare the entry at maturity (July 1).

Chapter
11-5
 Accounting for Current Liabilities
Illustration: On March 1, 2014, Cole Williams borrows
$100,000 from First National Bank on a 4-month, 12% note.
a) Prepare the entry on March 1.
Cash 100,000
Notes payable 100,000

b) Prepare the adjusting entry on June 30.

$100,000 x 12% x 4/12 = $4,000

Interest expense 4,000

Interest payable 4,000
Chapter
11-6
 Accounting for Current Liabilities
Illustration: On March 1, 2014, Cole Williams borrows
$100,000 from First National Bank on a 4-month, 12% note.
c) Prepare the entry at maturity (July 1).

Notes payable 100,000

Interest payable 4,000
Cash 104,000

Chapter
11-7
 Accounting for Current Liabilities
Sales Tax Payable
Sales taxes are expressed as a stated
percentage of the sales price.
Either rung up separately or included in total
receipts.
Retailer collects tax from the customer.
Retailer remits the collections to the states
department of revenue.

Chapter
11-8
 Accounting for Current Liabilities
Illustration: The March 25 cash register reading for
Cooley Grocery shows sales of $10,000 and sales taxes of
$600 (sales tax rate of 6%), the journal entry is:

Cash 10,600
Sales 10,000
Sales tax payable 600

Chapter
11-9
 Accounting for Current Liabilities
Unearned Revenue
Revenues that are received before the company
delivers goods or provides services.
1. Company debits Cash, and
credits a current liability
account (unearned revenue).
2. When the company earns
the revenue, it debits the
Unearned Revenue account,
and credits a revenue account.

Chapter
11-10
 Accounting for Current Liabilities
Illustration: Assume that Superior University sells 10,000
season football tickets at $50 each for its five-game home
schedule. The university makes the following entry for the
sale of season tickets:
Aug. 6 Cash 500,000
Unearned revenue 500,000

As the University completes each of the five home games, it

would record the revenue earned.

Sept. 7 Unearned revenue 100,000

Ticket revenue 100,000

Chapter
11-11
 Accounting for Current Liabilities
Unearned and earned revenue accounts:

Chapter
11-12
 Accounting for Current Liabilities
Current Maturities of Long-Term Debt
Portion of long-term debt that comes due in the
current year.
No adjusting entry required.

Chapter
11-13
 Accounting for Current Liabilities
Current Maturities of Long-Term Debt
Illustration: Assume that Wendy Construction issues a
five-year interest-bearing $25,000 note on January 1,
2013. This note specifies that each January 1, starting
January 1, 2014, Wendy should pay $5,000 of the note.
When the company prepares financial statements on
December 31, 2013, it should report $5,000 as a
current liability and $20,000 as a long-term liability

Chapter
11-14
 Accounting for Current Liabilities
Statement Presentation and Analysis
Illustration 11-3

Chapter
11-15
 Accounting for Current Liabilities
Statement Presentation and Analysis
Illustration 11-4

Liquidity refers to the

ability to pay maturing
obligations and meet
unexpected needs for
cash.
The current ratio
permits us to compare
the liquidity of
different-sized
companies and of a single
company at different
Illustration 11-5
times.

Chapter
11-16
 CONTINGENT LIABILITIES
A contingent liability is a potential liability that
may become an actual liability in the future. It
represents the likelihood that the future event
will confirm the incurrence of a liability can range
from probable to remote.
Types of probability:
Probable.
Reasonably possible.
Remote.
Chapter
11-17
 CONTINGENT LIABILITIES
Probability Accounting

Probable Accrue

Reasonably
Footnote
Possible

Remote Ignore

Chapter
11-18
 CONTINGENT LIABILITIES
Reporting a Contingent Liability
1. If the contingency is probable (if it is likely to
occur) and the amount can be reasonably
estimated, the liability should be recorded in
the accounts.
2. If the contingency is only reasonably possible (if
it could happen), then it needs to be disclosed
only in the notes that accompany the financial
statements.
3. If the contingency is remote (if it is unlikely to
occur), it need not be recorded or disclosed.
Chapter
11-19
 CONTINGENT LIABILITIES

Recording a Contingent Liability

Product Warranties
Promise made by a seller to a buyer to make
good on a deficiency of quantity, quality, or
performance in a product.

Estimated cost of honoring product warranty

contracts should be recognized as an expense in
the period in which the sale occurs.

Chapter
11-20
 CONTINGENT LIABILITIES
Illustration: Denson Manufacturing Company sells
10,000 washers and dryers at an average price of $600
each. The selling price includes a one-year warranty on
parts. Denson expects that 500 units (5%) will be
defective and that warranty repair costs will average
$80 per unit. In 2013, the company honors warranty
contracts on 300 units, at a total cost of 24,000. At
December 31, compute the estimated warranty
liability.

Chapter
11-21
 CONTINGENT LIABILITIES
Illustration: Assume that in 2013 Denson Manufacturing
Company sells 10,000 washers and dryers at an average
price of $600 each. The selling price includes a one-year
warranty on parts. Denson expects that 500 units (5%)
will be defective and that warranty repair costs will
average $80 per unit. In 2013, the company honors
warranty contracts on 300 units, at a total cost of
$24,000. Then it is necessary to accrue the estimated
warranty costs on the 2013 sales
At December 31, make the required adjusting entry.
Warranty expense 40,000
Estimated warranty liability 40,000
Chapter (To accrue estimated warranty costs)
11-22
 CONTINGENT LIABILITIES
Illustration: Prepare the entry to record the repair
costs incurred in 2013 to honor warranty contracts on
2013 sales.
Estimated warranty liability 24,000
Repair parts 24,000

The company reports warranty expense of $40,000

under selling expenses in the income statement.
It classifies warranty liability of $16,000 ($40,000
$24,000) as a current liability on the balance
sheet.
Chapter
11-23
 CONTINGENT LIABILITIES
In the following year, Denson should debit to the
Warranty Liability account all expenses incurred in
honoring warranty contracts on 2013 sales.

Assume that the company replaces 20 defective

units in January 2014, at an average cost of $80 in
parts and labor. The summary entry for the month
of January 2014 is:

Estimated warranty liability 1,600

Repair parts 1,600

Chapter
11-24
 PAYROLL ACCOUNTING
The term payroll pertains to both:
Salaries - managerial, administrative, and sales
personnel (monthly or yearly rate).
Wages - store clerks, factory employees, and
manual laborers (rate per hour).
Payroll does not apply to payments made for
services of professionals (Payments to
them are called fees)
Determining the payroll involves computing
three amounts: (1) Gross earnings, (2) Payroll
deductions, and (3) Net pay.
Chapter
11-25
 DETERMINING THE PAYROLL
Gross Earnings
Total compensation earned by an employee (wages
or salaries, plus any bonuses and commissions).
Companies determine total wages for an employee
by multiplying the hours worked by the hourly rate
of pay. Companies are required by law to pay hourly
workers a minimum of 1 times the regular
hourly rate for overtime work

Chapter
11-26
 DETERMINING THE PAYROLL
Payroll Deductions
Mandatory: Voluntary:
FICA tax Charity
Federal income tax Retirement
State income tax Union dues
Health and life insurance
Pension plans

Chapter
11-27
 DETERMINING THE PAYROLL

Chapter
11-28
 DETERMINING THE PAYROLL
Social Security taxes
Payroll Deductions
Supplemental retirement,
Mandatory:
employment disability, and
FICA tax medical benefits.

Federal income tax In 2008, the rate was 7.65%

(6.2% Social Security plus
State income tax 1.45% Medicare) on the
first $102,000 of gross
earnings for each employee.
For purpose of illustration,
assume a rate of 8% on the
first $100,000 of gross
earnings, maximum of $8,000.
Chapter
11-29
 DETERMINING THE PAYROLL
Payroll Deductions
Mandatory: Employers are required to
withhold income taxes
FICA tax
from employees pay.
Federal income tax Withholding amounts are
State income tax based on gross wages and
the number of allowances
claimed.

Chapter
11-30
 DETERMINING THE PAYROLL
Payroll Deductions
Most states (and some
Mandatory: cities) require employers to
FICA tax withhold income taxes from
employees earnings.
Federal income tax
Three variables determine
State income tax the amount to be withheld:
(1) the employees gross
earnings; (2) the number of
allowances claimed by the
employee; and (3) the length
Chapter of the pay period
11-31
 DETERMINING THE PAYROLL
Other Deductions
Employees may voluntarily authorize
withholdings for charitable organizations,
retirement, and other purposes.
All voluntary deductions from gross earnings
should be authorized in writing by the employee.
The authorization(s) may be made individually
(deductions for charitable organizations) or as
part of a group plan (deductions for union dues,
health and life insurance, and pension plans).
Chapter
11-32
 DETERMINING THE PAYROLL
Net Pay
Gross earnings minus payroll deductions.

Chapter
11-33
 RECORDING THE PAYROLL
Maintaining Payroll Department Records
An employer must keep a cumulative record of
each employees gross earnings, deductions, and
net pay during the year.
The record that provides this information is
the employee earnings record
Companies keep a separate earnings record for
each employee, and update these records after
each pay period.

Chapter
11-34
 RECORDING THE PAYROLL
Maintaining Payroll Department Records
The employer uses the cumulative payroll data on
the earnings record to:
1. Determine when an employee has earned the
maximum earnings subject to FICA taxes,
2. File state and federal payroll tax returns,
and
3. Provide each employee with a statement of
gross earnings and tax withholdings for the
year.
Chapter
11-35
 RECORDING THE PAYROLL
Employee Earning Records

Chapter
11-36
 RECORDING THE PAYROLL
Maintaining Payroll Department Records
Many companies find it useful to prepare a payroll
register.
This accumulates the gross earnings, deductions,
and net pay by employee for each pay period.
In some companies, a payroll register is a journal
or book of original entry. Postings are made from
it directly to ledger accounts.
In other companies, the payroll register is a
memorandum record that provides the data for a
Chapter
general journal entry and subsequent posting to
11-37
the ledger accounts
 RECORDING THE PAYROLL
Maintaining Payroll Department Records
Payroll register

Chapter
11-38
 RECORDING THE PAYROLL
Recognizing Payroll Expenses and Liabilities
Illustration: Prepare the entry Academy Company
would make to record the payroll for the week ending
January 14.
Office salaries expense 5,200.00
Wages expense 12,010.00
FICA tax payable (8%) 1,376.80
Federal income tax payable 3,490.00
State income tax payable 344.20
United Way payable 421.50
Union dues payable 115.00
Salaries and wages payable 11,462.50
Chapter
11-39
 RECORDING THE PAYROLL
Recognizing Payroll Expenses and Liabilities
Illustration: Prepare the entry Academy Company
would make to record the payment of the payroll.

Salaries and wages payable 11,462.50

Cash 11,462.50
(To record payment of payroll)

Chapter
11-40
 RECORDING THE PAYROLL
Paycheck and statement of earnings

Chapter
11-41
 EMPLOYER PAYROLL TAXES
Payroll tax expense results from three taxes
that governmental agencies levy on employers.
Same rate and maximum
These taxes are: earnings as the employees.
FICA tax
In 2008, the rate was
Federal 7.65% (6.2% Social
unemployment Security plus 1.45%
tax Medicare) on the first
State $102,000 of gross earnings
unemployment for each employee.
tax
Chapter
11-42
 EMPLOYER PAYROLL TAXES
Payroll tax expense results from three taxes
that governmental agencies levy on employers.
FUTA tax rate is 6.2% of
These taxes are:
first $7,000 of taxable
FICA tax wages.
Federal
Employers who pay the
unemployment tax
state unemployment tax
State on a timely basis will
unemployment tax receive an offset credit
of up to 5.4%. Therefore,
Chapter
the net federal tax rate is
generally 0.8%.
11-43
 EMPLOYER PAYROLL TAXES
Payroll tax expense results from three taxes
that governmental agencies levy on employers.
These taxes are:
FICA
Federal
unemployment tax
SUTA basic rate is
State usually 5.4% on the
unemployment tax first $7,000 of wages
paid.

Chapter
11-44
 EMPLOYER PAYROLL TAXES

Chapter
11-45
 EMPLOYER PAYROLL TAXES
Illustration: Academy records the payroll tax expense
associated with the January 14 payroll with the
following entry. Use the following rates: FICA 8%,
state unemployment 5.4%, federal unemployment 0.8%.
Payroll tax expense 2,443.82
FICA tax payable 1,376.80 *
State unemployment tax payable 929.34 **
Federal unemployment tax payable 137.68 ***

* $ 17,210.00 x 8% = $1,376.80
** $17,210.00 x 5.4% = $929.34 *** $17,210 x .8% = $137.68
Chapter
11-46
 FILING AND REMITTING
PAYROLL TAXES
Companies must report FICA taxes and federal
income taxes withheld no later than one month
following the close of each quarter.

Companies generally file and remit federal

unemployment taxes annually on or before January 31
of the subsequent year. Companies usually file and
pay state unemployment taxes by the end of the
month following each quarter.

Employers must provide each employee with a Wage

and Tax Statement (Form W-2) by January 31.
Chapter
11-47
 INTERNAL CONTROL FOR
PAYROLL
As applied to payroll, the objectives of
internal control are

1. To safeguard company assets against

unauthorized payments of payrolls, and

2. To ensure the accuracy and reliability of

the accounting records pertaining to
payrolls.

Chapter
11-48
 ADDITIONAL FRINGE BENEFITS

In addition to the three payroll-tax fringe

benefits, employers incur other substantial
fringe benefit costs.
Two important fringe benefits include:
Paid absences
Post-retirement benefits

Chapter
11-49
 PAID ABSENCES
Employees often are given rights to receive
compensation for absence when they meet
certain conditions of employment.
The compensation may be for paid vacations,
sick pay benefits, and paid holidays.
When the payment for such absences is
probable and the amount can be reasonably
estimated, the company should accrue a liability
for paid future absences.

Chapter
11-50
 POST-RETIREMENT BENEFITS
Post-retirement benefits are benefits that
employers provide to retired employees for
1. Pensions and
2. Health care and life insurance.

Companies account for the post-retirement

benefits on the accrual basis.

Chapter
11-51
 PENSIONS
A pension plan is an agreement whereby employers
provide benefits to employees after they retire.
Two types of pension plans:
1. In a Defined-contribution Plan, the plan
defines the contribution that an employer will
make but not the benefit that the employee
will receive at retirement. This is often
referred to as a 401 (k) plan.
2. In a Defined-benefit Plan, the employer
agrees to pay a defined amount to retirees,
based on employees meeting certain eligibility
standards.
Chapter
11-52