Current Liabilities and Payroll doc

Current
Liabilities
and Payroll
Chapter
11

Objective 1
Account for current liabilities
of known amount.

Accounts Payable
…are amounts owed to suppliers for goods
or services purchased on account.
•
Accounts payable do not bear interest
expense for the debtor.

Accounts Payable Example
•
Suppose that on June 3, Lloyd’s Sporting
Store purchased $1,000 of goods on
account from Patti Wholesaler.
•
What is the journal entry?
Inventory 1,000
Accounts Payable 1,000
Purchase on account

Short-Term Notes Payable
…are promissory notes payable due within

one year.
•
In addition to recording the note payable,
the business must also pay interest
expense.
•
If interest expense is accrued at the end of
the period, interest payable must also be
recorded.

Short-Term Notes Payable
Example
•
On April 30, Patti purchased inventory for
$10,000 by issuing a 90-day, 10% note
payable.
•
What is the journal entry?
Inventory 10,000
Notes Payable 10,000
Purchase inventory on a 90-day, 10% note

Short-Term Notes Payable
Example
•
Assume the accounting period ended
May 31.
•
How much interest was accrued as of
May 31?

•
$10,000 × 10% × 31/360 = $86.11
•
How does Patti record the payment at
maturity?

Short-Term Notes Payable
Example
July 29
Note Payable 10,000.00
Interest Payable 86.11
Interest Expense 163.89
Cash 10,250.00

Sales Tax Payable Example
•
Most states levy a sales tax on retail sales.
•
Suppose that a store sold $3,000 worth of
merchandise on a given Saturday.
•
The business collected an additional 5%
in sales tax.
•
How much is the sales tax liability?
•
$150

Accrued Expenses (Liabilities)
–

are expenses that have been incurred but
not recorded.
–
salaries
–
taxes withheld
–
interest
–
utilities

Payroll Liabilities
Salary Expense 10,000
Employee Income Tax Payable 1,200
FICA Tax Payable 800
Employee Union Dues Payable 140
Salary Payable 7,860
To record salary expense

Unearned Revenue Example
•
Assume that on June 1, Dennis’s Landscaping
collected $1,500 for services to be provided
during the months of June, July, and August.
June 1
Cash 1,500
Unearned Revenue 1,500
Received cash in advance

Unearned Revenue Example

•
What entry does Dennis record on June
30?
June 30
Unearned Revenue 500
Service Revenue 500
Earned service revenue that was collected
in advance

Objective 2
Account for Current Liabilities
That Must be Estimated.

Estimated Warranty Payable
•
The matching principle demands that the
company record the warranty expense in
the same period that the business
recognizes sales revenue.

Estimated Warranty Payable
Example
•
Patti Wholesaler made sales of $1,000,000
subject to product warranties.
•
In the past years, claims have averaged
2%.
Warranty Expense 20,000
Estimated Warranty Payable 20,000

To accrue warranty expense

Estimated Warranty Payable
Example
•
On January 28, a customer returned a
defective product and was given a $300
refund.
Estimated Warranty Payable 300
Cash 300
To record refund under warranty

Estimated Vacation Pay
Liability Example
•
Suppose Lloyd’s Sporting Store has a
March payroll of $10,000 and vacation pay
adds 4% (2 weeks of annual vacation
divided by 50 workweeks each year).
•
How much vacation pay should be
accrued?

Estimated Vacation Pay
Liability Example
March 31
Vacation Pay Expense 400
Estimated Vacation Pay Liability 400
To accrue vacation expense

Contingent Liability
•
Report a contingent liability in the notes to
the financial statement if it is reasonably
possible that a loss or expense will occur.
•
The FASB says to record an actual liability
if it is probable that the business has
suffered a loss and its amount can be
reasonably estimated.

Contingent vs. Current Liability
•
Suppose a hospital has lost a court case for
uninsured malpractice.
•
The hospital estimates that the liability will
fall between $1.5 and $2.5 million.

Contingent vs. Current Liability
•
The hospital must record a loss and a
liability of $1.5 million.
•
The hospital must disclose in a note the
possibility of an additional $1.0 million
loss.

Objective 3
Compute Payroll Amounts.

Payroll
•
Straight time is the base rate paid to
employees for a set number of hours.
•
Overtime is additional time worked by
employees for which they received a
higher rate (usually 1.5 times the straight
time rate).

Gross Pay and Net Pay
Gross Pay Deductions Net Pay