Accounting 21th waren reeve fess chapter 11

Chapter 11
Current Liabilities
Accounting, 21st Edition
Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

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Objectives
Objectives
1. Define and give examples of current liabilities.
2. Prepare journal

entries
for short-term
notes
After
studying
this
After
studying
this
payable and disclosure for the current portion of
chapter,
chapter, you
you should
should
long-term debt.
be
to:
3. Describe the accounting
for contingent
be able
abletreatment
to:
liabilities and journalize entries for product
warranties.
4. Determine employer liabilities for payroll,
including liabilities arising from employee
earnings and deductions from earnings.


Objectives

Objectives
5. Describe payroll accounting systems
that use a payroll register, employee
earnings record, and a general journal.
6. Journalize entries for employee fringe
benefits, including vacation pay and
pensions.
7. Use the quick ratio to analyze the
ability of a business to pay its current
liabilities.


The
The Nature
Nature of
of Current
Current Liabilities
Liabilities
Liabilities
Liabilities that
that are
are to
to be
be paid
paid out
out of
of
current
current assets
assets and

and are
are due
due within
within aa
short
short time,
time, usually
usually within
within one
one
year,
year, are
are called
called current
current liabilities.
liabilities.

Examples:








Accounts payable
Notes payable
Unearned rent
Taxes payable

Wages payable
Current portion of long
term debt


Short-Term
Short-Term Notes
Notes Payable
Payable
A
A firm
firm issues
issues aa 90-day,
90-day, 12%
12% note
note for
for
$1,000,
$1,000, dated
dated August
August 1,
1, 2006
2006 to
to Murray
Murray
Co.
Co. for
for aa $1,000
$1,000 overdue
overdue account.

account.
Aug. 1
Payable—Murray Co.
Notes Payable
1 Issued
000 00a 90-day, 12% note on
account.

Accounts
1 000 00


Short-Term
Short-Term Notes
Notes Payable
Payable
On
On October
October 30,
30, when
when the
the note
note matures,
matures, the
the
firm
firm pays
pays the
the $1,000
$1,000 principal

principal plus
plus $30
$30
interest
interest ($1,000
($1,000 xx .12
.12 xx 90/360).
90/360).
Oct. 30
Payable 1 000 00
Interest
CashExpense
1 030 00
Issued a 90-day, 12% note on

Appears
on
account.
Appears
on the
the
income
income statement
statement as
as
an
an “Other
“Other Expense.”
Expense.”

Notes
30 00


Short-Term
Short-Term Notes
Notes Payable
Payable
Bowden Co. (Borrower)
Description
Credit

Mdse. Inventory
Accounts Payable
10,000

Debit

10,000

Coker Co. (Creditor)
Description
Credit

Debit

Accounts Receivable
Sales
10,000

10,000

Cost of Mdse. Sold
Mdse. Inventory
7,500

7,500

May
May31.
31. Bowden
Bowden Co.
Co. purchased
purchased merchandise
merchandise on
on
account
account from
from Coker
Coker Co.,
Co., $10,000,
$10,000, 2/10,
2/10, n/30.
n/30.
The
The merchandise
merchandise cost
cost Coker
Coker Co.
Co. $7,500.

$7,500.


Short-Term
Short-Term Notes
Notes Payable
Payable
Bowden Co. (Borrower)
Description
Credit

Debit

Mdse. Inventory
Accounts Payable

Accounts Payable
Notes Payable

10,000
10,000

10,000
10,000

Coker Co. (Creditor)
Description
Credit

Debit

Accounts Receivable
Sales
10,000

10,000

Cost of Mdse. Sold
Mdse. Inventory
Notes Receivable
7,500
Accounts Receivable
10,000

7,500

May
May 31.
31. Bowden
Bowden Co.
Co. issued
issued aa60-day,
60-day, 12%
12%
note
note for
for $10,000
$10,000 to
to Coker
Coker on

on account.
account.

10,000


Short-Term
Short-Term Notes
Notes Payable
Payable
Bowden Co. (Borrower)

Coker Co. (Creditor)

Description
Debit
Description
Debit
CreditCoker
Credit
July
July 30.
30. Bowden
Bowden Co.
Co. paid
paid
Coker Co.
Co. the
the

Mdse. Inventory
10,000
Accounts Receivable
10,000
amount
due
on
the
note
of
May
31.
Interest:
amount
due on 10,000
the note ofSales
May 31. Interest:
Accounts
Payable
$10,000
60/360
$10,000 xx 12%
12% xx10,000
60/360 ==$200.
$200.

Accounts Payable
Notes Payable

10,000

10,000

Cost of Mdse. Sold
Mdse. Inventory
Notes Receivable
7,500
Accounts Receivable
10,000

Notes Payable
Interest Expense
Cash

10,000
200
10,200

Cash
Interest Revenue
Notes Receivable

10,200
200
10,000

7,500
10,000


Discounted

Discounted Notes
Notes Payable
Payable
On
On August
August 10,
10, Cary
CaryCompany
Companyissues
issuesaa$20,000,
$20,000,
90-day
90-day note
note to
to Rock
Rock Company
Company in
in exchange
exchange for
for
inventory.
inventory. Rock
Rock discounts
discountsthe
the note
note at
at 15%.
15%.
Aug. 10
Inventory

Merchandise
19 250 00

Interest
NotesExpense
Payable
20
000 a 00
Issued
90-day, note to Rock
Co. discounted at 15%.

Discount
Discount rate
rate

Proceeds
Proceeds750

00

Discount:
Discount: $20,000
$20,000
xx.15
.15xx90/360
90/360

Discounted
Discounted Notes
Notes Payable
Payable
On
On November
November 88 the
the note
note isis paid
paid in
in full.
full.
Nov. 8
Payable 20 000
Cash00
20 000 00
Paid note due.

Notes


Contingent
Liabilities


Product
Product Liability
Liability
On
On June

June 30,
30, aa company
company sells
sells aa product
product for
for $60,000
$60,000
on
on which
which there
there isis aa 36-month
36-month warranty.
warranty. Past
Past
experience
experience indicates
indicates that
that repairs
repairs of
of defects
defects cost
cost 5%
5%
of
of the
the sales
sales price
price over
over the
the warranty

warranty period.
period.
June 30 Product Warranty Expense
Product Warranty Liability
3 000 00
Warranty expenses projected for
June, 5% of $60,000.

3 000 00


Product
Product Liability
Liability
On
On August
August 16,
16, aa customer
customer needed
needed aa
defective
defective part
part replaced.
replaced. Cost
Cost to
to the
the
company
company was
was $200

$200 for
for the
the part.
part.
Aug. 16
Warranty Payable
Supplies
200 00
Replaced defective part under
warranty.

Product
200 00


Accounting
Accounting Treatment
Treatment of
of
Contingent
Contingent Liabilities
Liabilities
Likelihood
of
Occurring

Measurement

Probable

Estimable

Record
Liability

Not
Estimable

Disclose
Liability

Contingency

Possible

Accounting
Treatment

Disclose
Liability


Payroll and
Payroll
Taxes


Liability
Liability for
for Employee

Employee Earnings
Earnings
Payroll is the amount paid to employees for
services provided. Payrolls are important because-1. Good employee relations demand that payrolls be calculated
accurately and paid as scheduled.
2. Payroll expenditures are subject to a variety of federal, state, and local
taxes.
3. Total payroll expense (gross payroll plus payroll taxes) has a major
impact on net income.


Gross
Gross Pay
Pay Calculation
Calculation
John
John T.
T. McGrath
McGrath isisemployed
employed by
by McDermott
McDermott
Supply
Supply Co.
Co. at
at the
the rate
rate of
of $34
$34 per

per hour,
hour, plus
plus1.5
1.5
times
timesthe
the normal
normal hourly
hourly rate
rate for
for hours
hours over
over 40
40
per
per week.
week. For
For the
the week
week ended
ended December
December 27,
27,
McGrath
McGrath worked
worked 42
42 hours.
hours.

Earnings at base rate (40 x $34)

$1,360
Earnings at overtime rate (2 x $51)
102
Total earnings


FICA
FICA Tax
Tax
Employers
Employers are
are required
required to
to withhold
withhold aa
portion
portion of
of the
the earnings
earnings of
of each
each of
of the
the
employees.
employees. The
The amount
amount isis matched
matched by
by

the
the employer
employer and
and serves
serves to
to provide
provide the
the
employee
employee with
with social
social security
security and
and
Medicare
Medicare benefits
benefits upon
upon retirement.
retirement.


FICA
FICA Tax
Tax Calculation
Calculation
Assume that John T. McGrath’s annual earnings
prior to the current period total $99,038. His
current period earnings are $1,462.
Earnings subject to 6% social security tax
($100,000 – $99,038)

$962
Social security tax rate
x 6%
Social security tax
Earnings subject to 1.5% Medicare tax
$57.72
Current earnings
$1,462
Medicare tax rate
Medicare tax
Total FICA tax

x 1.5%
21.93
$79.65


Withholding
Withholding Taxes,
Taxes, Other
Other Deductions
Deductions
 Employers are required to withhold federal

income tax from each employee based on the
withholding table and information provided by
the employee’s W-4 form.
 Federal income tax and FICA tax must be

withheld from the pay of each employee.

 Deductions for other purposes may be withheld

by mutual agreement.


Employee Net Pay Calculation
Gross earnings for the week
$1,462.00
Deductions:
Social security tax tax
$ 57.72
Medicare tax
21.93
Federal income tax
279.51
Retirement savings
20.00
United Way
5.00
Total deductions
384.16
John
T. McGrath is single, has declared one
Net pay
$1,077.84 allowance, and had gross pay of
withholding

$1,462 for the week ended December 27.

Responsibility
Responsibility for
for Tax
Tax
Payments
Payments
EMPLOYEE

Social security tax
Medicare tax
Federal withholding tax

GOVERNMENT

BUSINESS

Social security tax
Medicare tax
Federal unemployment
compensation tax
State unemployment
compensation tax


Federal Income
Corporate
Estate, gift,
income tax
and other
8%

8%
46%

Personal
income tax

FICA and
FUTA
38%