Horngren’s Accounting Volume One, Eleventh Canadian Edition HORNGREN’S ACCOUNTING Chapter 11 Current Liabilities and Payroll @ vouumeone Orso coprah: © 2029 Pecan Cana In at Current Liabilities + Current liabilities are obligations due within one year or within the company's operating cycle if its longer than one year + Obligations due beyond that period are long-term liabilities + Showing current liabilities separate is important for users of financial statements @remon Copyright 2020 Pearson Canada te. a2 6/24/2019Learning Objective 1 Account for current liabilities of known amount + What are current liabilities, and how do we account for ‘them? Orveren nit ©2520 ean Cnn ws Accounts Payable * Accounts payable defined: Amounts owed for products or services that are purchased on account, usually due in 30 days + Assume on Nov. 22, Brick Brewing Co, Limited purchases inventory on credit, $600 + The entry to record the purchase is: Nov. 22 [ Inventory (600 _ | Blank Blank | Accounts Payable Blank 600 Biank [To record purchase of inventory on account. [Blank | Blank + The entry to record the payment on Dec. 5 is: Dec. 8 | Assounts Payable 00 [Bink] Blank | Cash Blank 600) Blank | To record payment of easount Blank | Bink een ‘Conran © 2020 Peron Cond ine ned 6/24/2019Short-Term Notes Payable (1 0:2) + Short-term notes payable defined: A promissory note that must be paid within one year, a common form of financing + Assume on Oct. 31, 2019, Safari Condo purchases inventory costing $16,000 by issuing a short-term 10% note payable; the entry is: 2018 [Blank Blank | Blank (Oct. 34 | Inventory 16,000 | Blank Blank | _ Note Payable, Short-Term Blank [| 16,000 Blank | Purchase ofinventory by issuing a one-year, [Blank | Blank 10 percent note payable, rere copyright © 2020 Pearzan Canc ne. tes Short-Term Notes Payable ¢2ot2) + At year end, itis necessary to accrue the interest for 2 months; the entry is: 2019 | Bank Blank [Biank | Dee. 31 | Interest Expense 267_| Blank Blank _|_Interest Payable Bisrk_|_257 Blank | Accrued interest expense at year end (616,000 x 0.10 x 2/12). | Blank —{ Bank * On Oct. 34, 2020 when the note matures, the entry is: ‘2020 Blank [Blank Ost 51 16,000 [Blank lank [Interest Payable 267 | Blank Blank _ | intrest Expense 7189 | Bank Blank | Cash Blank | 17,600 ‘lonk | Palde noe payable ad intrest at maluriy ntrest expanse is | Blark | Blank $1,389 ($16,000 «0.10 10/12), Cash pads $17,600 [$16,000 + 1§16,000* 0.10) 6/24/2019Short-Term Bank Loans and Operating Lines of Credi' * Short-term bank loans are very similar to short-term notes payable ~ They are arranged with a bank or other financial institution fora fixed period at a negotiated interest rate + Line of credit is arranged with a financial institution and is drawn upon when needed ~ Have cash available in case of a temporary cash shortfall — Interest is payable only on the amount of the line of credit that is actually used, Orvree ‘epane © 2020 atson Cade ne. a7 Goods and Services Tax, Harmonized Sales Tax, and Sales Tax Payable (1 02) + There are two basic consumption taxes levied on purchases in Canada — Goods and Services tax (GST) by the federal government; the GST is currently 5% — Provincial sales tax (PST) by provincial governments; the percentage of PST varies from province to province ~ There Is also Harmonized Sales Tax (HST); HST is GST and PST combined, remitted to the CRA; the CRA pays the PST portion to the relevant provincial government — GST Is mandatory in all provinces; PST and HST vary by province; for example: * Alberta - 5% GST only * Ontario - 19% HST (combined 5% GST and 8% PST) * Saskatchewan ~ 5% GST and a separate 6% PST Orem ora © 2020 pearson Canada 18 6/24/2019Goods and Services Tax, Harmonized Sales Tax, and Sales Tax Payable (02) + GST Charged on Sales: the tax is collected by the individual or business selling the taxable good or service; recorded as GST Payable + GST Paid on Purchases: Businesses have to pay tax on their purchases; they are able to deduct the amount of GST paid from the GST they have collected from their sales in calculating the amount due; recorded as GST Recoverable, and called an input tax credit, or ITC + GST Remittance: GST Payable, net of GST Recoverable is remitted to the Receiver General + GST Payable is a current liability, whereas GST Recoverable is a current asset Orie enn © 202 Feo aan Goods and Services Tax, Example (1 03) + Assume a business that operates in a province without PST purchases equipment for $2,400 + $120 GST; a further $100 + $5 GST was paid for advertising + The service revenue eamed by the business using the above equipment was $4,000; GST collected on this revenue was $200 son copyright 2020 Pearson Canada. u-10 6/24/2019Goods and Services Tax, Example (2013) 7019 [Bank Bak [Berk] uL2 | Eaupment 2.400 [ark Blank | 6ST Recovered 120 | Blank ierk | Cash Birk | 2520 Blank | To recon purchase of anew sound system, | lank [Birk Jul-Sep [Advertsing Expense 100 lank Bark | GST Recoverbe 5 [ink Bank | Cash Bank | 108 Blank | To reoord averting csi forthe por Bark [Blank “ul-Sep_ [Cah 4200 | Bank [Bien | Oise Jockey Revense Bink | 4000 ‘irk | GST Poyale Bink 200 [Blank [To record revenue fam varios ever ink [Blank Orn Coy © 2020 ean Cade nen Goods and Services Tax, Example @3or3) + The business collected $200 in GST, and paid $125 in GST on the equipment ($120) and advertising ($5) + This means that there is a net $75 due to the CRA + The GST collected less the ITC must be remitted to the Receiver General; the entry is: Oct. 31 | GST Payable 200__ [Blank Blank | GST Recoverable Blank | _ 125 Blank | Cash Blank 75 Blank | To record payment of GST payable net of | Blank | Blank input tax credits tothe Receiver General l Oren epg © 2020 Fersn Cana wea 6/24/2019Harmonized Sales Tax (HST) + Some provinces combine the GST and PST — in Ontario, this Harmonized Sales Tax (HST) combines the 5% GST + 8% PST to make a 13% HST + Companies use HST Payable and HST Recoverable accounts, similar to GST Payable and GST Recoverable accounts + Combining the taxes reduces the cost of collecting and administering consumption taxes Oars conyant © 2020 Pearson Canad ne wen Provincial Sales Tax + Some provinces levy Provincial Sales Tax (PST) on sales to the final consumers of products; sales tax typically is not levied on sales to wholesalers or retailers + Retailers accumulate the PST charged to consumers in the Sales Tax Payable account, which is a current liability + Sales Tax Payable is an account used only for collecting tax on behalf of the government; it does not correspond to any sales tax expense that the business is incurring * Considered an end-user tax Qruse Copyright © 2020 Pearon Canad. m4 6/24/2019Current Portion of Long-Term Debt * The current portion of long-term debt is the amount of the principal that is payable within one year + The current portion of long-term debt does not include any accrued interest payable + Since current portion of long-term debt is necessary only for reporting on the balance sheet, no journal entry is required + However, companies may make the following entry to transfer long-term debt to current: 72020 ‘| Blank Blank | Blank Dec. 31 _| Long-Term Debt 10,000 _| Bank Blank Curent Porton of Long-Term Debt Blank | 10,000 Blank | Totranster the portion of long-orm debt cuein | Blank | Blank 2018 tothe curent lablity account Orne ora 2020 ren Cra nis Accrued Expenses (Accrued Liabilities) + Accrued expense defined: An expense that has not yet been paid; an accrued expense creates a liability (accrued liabilities) + Examples of accrued liabilities include: ~ Interest payable = Property taxes payable ~ Salaries payable ~ Payroll liabilities payable rane Cenratt 202 Peano canta nc nos 6/24/2019Unearned Revenues (: of2) + Unearned revenues are also called deferred revenues and are revenues collected in advance + Uneamed revenue is a liability because it represents an obligation to provide a good or service. + Gift cards, concert tickets, and airline tickets are examples of prepayments that the company must record as uneamed revenue rere arg © 2020 fein Cra. wea Unearned Revenues (2012) + On September 3, 2020, a subscriber pays $20 to Rogers Publishing for an annual subscription; Rogers would record the entry as 2a) [ane Bink [Bank Sep. 8 [aan 20__| Bank Blank | Unesmed Subeciplon Revere Bia 2 ‘Blank | To eoo eeu ofessh at he star oa one year Birk | Bank ssi + The adjusting entry on Dec. 31, 2020, to decrease the liability and Increase the revenue is: 00 an oem [Bank ‘Dea 31 | Unearned Sibasipton Reverue = [sea Bank | Sabeaipon Revenue Bank e Bink | Ewnodvovone hat was oaleced n atvance 620116) [Bink | Blank rav00 conan @ 2020 Pevsan Cant ne 6/24/2019Customer Deposits Payable * Companies often require cash deposits from customers as security on borrowed assets + These amounts are called Customer Deposits Payable because the company must refund the cash to the customer under certain conditions, @ranen oni © 262 pero Cnn. soe Learning Objective 2 Account for current liabilities that must be estimated + Why would we estimate liabilities, and how do we account for them? Orare ont © 2020 exon Canad ery 6/24/2019 10Current Liabilities that must be Estimated * Abusiness may know that a liability exists but not know the exact amount + It cannot simply ignore the liability + This liability must be recorded and reported on the balance sheet Orarmee apt © 202 Peron Cada ne ren Estimated Warranty Payable + Many companies guarantee their products against defects under warranty agreements + The matching objective requires a warranty expense be recorded in the same period we record the revenue; the expense occurs when the sale is completed, not when the warranty claim is paid Oren ony © 202 reo anata non 6/24/2019 aEstimated Warranty Payable Example (10f2) + In 2019, Collico Fabricating Ltd had sales of $80 million that are subject to a one year warranty; the company believes that 1% of the $80 million sold is the appropriate estimate of the cost of the warranty * The entries to record the sales. and warranty expense are: 2010 [Bink Bark [Bank Various [Accounts Recaable 20,000,005 | Bank dates | Sales Revenue ‘lank | 0,000,600 ‘lnk | Sees on account Blank [Bank [ee 57 Warranty Expense 200000 [Bank Bink | Estimated Waraniy Payable Bink 200000 Blank — | To acowe waranty expense on $86 miliono | Bank lank se, Oran Conta © 2820 evaen Cnt. son Estimated Warranty Payable Example (20f2) + Assume that the costs to repair defective merchandise total $700,000; the journal entry is: 220 [Bank Bink Bink ‘areus | Estate Wieranty Payable 700700 en ates | Cash Bank 700500 ‘Blank | To pay ropa costs for detecve produce sal unger | Blank Blak wana. + If the product is replaced, the journal entry is: [2000 [aia Bia Bank Various _ | Estated Werany Payable 700,000 | Bank ates | venony Blank 700600 [Bien Te repacadeecve poaicis sod under wary [Blank Bank + The expense on the income statement is $800,000, not the $700,000 actually paid Oran Conta © 2020 exon cnt. sete 6/24/2019 aeEstimated Vacation Pay Liability + The law requires most employers to provide a minimum number of weeks’ holiday per year (usually two, but sometimes more based on the number of years worked) + The vacation pay is estimated and accrued in the same period as the employees are working and earning the vacation time Orewa Capynant © 2020 Pearson Canada ie. nas Estimated Vacation Pay Liability, Example + January payroll is $100,000 and vacation pay adds 4 percent, or $4,000, In January, the company records the vacation pay accrual as follows: ‘Jan. 31_ | Vacation Pay Expense 4,000 _| Blank Blank | Estimated Vacation Pay Liability Blank | 4,000 Blank _| To record vacation accrual for January. Blank | Blank + In August, an employee with a weekly salary of $500 takes a two week vacation; the entry is: ‘Aug. 81 _[ Estimated Vacation Pay Liability 7000_[ Bank Blank | Salaries Expense 7,000__| Blank Blank | Various Withholding Accounts and Gash_[Blank | 2,000 Blank | To record payment of salary and vacation pay. [Blank | Blank Oran Copan © 2020 Fearon cade ne 1-5 6/24/2019 13Income Tax Payable (for a Corporation) (1 of 3) * Corporations are required to pay tax and make instalment payments during the year based on their estimated tax for the year + The entry to record a $100,000 monthly income tax instalment is: Sep. 30 Income Tax Expense 100,000 [Blank lank | Cash Blank | 100,000 Blank [To pay monthly income laxinsaiment | Blank | Bank reason Coppin © 2020 earn Canes tn, nea Income Tax Payable (for a Corporation) (2 0f 3) ExvuntT 11-7 | Disbursement Hana Wats PodCast by an Emlyer Using te POO (AC) tne + lye copy Sine Gre rea Coppin © 2020 pearson Cane ne nea 6/24/2019 14Income Tax Payable (for a Corporation) (B0f3) + Atyear end, the corporation calculates actual tax expense for the year to be $1,240,000. The company pays the last monthly installment of $100,000 and accrues an additional $40,000 + The entry to record the accrual of the $40,000 on December 31 is: Deo. 31 | Income Tax Expense | 49,000 [Blank Blank | Income Tax Payable Blank | 40,000 Blank [To accrue income tax at yearend. | Blank —_| Blank Orson Copyright © 2020 Pearson Canad u-39 Contingent Liabilities + Contingent liabilities defined: A potential liability that depends on a future event arising out of past events + The future event is the court case that will settle the lawsuit * Contingent losses are to be accrued or disclosed in the financial statements * Contingent gains cannot be recognized until they are realized @rnon capone 2020 earsn cana 11-30 6/24/2019 15Contingent Liabilities: Three Categories Re a guna Orin Conran © 202 Peron Coats In soa Ethical Issues in Accounting for Current and Contingent Liabilities + Businesses want to look as successful as possible; owners and managers may be tempted to overlook some. expenses and liabilities at the end of the period; this would overstate net income. + Abusiness with contingent liabilities walks a tightrope between: ~ Disclosing enough information; and ~ Giving away t00 much information + Falsifying financial statements can ruin one’s reputation in the business community and lead to criminal convictions. ron copyrant © 2020 Pearson Con ne 1-2 6/24/2019 16Learning Objective 3 Compute payroll amounts + How are payroll amounts calculated? Oren coor @ 2020 Pesan anne som Accounting for Payroll (1 of2) + There are numerous ways to express an employee's gross payroll: ~ Salary (annually, monthly, weekly) — Wages (hourly rates) — Commission (percentage of sales) ~ Piecework (per number of pieces produced) ~ Bonus (over and above base salary) — Benefits (extra compensation items not paid directly to the employee) Oras Copii © 2020 Pearson Can Te ni-34 6/24/2019 7Accounting for Payroll 2.02) + Straight-time pay is the base rate paid to employees for a set number of hours * Overtime is additional time worked by the employees for which they receive a higher rate (usually 1.5 times the straight-time rate, called time and a half) @reaven onra0 2020 reson Canaan nos Gross Pay and Net Pay * Gross pay is the total amount of salary, wages, commission, piecework, and bonus eamed by the ‘employee during a pay period, prior to income tax and other deductions + Net pay (or take-home pay) is the amount the employee keeps; gross pay minus all deductions Orenen enya © 2020 Pere canada. 116 6/24/2019 18Payroll Deductions + Payroll deductions create the difference between gross and net pay; they are withheld and fall into two categories: = Required (or statutory deductions), which include employee income tax, El, and CPP or QPP — Optional deductions, which include union dues, insurance premiums, charitable donations, and others Orevessn Copyright © 2020 Pearson Candee. ny Employer Payroll Costs + Employers have expenses for at least three payroll costs — CPP contributions (employer matches the employee's contribution) — Employment Insurance premiums (employer remits 1.4 times the ‘employee's contribution) — Workers’ Compensation Plan premiums (employer pays a rate determined by each province times the employer's gross payroll) Qrere0 conan © 2020 Feren Cate ie 138 6/24/2019 19Disbursement of Payroll Costs [nnuBHT 12-7 | lebunomentot Hon Wests Payal Costs hy an Enloer Using the POOC (BG) as a Pp ss ee wnat eine cabin’ ee sist SR SSR SR) wee t 4 t + t ei omni Sti 78 Ore onan © 2020 ren Coad te so Learning Objective 4 Record basic payroll transactions + How are payroll liabilities recorded and reported in the accounting records? Oren cota 2020 rain com new 6/24/2019 20The Payroll System + Good business practice requires paying employees accurately and on time + Apayroll system accomplishes these goals. The components of the payroll system are: = Apayroll register = Payroll cheques — Employee earnings records Oran ret © 2020 een Cade ne sts Payroll Register + The company organizes payroll data in a special journal called the payroll register + Itlists payroll data for each employee + It serves as a cheque register (the list of net pay amounts paid to employees) + It provides information for recording payroll expenses and related withholdings rear opt © 2020 Pearson Candee ne 6/24/2019 2Payroll Cheques + Most companies pay employees by cheque or by electronic funds transfer (EFT), called direct deposit + Apayroll cheque has an attachment, or stub, that details the employee's gross pay, payroll deductions, and net pay Orv Recording Cash Payments for Payroll + Most employers must record at least three cash payments: = For net pay to employees = For payroll withholdings to the government ~ For payment to third parties for employee benefits + When the employer pays the employees, there is a debit to Salaries Payable and a credit to Cash + When the employer pays the liabilities to the government and third parties, the respective liabilities are debited and Cash is credited Orvaren opmtan © 2020 Pein Coat in sa 6/24/2019 22Payroll Entries + The first entry records the employer's salary expense, which is the gross salary for all employees + The employer acts as a collection agent for the CRA (income tax and CPP), the provincial government (income tax), the Employment Insurance Commission (El), and the union (union dues) Orv enya. 0 2020 reason Cnt teas Payroll Entries, Example (1 of) + Accrue for the weekly payroll for December 31, 2018 is $13,654.00; the take-home pay is $10,002.28 + Three entries are required: — Record the accrued payroll for net wages, salaries, and bonuses: ~ Record the employer's share of El and CPP = Record payment of salaries payable to the employees @ravin Conn 0252 peraen Cra sos 6/24/2019 23,Payroll Entries, Example @ ot6) + The entry to record salary expense and employee withholdings is: sie eat te sas tipaee ‘co | see Saino epee 49000) Erp core TaxPbie | a ‘ans Peson Pn Patio j | taro} {onstage _EnloenciniranesPpabie | | ‘ted ay ae | | i | } | ste yale Jeuedbecmrsrion errs | Pram Cont 202 Peron anda ne. ee Payroll Entries, Example 3 ors) + The entry that represents the employer's share of CPP and Elis: me i 86:31. | enpneetoti pene | [Geeta reeonrunra i | erocjmen earns pate | once eels rf |corshewuses er fret se [Rares | @ rane apn © 2020 ern Cand nea 6/24/2019 24Payroll Entries, Example (4 ofs) + The company would make the following entry in January to record the cash payment (column L in Exhibit 11-8) for the December 31, 2018 weekly pay period: a | jana” | Solries Payable 100228 cash | 1000228 ash payment for December 21,2018, weekly | paral Orvwen Copyright © 2020 Pearson Canada Ine isa Payroll Entries, Example (5016) + Record the payment of employee withholdings and employer expenses for the MONTH of December: | aoa | jan0 | enpoye cone Tarte aaio Cara Penson Po Poyale ‘sas lope rt Pople | ass) cash | ‘ere pont ote ca ocCucimber iewnoangs Dermbes toons orn | ‘EPayable = $1,232.14 + (1.4 x $1,232.14) 1 19451.68 40.10 | United Way Payable 620.00 cash “To record payment to United Way for December 2018 withholdings. reaver capyign@ 2020 Pearson Caneeae 11-50 6/24/2019 25Independent Contractors + Acompany’s payments to people who are not employees—outsiders called independent contractors— are not company payroll expenses + These independent contractors provide invoices for their services, similar to those provided by other external vendors Oranin Copan © 2020 Fearon Casta ne 1st Earnings Record + Employers maintain records for each employee in order to file Summary of Remuneration Paid returns with CRA (T4 slips must be filed before February 28) Orson Copyright© 2020 Pearson Cann I nem 6/24/2019 26Learning Objective 5 Report current liabilities on the balance sheet + How are liabilities reported? Qrewron Copyrgne © 2020 ears Canada Ine. ness Reporting Current Liabilities (1 of2) + This is an example of reporting liabilities in a classified balance sheet reaver ‘apyraht © 2020 Pearson Canada In. no 6/24/2019 276/24/2019 Reporting Current Lia! ES (2 0f2) EXHIBIT 11-12 | Partial Balance Sheet as at December 31, 2020 Gongterm fabs ‘Not payable 90.000 Less Current portion of longterm debt 10.000 Total long-term lables “Tg ' aoo00 Total abies 008 ‘oot © 20 Para ac ne Orava Conrta ©252 fearon Cn soot Learning Objective 6 Describe the impact of IFRS on current liabilities + How does IFRS affect current liabilities? vests Copyignt © 2020 Pearson Cana in. n1-56 28The Impact of IFRS on Current Liabilities (1 oF2) ‘ibri 2%0 Pn Cod @rrarson Coppi © 2020 Pebrenn Cano In aes The Impact of IFRS on Current Liabilities (2 of2) ‘The fling stan gigs hie Senin eran aes reniie aie oi 6/24/2019 29