current liabilities and payroll chapter 11 copyright ©2014 pearson education, inc. publishing as...
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Current Liabilities and Payroll
Chapter 11
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 11-1
Liabilities
• Best described as:– Debts and obligations owed to others.
• Three primary characteristics:– They occur as a result of a past
transaction or event.– They create a present obligation for
future payments.– They are an unavoidable obligation.
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Current Liabilities
Long-Term Liabilities
Will be paid from current assets within one year or the company’s operating
cycle, whichever is longer.
Due after one year or the company’s operating cycle,
whichever is longer.
Two Major Categories
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Current Liabilities(examples) • Accounts payable• Short-term notes payable• Sales tax payable• Current portion of long-term notes payable• Accrued liabilities• Unearned revenues
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Eastman Chemical Footnote Disclosure
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Accounts Payable(example)
• For products and services purchased on account
• Integrated accounts payable and inventory systems
• Paid later within a discount period or not• Usually due in 30 days
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cashAccounts payable
700679 700
Inventory700
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Sales Tax Payable
• Tax levied by state on retail sales• Record sales, with the taxes, as follows:
• Record and forward the sales tax to the state
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cashAccounts payable Sales revenue
10,600 10,000 600
InventorySales Tax Payable
600600
Accrued Expenses• Expense incurred, but not yet paid
– Often an adjusting entry
• Debit expense and credit an accrued liability• Examples:
– Salaries – Interest payable
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Wages/Salaries Payable
Wages/Salaries Expense
1,500 1,500
Incurred $1,500 wages/salaries expense which has not been paid
Unearned(deferred) Revenues• Cash received in advance of performing
work• Obligation to provide goods or services
• Revenue earned as goods delivered or work performed
• Debit liability and credit revenues as earned
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cashUnearned revenue Sales revenue
600 600 600 600
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Unearned(deferred) Revenues
11-15©2014 Pearson Education, Inc. Publishing as Prentice Hall
11-16©2014 Pearson Education, Inc. Publishing as Prentice Hall
Current portionLong-Term Debt
11-17©2014 Pearson Education, Inc. Publishing as Prentice Hall
Accounting for Payroll
• Employees are typically not paid as they work.
• Employees are typically paid periodically, after accumulating a quantity of work.
• Any time employees have worked, but not yet been paid, there is a liability that must be recorded.
When employees are paid, they do not
receive the gross pay that they have earned.
Employers withhold amounts that are due to
other parties and the employee only receives what is “left over,” the
net amount.11-18
Accounting for Payroll
OASDI Taxes
Medicare Taxes
Federal Income
Tax
State and Local
Income Taxes
Voluntary Deductions
Gross Pay
Net Pay
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FICA
Amounts withheld depend on the employee’s earnings and the tax rates. Employers owe the income tax
amounts withheld from employees’ gross pay to the appropriate government agency.
Amounts withheld depend on the employee’s earnings and the tax rates. Employers owe the income tax
amounts withheld from employees’ gross pay to the appropriate government agency.
Federal Income
Tax
State and Local Income
Taxes
Withholding for Employee Income Tax
Top rate of 39.6% on income > $400,000
For example, in some states the state income tax rate is
5%.
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OASDI Taxes
Medicare Taxes
These amounts are due to the federal government following withholding.
Withholding for Employee Social Security and Medicare(FICA Taxes)
4.2%Applied to first
$110,100 of earned income
1.45%Applied to 100%
of income
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6.2% as of 2013
Union Dues
Savings Accounts
Pension Contributions
Insurance Premiums
Charities
Union Dues
Savings Accounts
Pension Contributions
Insurance Premiums
Charities
Optional Withholding Deductions
• Amounts withheld depend on the employee’s request.
• Employers must forward the voluntary deductions withheld from employees’ gross pay to the designated agency.
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Recording Payroll
• This table summarizes the payroll and withholdings for Smart Touch Learning for December.
• As shown in Exhibit 11-2, a Payroll Register is normally used to accumulate this data.
Gross Pay 28,580$ Withholdings OASDI $961 Medicare 414 Income Tax 5,716 Health Insurance 645 Other 60
Total Withholdings 7,796 Net (take-home) Pay 20,784$
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Recording Payroll
Typically, the payroll checks will be drawn against a separate payroll checking account that is only used for
payroll.
Date Accounts and Explanation Debit Credit
Dec. 31 Salaries and Wages Expense 28,580 FICA - OASDI Taxes Payable 961 FICA - Medicare Taxes Payable 414 Employee Income Taxes Payable 5,716 Employee Health Ins. Payable 645 Other Payables 60 Salaries and Wages Payable 20,784 To record payroll for December.
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A L + E
= Various Salaries/Wages
Payables Expense
Employer Payroll Taxes
• Employers are also required to pay taxes separate from the taxes withheld from employee paychecks.1. Employers must “match” the
FICA amounts withheld from employee paychecks.
2. State & Federal Unemployment Compensation Taxes
7.65% of earnings
up to $110,100; 1.45% of
earnings in excess of $110,100
6.2% of first $7,000 of employee earnings
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Unemployment Taxes
• Unemployment checks are paid out of the Unemployment Insurance Fund.
• Companies pay into the fund monthly (5.6% to the state and 0.60% to the federal government).
• The rate varies with each company’s employment history.
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Recording PayrollIn December, Smart Touch Learning had wages subject
to OASDI of $22,880 (one employee went over the $110,000 limit). Wages subject to Medicare were
$28,580. FUTA and SUTA were due on $4,000 of wages paid to a new employee.
Date Accounts and Explanation Debit Credit
Dec. 31 Payroll Tax Expense 2,081 FICA--OASDI Taxes Payable 1,419 FICA--Medicare Taxes Payable 414 Federal Unempl. Taxes Payable 24 State Unempl. Taxes Payable 224 To record employer payroll taxes.
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A L + E
= Various Payroll Tax
Payables Expense
$4,000 * .6%
$4,000 * 5.6%
$22,580 * 1.45%
$22,880 * 6.2%
Internal Controls for Payroll
• Efficiency Controls– Payroll is usually automated, rather than
prepared by hand.
• Disbursement Controls– Employees sign for checks or present ID’s.– Hiring and firing is separated from payroll
preparation.– Time clocks and direct deposit are also
used.
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Accounting for Estimated Liabilities
• Some liabilities are estimated– Bonus Accruals– Vacation and Sick
Leave Accruals– Pension expense
Accrual– Warranties expense
Many liabilities are estimated at year-end, even though
actual amounts will not be known until
some time after year-end. This is in
accordance with the Matching Principle.
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Dell Warranty Disclosure
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Contingent Liabilities
• A contingent liability is a POTENTIAL liability that depends on a future event.
• How do we disclose a liability that might arise in the FUTURE as a result of something that has occurred in the PRESENT?
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Contingent Liabilities
• The type of disclosure of a contingent liability depends on two issues:
1. How likely is the future event?
2. Can the amount of the liability be reasonably estimated?
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Probability of future sacrifice . . .Reasonably
Probable Possible RemoteRecord the Disclose the
Can be contingent liability in the No
Estimated liability. notes to the action.
financial stmts.
Disclose the Disclose the
Cannot be liability in the liability in the No
Estimated notes to the notes to the action.financial stmts. financial stmts.
Am
ou
nt
. . .
Contingent LiabilitiesThis table can be used to determine the proper
disclosure treatment of a contingent liability.
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Times-Interest-Earned Ratio
This ratio is used to evaluate a business’s ability to pay interest
expense.
A high ratio indicates that the company is better able to pay its interest.
Times-Interest-Earned Ratio
= ( Net Income
+Income Tax
Expense +
Interest Expense
) ÷Interest Expense
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Times-Interest-Earned Ratio
Times-Interest-Earned Ratio
= ( Net Income
+Income Tax
Expense +
Interest Expense
) ÷Interest Expense
Compute the Times-Interest-Earned Ratio for Green Mountain for 2011
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Times-Interest-Earned Ratio
Times-Interest-Earned Ratio
= ( Net Income
+Income Tax
Expense +
Interest Expense
) ÷Interest Expense
= ( 199,501$ + $101,699 + 57,657$ ) ÷ 57,657$
= 358,857$ ÷ $57,657
= 6.22 (rounded)
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 11-38