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Chapter 11
Current Liabilities and Payroll, Global Edition
Review Questions
1. What are the three main characteristics of liabilities?

The three main characteristics of liabilities are:
 They occur because of a past transaction or event.
 They create a present obligation for future payment of cash or services.
 They are an unavoidable obligation.
2. What is a current liability? Provide some examples of current liabilities.

Current liabilities must be paid with cash or with goods and services within one year or within
the entity’s operating cycle if the cycle is longer than a year. Examples of current liabilities
include: Accounts Payable, Notes Payable due within one year, Salaries Payable, Interest
Payable, Sales Tax Payable, Income Tax Payable and Unearned Revenue.
3. How is sales tax recorded? Is it considered an expense of a business? Why or why not?
Sales tax is recorded as a liability when it is charged to the customer; it is usually calculated as a
percentage of the amount of the sale. It is not considered an expense to the business, but a current
liability. Companies collect the sales tax and then forward it to the state at regular intervals.
4. How do unearned revenues arise?

Unearned revenue arises when a business has received cash in advance of providing goods or
performing work and, therefore, has an obligation to provide goods or services to the customer in the
future.
5. What do short-term notes payable represent?

Short-term notes payable represent a written promise by the business to pay a debt, usually involving
interest, within one year or less.
6. The principal amount that will be paid within one year will be reported in the current liabilities as
current portion of notes payable.
7. What is the difference between gross pay and net pay?

Gross pay is the total amount of salary, wages, commissions, and bonuses earned by the employee
during a pay period, before taxes or any other deductions. Gross pay is an expense to the employer.
Net pay is the amount the employee gets to keep. Net pay equals gross pay minus all deductions paid
by the employee such as income tax withheld.
© 2022 Pearson Education, Ltd. 11-1

8. List the required employee payroll withholding deductions, and provide the tax rate for each.
Required payroll withholding deductions are:
Withholding Deductions Tax Rate

Federal, State and Local Income Tax The amount withheld depends on the
employee’s gross pay, filing status,
and the number of withholding
allowances he or she claims.
FICA—OASDI (old age, survivors, and For 2016, the OASDI tax applies to the
disability insurance) first $118,500 of employee earnings
in a year. The taxable amount of
earnings is adjusted annually. The
OASDI tax rate at the time of this
writing is 6.2%.
FICA—Medicare (medical benefits) Medicare applies to all employee
earnings—that means that there is
no maximum tax. At the time of
this writing, this tax rate is 1.45%
on the first $200,000 of earnings,
then 2.35% on any earnings above
$200,000.
9. How might a business use a payroll register?

Many companies use a payroll register to help summarize the earnings, withholdings, and net pay for
each employee.
10. What payroll taxes is the employer responsible for paying?

The payroll taxes an employer is responsible for paying are:
 Employer FICA tax (OASDI and Medicare)
 State unemployment compensation tax (SUTA)
 Federal unemployment compensation tax (FUTA)
11. What are the two main controls for payroll? Provide an example of each.
There are two main controls for payroll: controls for efficiency and controls to safeguard payroll
disbursements.
Using computer processing for payroll brings efficiency to the process. The payroll data are stored in
a file, and the computer makes the calculations, prints paychecks, and updates all records
electronically. In addition, companies may require direct deposits for employees’ pay so that paper
checks do not have to be written to each employee. Direct deposits also increase efficiency by
reducing the amount of reconciliation needed on outstanding checks.
Controls to safeguard payroll disbursements include: Hiring and firing employees should be
separated from accounting and from passing out paychecks. Photo IDs ensure that only actual
employees are paid. Employees clock in at the start and clock out at the end of the workday to prove
their attendance and hours worked.

12. When do businesses record warranty expense, and why?
The matching principle requires businesses to record Warranty Expense in the same period that the
company records the revenue related to that warranty. The expense, therefore, is incurred when the
company makes a sale, not when the company pays the warranty claims.
13. What is a contingent liability? Provide some examples of contingencies.

A contingent liability is a potential, rather than an actual, liability because it depends on a future
event. For a contingent liability to be paid, some event (the contingency) must happen in the future.
Some examples of contingencies are lawsuits and co-signing a note for another entity.
14. Curtis Company is facing a potential lawsuit. Curtis’s lawyers think that it is reasonably possible
that it will lose the lawsuit. How should Curtis report this lawsuit?
Contingencies that are reasonably possible have more chance of occurring but are not likely. A
reasonably possible contingency should be described in the notes to the financial statements.
15. How is the times-interest-earned ratio calculated, and what does it evaluate?
The times-interest-earned ratio is calculated as earnings before interest and taxes or EBIT (Net
income + Income tax expense + Interest expense) divided by interest expense. Investors can use the
times-interest-earned ratio to evaluate a business’s ability to pay interest expense. This ratio
measures the number of times earnings before interest and taxes can cover (pay) interest expense.
Short Exercises
For all payroll calculations, use the following tax rates and round amounts to the nearest cent.
Employee: OASDI: 6.2% on first $132,900 earned; Medicare: 1.45% up to $200,000, 2.35% on earnings
above $200,000.
Employer: OASDI: 6.2% on first $132,900 earned; Medicare: 1.45%; FUTA: 0.6% on first $7,000 earned;
SUTA: 5.4% on first $7,000 earned.
S-F:11-1
Determining current versus long-term liabilities
Learning Objective 1
Rios Raft Company had the following liabilities.

a. Accounts Payable
b. Note Payable due in 3 years
c. Salaries Payable
d. Note Payable due in 6 months
e. Sales Tax Payable
f. Unearned Revenue due in 8 months
g. Income Tax Payable
Determine whether each liability would be considered a current liability (CL) or a long-term liability (LTL).
S-F:11-1 SOLUTION
a. current liability (CL)

b. long-term liability (LTL)
c. current liability (CL)
d. current liability (CL)
e. current liability (CL)
f. current liability (CL)
g. current liability (CL)
S-F:11-2
Recording sales tax
On July 5, Williams Company recorded sales of merchandise inventory on account, $55,000. The sales were
subject to sales tax of 4%. On August 15, Williams Company paid the sales tax owed to the state from the
July 5 transaction.
Requirements
1. Journalize the transaction to record the sale on July 5. Ignore cost of goods sold.
2. Journalize the transaction to record the payment of sales tax to the state on August 15.
SOLUTION
Requirement 1
Date Accounts and Explanation Debit Credit

July 5 Accounts Receivable 57,200
Sales Revenue 55,000
Sales Tax Payable ($55,000 × 0.04) 2,200
To record sales revenue on account and the
related sales tax.

S-F:11-2, cont.
Requirement 2

Aug. 15 Sales Tax Payable 2,200
Cash 2,200
To record cash payment for sales tax payable.
S-F:11-3
Recording unearned revenue
On June 1, Movies Online collected cash of $63,000 on future annual subscriptions starting on July 1.
Requirements
1. Journalize the transaction to record the collection of cash on June 1.
2. Journalize the transaction required at December 31, the magazine’s year-end, assuming no revenue earned
has been recorded. (Round adjustment to the nearest whole dollar.)
SOLUTION
Requirement 1

June 1 Cash 63,000
Unearned Revenue 63,000
Collected cash for future services.
Requirement 2

Dec. 31 Unearned Revenue 31,500
Subscription Revenue ($63,000 × 6/12) 31,500
To record subscription revenue earned that was
collected in advance.

S-F:11-4
Accounting for a note payable
On December 31, 2023, Franklin purchased $13,000 of merchandise inventory on a one-year, 9% note
payable. Franklin uses a perpetual inventory system.
Requirements
1. Journalize the company’s purchase of merchandise inventory on December 31, 2023.
2. Journalize the company’s accrual of interest expense on June 30, 2024, its fiscal year-end.
3. Journalize the company’s payment of the note plus interest on December 31, 2024.
SOLUTION
Requirement 1

2023
Dec. 31 Merchandise Inventory 13,000
Notes Payable 13,000
Purchased merchandise inventory in exchange
for one year, 9% note.
Requirement 2

2024
Jun. 30 Interest Expense ($13,000 × 0.09 × 6/12) 585
Interest Payable 585
Accrued interest expense at year-end.
Requirement 3

2024
Dec. 31 Notes Payable 13,000
Interest Expense ($13,000 × 0.09 × 6/12) 585
Cash 14,170
Paid note and interest at maturity.

S-F:11-5
Determining current portion of long-term note payable
On January 1, Irving Company purchased equipment of $280,000 with a long-term note payable. The debt is
payable in annual installments of $56,000 due on December 31 of each year. At the date of purchase, how
will Irving Company report the note payable?
SOLUTION
Irving will report $56,000 as current portion of notes payable in the current liability section. The
remaining $224,000 ($280,000 − $56,000) will show as a notes payable in the long-term liability
section.
S-F:11-6
Computing and journalizing an employee’s total pay
Lucy Rose works at College of Fort Worth and is paid $12 per hour for a 40-hour workweek and time-and-a-
half for hours above 40.
Requirements
1. Compute Rose’s gross pay for working 60 hours during the first week of February.
2. Rose is single, and her income tax withholding is 15% of total pay. Rose’s only payroll deductions are
payroll taxes. Compute Rose’s net (take-home) pay for the week. Assume Rose’s earnings to date are less
than the OASDI limit.
3. Journalize the accrual of wages expense and the payment related to the employment of Lucy Rose.
SOLUTION
Requirement 1
Straight-time pay for 40 hours ($12 × 40 hours) $ 480

Overtime pay for 20 hours (20 hours × $12 × 1.5) 360
Gross Pay $ 840
Requirement 2
Gross pay $ 840.00

Withholding deductions:
Employee income tax (15%) $ 126.00
Employee OASDI tax (6.2%) 52.08
Employee Medicare tax (1.45%) 12.18
Total withholdings 190.26
Net (take-home) pay $ 649.74

S-F:11-6, cont.
Requirement 3

Wages Expense 840.00
Employee Income Taxes Payable 126.00
FICA—OASDI Taxes Payable 52.08
FICA—Medicare Taxes Payable 12.18
Wages Payable 649.74
To record wages expense and payroll withholdings.

Cash 649.74
To record payment of wages.
S-F:11-7
Computing payroll amounts considering FICA tax limits
Lily Carter works for JDK all year and earns a monthly salary of $12,300. There is no overtime pay. Lily’s
income tax withholding rate is 15% of gross pay. In addition to payroll taxes, Lily elects to contribute 4%
monthly to United Way. JDK also deducts $200 monthly for co-payment of the health insurance premium.
As of September 30, Lily had $125,100 of cumulative earnings.
Requirements
1. Compute Lily’s net pay for October.
2. Journalize the accrual of salaries expense and the payment related to the employment of Lily Carter.

S-F:11-7 SOLUTION
Requirement 1
Gross pay $ 12,300.00

Employee income tax (15%) $ 1,845.00
Employee OASDI tax (6.2%)* 483.60
Employee health insurance 200.00
Employee contribution to United Way (4%) 492.00
Total withholdings 3,198.95
Net (take-home) pay $ 9,101.05
*Calculation of tax for OASDI

Employee earnings subject to tax $ 132,900
Employee earnings prior to the current month – 125,100
Current pay subject to tax 7,800
Tax rate × 0.062
Tax to be withheld from paycheck $ 483.60
Requirement 2

Oct. Salaries Expense 12,300.00
31
Employee Income Taxes Payable 1,845.00
Employee Health Insurance Payable 200.00
United Way Payable 492.00
Salaries Payable 9,101.05
To record salaries expense and payroll withholdings.

Cash 9,101.05
To record payment of salaries.

S-F:11-8
Computing and journalizing the payroll expense and payments
Macintosh Company has monthly salaries of $26,000. Assume Macintosh pays all the standard payroll taxes,
no employees have reached the payroll tax limits, total income tax withheld is $2,000, and the only payroll
deductions are payroll taxes. Journalize the accrual of salaries expense, accrual of employer payroll taxes,
and payment of employee and employer payroll taxes for Macintosh Company.
SOLUTION

Salaries Expense 26,000
FICA—OASDI Taxes Payable (6.2% × $26,000) 1,612
FICA—Medicare Taxes Payable (1.45% × $26,000) 377
Employee Income Taxes Payable 2,000
Salaries Payable 22,011
To record salaries expense and payroll withholdings.
Payroll Tax Expense 3,549

FICA—OASDI Taxes Payable (6.2% × $26,000) 1,612
Federal Unemployment Taxes Payable (0.6% × $26,000) 156
State Unemployment Taxes Payable (5.4% × $26,000) 1,404
To record employer's payroll tax expense.
FICA—OASDI Taxes Payable ($1,612 + $1,612) 3,224

FICA—Medicare Taxes Payable ($377 + $377) 754
Employee Income Taxes Payable 2,000
Federal Unemployment Taxes Payable 156
State Unemployment Taxes Payable 1,404
Cash 7,538
Payment of payroll taxes

S-F:11-9
Computing bonus payable
On December 31, Weston Company estimates that it will pay its employees a 5% bonus on net income after
deducting the bonus. The company reports net income of $64,000 before the calculation of the bonus. The
bonus will be paid on January 15 of the next year.
Requirements
1. Journalize the December 31 transaction for Weston.
2. Journalize the payment of the bonus on January 15.
SOLUTION
Requirement 1

Dec. 31 Employee Bonus Expense 3,047.62
Employee Bonus Payable 3,047.62
To record employee bonus expense.
(5% × $64,000) / (1.05) = $3,047.62
Requirement 2

Jan. 15 Employee Bonus Payable 3,047.62
Cash 3,047.62
To record payment of employee bonus.

S-F:11-10
Journalizing vacation benefits
Samuel Industries has three employees. Each employee earns two vacation days a month. Samuel pays each
employee a weekly salary of $1,250 for a five-day workweek.
Requirements
1. Determine the amount of vacation expense for one month.
2. Journalize the entry to accrue the vacation expense for the month.
SOLUTION
Requirement 1
Employees 3 Weekly salary $1,250

× Vacation Days per month × 2 ÷ Days in the week 5
= Total days to accrue 6 = Pay per day = $250
Total amount to accrue 6 days times $250 per day = $1,500 for one month
Requirement 2

Vacation Benefits Expense 1,500
Vacation Benefits Payable 1,500
To record employee vacation benefits expense.

S-F:11-11
Accounting for warranty expense and warranty payable
Trail Runner guarantees its snowmobiles for three years. Company experience indicates that warranty costs
will be approximately 5% of sales.
Assume that the Trail Runner dealer in Colorado Springs made sales totaling $600,000 during 2024. The
company received cash for 20% of the sales and notes receivable for the remainder. Warranty payments
totaled $10,000 during 2024.
Requirements
1. Record the sales, warranty expense, and warranty payments for the company. Ignore cost of goods sold.
2. Assume the Estimated Warranty Payable is $0 on January 1, 2024. Post the 2024 transactions to the
Estimated Warranty Payable T-account. At the end of 2024, how much in Estimated Warranty Payable
does the company owe?
SOLUTION
Requirement 1

2024 Cash (20% × $600,000) 120,000
Notes Receivable (80% × $600,000) 480,000
To record sales for 2024.
Warranty Expense (5% × $600,000) 30,000

Estimated Warranty Payable 30,000
To accrue warranty payable.

Cash 10,000
Warranty payments.
Requirement 2
Estimated Warranty Payable

0 Beg. Bal.
Payments 10,000 30,000 Accrual
20,000 Bal.

S-F:11-12
Accounting treatment for contingencies
Freeman Motors, a motorcycle manufacturer, had the following contingencies.
a. Freeman estimates that it is reasonably possible but not likely that it will lose a current lawsuit. Freeman’s
attorneys estimate the potential loss will be $4,500,000.
b. Freeman received notice that it was being sued. Freeman considers this lawsuit to be frivolous.
c. Freeman is currently the defendant in a lawsuit. Freeman believes it is likely that it will lose the lawsuit
and estimates the damages to be paid will be $75,000.
Determine the appropriate accounting treatment for each of the situations Freeman is facing.
SOLUTION
Situation Appropriate accounting treatment
a. Describe the situation in a note to the financial statements.
b. Do not disclose.
c. Record an expense (or loss) and a liability based on estimated amounts.
S-F:11-13
Computing times-interest-earned ratio
Abernathy Electronics reported the following amounts on its 2024 income statement:
Year Ended December 31, 2024
Net income $ 45,000
Income tax expense 6,750
Interest expense 3,750
What is Abernathy’s times-interest-earned ratio for 2024? (Round to two decimals.)
SOLUTION
Times-interest-earned ratio
Net Income $ 45,000
+ Income Tax Expense + 6,750
+ Interest Expense + 3,750
Total $ 55,500
÷ Interest Expense ÷ 3,750
Ratio for 2024 14.80

Exercises
above $200,000.
E-F:11-14
Recording sales tax
Sales Tax Payable $16,100
Consider the following transactions of Sapphire Software:
Mar. 31 Recorded cash sales of $230,000, plus sales tax of 7% collected for the state of New
Jersey.
Apr. 6 Sent March sales tax to the state.
Journalize the transactions for the company. Ignore cost of goods sold.
SOLUTION

Mar. 31 Cash 246,100
Sales Tax Payable ($230,000 × 0.07) 16,100
To record cash sales and the related sales tax.
Apr. 6 Sales Tax Payable 16,100

Cash 16,100

E-F:11-15
Recording note payable transactions
Aug. 1, 2024 Interest Expense $840
Consider the following note payable transactions of Creative Video Productions.

2023
Aug. 1 Purchased equipment costing $16,000 by issuing a one-year, 9% note payable.
Dec. 31 Accrued interest on the note payable.
2024
Aug. 1 Paid the note payable plus interest at maturity.
Journalize the transactions for the company.
SOLUTION

2023
Aug. 1 Equipment 16,000
Purchased equipment in exchange for one-
year, 9% note.
Dec. 31 Interest Expense ($16,000 × 0.09 × 5/12) 600

Accrued interest expense at year-end.
2024
Aug. 1 Notes Payable 16,000
Interest Expense ($16,000 × 0.09 × 7/12) 840
Cash 17,440
Paid note and interest at maturity.

E-F:11-16
Recording and reporting current liabilities
Dec. 31 Subscription Revenue $80
Watson Publishing completed the following transactions during 2024:

Oct. 1 Sold a six-month subscription (starting on November 1), collecting cash of $240, plus sales
tax of 8%.
Nov. 15 Remitted (paid) the sales tax to the state of Tennessee.
Dec. 31 Made the necessary adjustment at year-end to record the amount of subscription revenue
earned during the year.
Journalize the transactions (explanations are not required). Round to the nearest dollar.
SOLUTION

2024
Oct. 1 Cash 259
Unearned Revenue 240
Sales Tax Payable ($240 × 8%) 19
To record unearned revenue and the related
sales tax.
Nov. 15 Sales Tax Payable 19

Cash 19
Dec. 31 Unearned Revenue 80

Subscription Revenue 80
To record subscription revenue earned that was
collected in advance. $240 × 2/6.

E-F:11-17
Journalizing current liabilities
Learning Objectives 1, 2
Salaries Expense $3,400
Erin O’Neil Associates reported short-term notes payable and salaries payable as follows:
2024 2023
Current Liabilities—partial:
Short-term Notes Payable $ 16,900 $ 16,000
Salaries Payable 3,400 4,000
During 2024, O’Neil paid off both current liabilities that were left over from 2023, borrowed cash on short-
term notes payable, and accrued salaries expense. Journalize all four of these transactions for O’Neil during
2024. Assume no interest on short-term notes payable of $16,000.
SOLUTION

2024
Cash 16,000
To record payment of 2023 notes.

Cash 4,000
To record payment for salaries payable.
Cash 16,900
To record cash borrowed on notes payable.
Salaries Expense 3,400

To record accrued salaries.

E-F:11-18
Computing and recording gross and net pay
1. Net Pay $576.69
Hugh Stanley manages a Dairy House drive-in. His straight-time pay is $12 per hour, with time-and-a-half
for hours in excess of 40 per week. Stanley’s payroll deductions include withheld income tax of 20%, FICA
tax, and a weekly deduction of $5 for a charitable contribution to United Way. Stanley worked 58 hours
during the week.
Requirements
1. Compute Stanley’s gross pay and net pay for the week. Assume earnings to date are $18,000.
2. Journalize Dairy Houses wages expense accrual for Stanley’s work. An explanation is not required.
3. Journalize the subsequent payment of wages to Stanley.
SOLUTION
Requirement 1
Straight-time pay for 40 hours ($12 × 40 hours) $ 480.00

Overtime pay for 18 hours: (18 × $12 × 1.5) 324.00
Gross Pay $ 804.00
Gross pay $ 804.00

Employee income tax (20%) $ 160.80
Employee OASDI tax (6.2%) 49.85
Employee contribution to United Way 5.00
Total withholdings 227.31
Net (take-home) pay $ 576.69
Requirement 2

Wages Expense 804.00

E-F:11-18, cont.
Requirement 3

Cash 576.69
E-F:11-19
Recording employer payroll taxes and employee benefits
1. Payroll Tax Expense $6,063.00
Ricardo’s Mexican Restaurant incurred salaries expense of $62,000 for 2024. The payroll expense includes
employer FICA tax, in addition to state unemployment tax and federal unemployment tax. Of the total
salaries, $22,000 is subject to unemployment tax. Also, the company provides the following benefits for
employees: health insurance (cost to the company, $3,000), life insurance (cost to the company, $330), and
retirement benefits (cost to the company, 10% of salaries expense).
Requirements
1. Journalize Ricardo’s expenses for employee benefits and for payroll taxes. Explanations are not required.
2. What was Ricardo’s total expense for 2024 related to payroll?
SOLUTION
Requirement 1

Payroll Tax Expense 6,063.00
FICA—OASDI Taxes Payable (6.2% × $62,000) 3,844.00
FICA—Medicare Taxes Payable (1.45% × $62,000) 899.00
Federal Unemployment Taxes Payable (0.6% × $22,000) 132.00
State Unemployment Taxes Payable (5.4% × $22,000) 1,188.00
To record employer's payroll tax expense.
Employee Benefits Expense 9,530.00

Employee Health Insurance Payable 3,000.00
Employee Life Insurance Payable 330.00
Employee Retirement Benefits Payable (10% × $62,000) 6,200.00
Accrual of employee benefit expenses.
Requirement 2
Salaries Expense $ 62,000.00

Employee Benefits Expense 9,530.00
Total $ 77,593.00

E-F:11-20
Recording employee and employer payroll taxes
2. Salaries & Wages Payable $12,462.10
Stream Company had the following partially completed payroll register:
Earnings Withholdings
Beginning Current Ending Salaries
Cumulative Period Cumulative Income Health United Total Net Check and Wages
Earnings Earnings Earnings OASDI Medicare Tax Insurance Way Withholdings Pay No. Expense
$ 79,000 $ 4,200 $ 1,680 $ 84 $5 801
126,000 7,200 1,800 144 40 802
56,000 3,900 1,560 78 0 803
61,500 4,700 1,175 94 20 804
0 1,000 250 20 0 805
$ 322,500 $ 21,000 $ 6,465 $ 420 $ 65

Requirements
1. Complete the payroll register. Round to two decimals.
2. Journalize Stream Company’s salaries and wages expense accrual for the current pay period.
3. Journalize Stream Company’s expenses for employer payroll taxes for the current pay period.
4. Journalize the payment to employees.
5. Journalize the payment for withholdings and employer payroll taxes.
SOLUTION
Requirement 1
Earnings Withholdings
Beginning Current Ending Salaries and
Cumulative Period Cumulative Income Health United Total Check Wages
Earnings Earnings Earnings OASDI Medicare Tax Insurance Way Withholdings Net Pay No. Expense
$ 79,000.00 $ 4,200.00 $ 83,200.00 $ 260.40 $ 60.90 $ 1,680.00 $ 84.00 $ 5.00 $ 2,090.30 $ 2,109.70 801 $ 4,200.00
126,000.00 7,200.00 133,200.00 427.80* 104.40 1,800.00 144.00 40.00 2,516.20 4,683.80 802 7,200.00
56,000.00 3,900.00 59,900.00 241.80 56.55 1,560.00 78.00 0.00 1,936.65 1,963.65 803 3,900.00
61,500.00 4,700.00 66,200.00 291.40 68.15 1,175.00 94.00 20.00 3,051.45 3,051.45 804 4,700.00
0 1,000.00 1,000.00 62.00 14.50 250.00 20.00 0.00 653.50 653.50 805 1,000.00
$ 322,500.00 $ 21,000.00 $ 343,500.00 $ 1,283.40 $ 304.50 $ 6,465.00 $ 420.00 $ 65.00 $ 8,537.90 $ 12,462.10 $ 21,000.00

Employee earnings subject to tax $ 132,900.00
Employee earnings prior to the current month – 126,000.00
Current pay subject to tax $ 6,900.00
Tax rate × 0.062
Employee tax $ 427.80

E-F:11-20, cont.
Requirement 2

Salaries and Wages Expense 21,000.00
FICA—OASDI Taxes Payable 1,283.40
Health Insurance Payable 420.00
Salaries and Wages Payable 12,462.10
To record salaries and wages expense and
payroll withholdings.
Requirement 3

FICA—OASDI Taxes Payable * 1,283.40
(1.45% × $21,000)
Federal Unemployment Taxes Payable 6.00
(0.6% × $1,000 (first $7,000 only))
State Unemployment Taxes Payable 54.00
(5.4% × $1,000 (first $7,000 only))
To record employer's payroll tax
expense.

Employee earnings subject to tax $ 132,900.00
Employee earnings prior to the current month – 126,000.00
Current pay subject to tax $ 6,900.00
Tax rate × 0.062
Employer tax $ 427.80
All others ($21,000 − $7,200) × 6.2% 855.60
$ 1,283.40

E-F:11-20, cont.
Requirement 4

Salaries and Wages Payable 12,462.10
Cash 12,462.10
To record payment of salaries and wages.
Requirement 5

FICA—OASDI Taxes Payable ($1,283.40 + $1,283.40) 2,566.80
FICA—Medicare Taxes Payable ($304.50 + $304.50) 609.00
Health Insurance Payable 420.00
Cash 10,185.80
To record payment of payroll withholdings and taxes.

E-F:11-21
Accounting for warranty expense and warranty payable
1. Warranty Expense $10,170
The accounting records of Sculpted Ceramics included the following at January 1, 2024:
In the past, Sculpted’s warranty expense has been 9% of sales. During 2024, Sculpted made sales of
$113,000 and paid $7,000 to satisfy warranty claims.
Requirements
1. Journalize Sculpted’s warranty expense and warranty payments during 2024. Explanations are not
required.
2. What balance of Estimated Warranty Payable will Sculpted report on its balance sheet at December 31,
2024?
SOLUTION
Requirement 1

2024
Warranty Expense (9% × $113,000) 10,170

Cash 7,000
Requirement 2
5,000 Beg. Bal.
Payments 7,000 10,170 Accrual
8,170 End. Bal.

E-F:11-22
Accounting for warranties, vacation, and bonuses
McNight Industries completed the following transactions during 2024:

Nov. 1 Made sales of $52,000. McNight estimates that warranty expense is 6% of sales.
(Record only the warranty expense.)
20 Paid $1,600 to satisfy warranty claims.
Dec. 31 Estimated vacation benefits expense to be $6,000.
31 McNight expected to pay its employees a 3% bonus on net income after deducting the
bonus. Net income for the year is $52,000.
Journalize the transactions. Explanations are not required. Round to the nearest dollar.
SOLUTION

2024
Nov. 1 Warranty Expense (6% × $52,000) 3,120
Nov. 20 Estimated Warranty Payable 1,600

Cash 1,600
Dec. 31 Vacation Benefits Expense 6,000

Vacation Benefits Payable 6,000
Dec. 31 Employee Bonus Expense (3% × 52,000) / 1.03 1,515

Employee Bonus Payable 1,515
E-F:11-23
Accounting treatment for contingencies
Analyze the following independent situations.

a. Weaver, Inc. is being sued by a former employee. Weaver believes that there is a remote chance that the
employee will win. The employee is suing Weaver for damages of $40,000.
b. Gulf Oil Refinery had a gas explosion on one of its oil rigs. Gulf believes it is likely that it will have to
pay environmental clean-up costs and damages in the future due to the gas explosion. Gulf cannot
estimate the amount of the damages.
c. Lawson Enterprises estimates that it will have to pay $75,000 in warranty repairs next year.
Determine how each contingency should be treated.

E-F:11-23 SOLUTION
Situation Appropriate accounting treatment

a. Do not disclose.
b. Describe the situation in a note to the financial statements.
c. Record an expense and a liability based on estimated amounts.
E-F:11-24
The following financial information was obtained from the year ended 2024 income statements for Cash
Automotive and Pennington Automotive:
Cash Pennington
Net income $ 26,070 $ 74,188
Income tax expense 9,270 27,080
Interest expense 300 2,900
Requirements
1. Compute the times-interest-earned ratio for each company. Round to two decimals.
2. Which company was better able to cover its interest expense?
SOLUTION
Requirement 1
Cash Pennington
Net Income $ 26,070 $ 74,188
+ Income Tax Expense + 9,270 + 27,080
+ Interest Expense + 300 + 2,900
Total $ 35,640 $ 104,168
÷ Interest Expense ÷ 300 ÷ 2,900
Ratio for 2024 118.80 35.92
Requirement 2
Cash is better able to cover its interest expense.

Problems (Group A)
above $200,000.
P-F:11-25A
Journalizing and posting liabilities
The general ledger of Seal-N-Ship at June 30, 2024, the end of the company’s fiscal year, includes the
following account balances before payroll and adjusting entries.
Accounts Payable $ 114,000
Interest Payable 0
Salaries Payable 0
Employee Income Taxes Payable 0
FICA—OASDI Taxes Payable 0
FICA—Medicare Taxes Payable 0
State Unemployment Taxes Payable 0
Unearned Rent Revenue 7,200
Long-term Notes Payable 210,000
The additional data needed to develop the payroll and adjusting entries at June 30 are as follows:
a. The long-term debt is payable in annual installments of $42,000, with the next installment due on July 31.
On that date, Seal-N-Ship will also pay one year’s interest at 9%. Interest was paid on July 31 of the
preceding year. Make the adjusting entry to accrue interest expense at year-end.
b. Gross unpaid salaries for the last payroll of the fiscal year were $4,700. Assume that employee income
taxes withheld are $910 and that all earnings are subject to OASDI.
c. Record the associated employer taxes payable for the last payroll of the fiscal year, $4,700. Assume that
the earnings are not subject to unemployment compensation taxes
d. On February 1, the company collected one year’s rent of $7,200 in advance.
Requirements
1. Using T-accounts, open the listed accounts and insert the unadjusted June 30 balances.
2. Journalize and post the June 30 payroll and adjusting entries to the accounts that you opened. Identify
each adjusting entry by letter. Round to the nearest dollar.
3. Prepare the current liabilities section of the balance sheet at June 30, 2024.

P-F:11-25A SOLUTION
Requirements 1 and 2

2024
June 30
a. Interest Expense 17,325
Interest Payable ($210,000 × 9% × 11/12) 17,325
a. No journal entry needed to reclassify the

current portion of long-term debt.
b. Salary Expense 4,700

FICA—OASDI Taxes Payable (6.2% × $4,700) 291
c. Payroll Tax Expense 359

d. Unearned Rent Revenue 3,000

Rent Revenue ($7,200 × 5/12) 3,000

P-F:11-25A, cont.
Requirements 1 and 2, cont.
Accounts Payable
114,000 Beg. Bal.
114,000 End Bal.
Interest Payable
0 Beg. Bal.
17,325 a.
17,325 End Bal.
Salaries Payable
0 Beg. Bal.
3,431 b.
3,431 End Bal.
Employee Income Taxes Payable

0 Beg. Bal.
910 b.
910 End Bal.
FICA—OASDI Taxes Payable

0 Beg. Bal.
291 b.
291 c.
582 End Bal.
FICA—Medicare Taxes Payable

0 Beg. Bal.
68 b.
68 c.
136 End Bal.
Unearned Rent Revenue

7,200 Beg. Bal.
d. 3,000
4,200 End Bal.
210,000 Beg. Bal.
210,000 End Bal.
Long-term Notes Payable

210,000 Beg. Bal.
210,000 End Bal.

P-F:11-25A, cont.
Requirement 3
SEAL-N-SHIP
Balance Sheet (Partial)
June 30, 2024
Liabilities
Current Liabilities:
Current Portion of Notes Payable 42,000
Interest Payable 17,325
Total Current Liabilities $ 182,584

P-F:11-26A
Computing and journalizing payroll amounts
1. Net Pay $146,935
Lenny Worthington is general manager of Countrywide Salons. During 2024, Worthington worked for the
company all year at a $13,400 monthly salary. He also earned a year-end bonus equal to 10% of his annual
salary.
Worthington’s federal income tax withheld during 2024 was $938 per month, plus $3,216 on his bonus
check. State income tax withheld came to $70 per month, plus $50 on the bonus. FICA tax was withheld on
the annual earnings. Worthington authorized the following payroll deductions: Charity Fund contribution of
2% of total earnings and life insurance of $20 per month.
Countrywide incurred payroll tax expense on Worthington for FICA tax. The company also paid state
unemployment tax and federal unemployment tax.
Requirements
1. Compute Worthington’s gross pay, payroll deductions, and net pay for the full year 2024. Round all
amounts to the nearest dollar.
2. Compute Countrywide’s total 2024 payroll tax expense for Worthington.
3. Make the journal entry to record Countrywide’s expense for Worthington’s total earnings for the year, his
payroll deductions, and net pay. Debit Salaries Expense and Bonus Expense as appropriate. Credit
liability accounts for the payroll deductions and Cash for net pay. An explanation is not required.
4. Make the journal entry to record the accrual of Countrywide’s payroll tax expense for Worthington’s total
earnings.
5. Make the journal entry for the payment of the payroll withholdings and taxes.
SOLUTION
Requirement 1
Lenny Worthington
Payroll for the year ended December 31, 2024
Calculation Annual
Gross Pay:
Salary $13,400 × 12 $ 160,800
Bonus $160,800 × 10% 16,080
Total Gross Pay $ 176,880
Deductions:
Federal Income Tax ($938 × 12) + $3,216 $ 14,472
State Income Tax ($70 × 12) + $50 890
FICA—OASDI 6.2% first $132,900 8,240
FICA—Medicare 1.45% × $176,880 2,565
Charity Fund 2% × $176,880 3,538
Life Insurance $20 × 12 240
Total Deductions 29,945
Net Pay $ 146,935

P-F:11-26A, cont.
Requirement 2
Lenny Worthington
Employer Payroll Expense for the year ended December 31, 2024
Calculation Annual
Total Gross Pay $176,880
Employer Payroll Taxes:

FICA—OASDI 6.2% first $132,900 8,240
FICA—Medicare 1.45% × $176,880 2,565
FUTA 0.6% × $7,000 42
SUTA 5.4% × $7,000 378
Total Employer Payroll Tax 11,225
Total Payroll Expense $ 165,655
Requirement 3

2024
Dec. 31 Salaries Expense 160,800
Bonus Expense 16,080
Employee Federal Income Taxes Payable 14,472
Employee State Income Taxes Payable 890
FICA—OASDI Taxes Payable 8,240
FICA—Medicare Taxes Payable 2,565
Charity Fund Payable 3,538
Life Insurance Payable 240
Cash 146,935
Requirement 4

2024
Dec. 31 Payroll Tax Expense 11,225

P-F:11-26A, cont.
Requirement 5

2024
Dec. 31 Employee Federal Income Taxes Payable 14,472
Employee State Income Taxes Payable 890
FICA—Medicare Taxes Payable ($2,565 + $2,565) 5,130
Cash 41,170

P-F:11-27A
Journalizing liability transactions
Jan. 29 Cash $16,695
The following transactions of Plymouth Pharmacies occurred during 2023 and 2024:
2023
Jan. 9 Purchased computer equipment at a cost of $12,000, signing a six-month, 9% note payable
for that amount.
29 Recorded the week’s sales of $63,000, three-fourths on credit and one-fourth for cash.
Sales amounts are subject to a 6% state sales tax. Ignore cost of goods sold.
Feb. 5 Sent the last week’s sales tax to the state.
Jul. 9 Paid the six-month, 9% note, plus interest, at maturity.
Aug. 31 Purchased merchandise inventory for $9,000, signing a six-month, 10% note payable. The
company uses the perpetual inventory system.
Dec. 31 Accrued warranty expense, which is estimated at 4% of sales of $609,000.
31 Accrued interest on all outstanding notes payable.
2024
Feb. 28 Paid the six-month 10% note, plus interest, at maturity.
Journalize the transactions in Plymouth’s general journal. Explanations are not required. Round to the nearest
dollar.

P-F:11-27A SOLUTION

2023
Jan. 9 Computer Equipment 12,000
29 Cash ($63,000 × ¼) + ($15,750 × 6%) 16,695

Accounts Receivable ($63,000 × ¾) + (47,250 × 50,085
6%)
Sales 63,000
Sales Tax Payable ($63,000 × 6%) 3,780
Feb. 5 Sales Tax Payable 3,780

Cash 3,780
Jul. 9 Notes Payable 12,000

Interest Expense ($12,000 × 9% × 6/12) 540
Cash 12,540
Aug. 31 Merchandise Inventory 9,000

Notes Payable 9,000
Dec. 31 Warranty Expense (4% × $609,000) 24,360

31 Interest Expense ($9,000 × 10% × 4/12) 300

2024
Feb. 28 Notes Payable 9,000
Cash 9,450

P-F:11-28A
The following transactions of Jasmine Reef occurred during 2024:

Apr. 30 Reef is party to a patent infringement lawsuit of $190,000. Reef’s attorney is certain it is
remote that Reef will lose this lawsuit.
Jun. 30 Estimated warranty expense at 2% of sales of $350,000.
Jul. 28 Warranty claims paid in the amount of $5,500.
Sep. 30 Reef is party to a lawsuit for copyright violation of $80,000. Reef’s attorney advises that it
is probable Reef will lose this lawsuit. The attorney estimates the loss at $80,000.
Dec. 31 Reef estimated warranty expense on sales for the second half of the year of $510,000 at
2%.
Requirements
1. Journalize required transactions, if any, in Reef’s general journal. Explanations are not required.
2. What is the balance in Estimated Warranty Payable assuming a beginning balance of $0?
SOLUTION
Requirement 1

2024
Apr. 30 No entry required
Jun. 30 Warranty Expense (2% × $350,000) 7,000

Jul. 28 Estimated Warranty Payable 5,500

Cash 5,500
Sep. 30 Estimated Loss from Lawsuit 80,000

Estimated Lawsuit Payable 80,000

Requirement 2

7,000 Jun. 30
Jul. 28 5,500 10,200 Dec. 31
11,700 End Bal.

P-F:11-29A
The income statement for California Communications follows. Assume California Communications signed a
3-month, 9%, $3,000 note on June 1, 2024, and that this was the only note payable for the company.
Requirements
1. Fill in the missing information for California’s year ended July 31, 2024, income statement. Round to the
nearest dollar.
2. Compute the times-interest-earned ratio for the company. Round to two decimals.

P-F:11-29A SOLUTION
Requirement 1
Interest Expense = $3,000 × 9% × 2/12 = $45
CALIFORNIA COMMUNICATIONS
Income Statement
Year Ended July 31, 2024
Net Sales Revenue $ 21,800

Cost of Goods Sold 14,000
Gross Profit 7,800
Operating Expenses:
Selling Expenses 720
Administrative Expenses 1,650
Total Operating Expenses 2,370
Operating Income 5,430
Other Income and (Expenses):
Interest Expense (45)
Total Other Income and (Expenses) (45)
Net Income before Income Tax Expense 5,385
Income Tax Expense 1,080
Net Income $ 4,305
Requirement 2
Net Income $ 4,305
+ Interest Expense + 45
Total $ 5,430
÷ Interest Expense ÷ 45
Ratio for 2024 120.67

Problems (Group B)
P-F:11-30B
Journalizing and posting liabilities
The general ledger of Prompt Ship at June 30, 2024, the end of the company’s fiscal year, includes the
following account balances before payroll and adjusting entries.
Interest Payable 0
Salaries Payable 0
Long-term Notes Payable 198,000
The additional data needed to develop the payroll and adjusting entries at June 30 are as follows:
a. The long-term debt is payable in annual installments of $39,600, with the next installment due on July 31.
On that date, Prompt Ship will also pay one year’s interest at 10%. Interest was paid on July 31 of the
preceding year. Make the adjusting entry to accrue interest expense at year-end.
b. Gross unpaid salaries for the last payroll of the fiscal year were $4,800. Assume that employee income
taxes withheld are $920 and that all earnings are subject to OASDI.
c. Record the associated employer taxes payable for the last payroll of the fiscal year, $4,800. Assume that
the earnings are not subject to unemployment compensation taxes.
d. On February 1, the company collected one year’s rent of $5,400 in advance.
Requirements
1. Using T-accounts, open the listed accounts and insert the unadjusted June 30 balances.
2. Journalize and post the June 30 payroll and adjusting entries to the accounts that you opened. Identify
each adjusting entry by letter. Round to the nearest dollar.
3. Prepare the current liabilities section of the balance sheet at June 30, 2024.

P-F:11-30B SOLUTION
Requirements 1 and 2

2024
Jun. 30
a. Interest Expense 18,150
Interest Payable ($198,000 × 10% × 11/12) 18,150
a. No journal entry needed to reclassify the

current portion of long-term debt.
b. Salary Expense 4,800

c. Payroll Tax Expense 368

d. Unearned Rent Revenue 2,250

Rent Revenue ($5,400 × 5/12) 2,250
Accounts Payable
118,000 Beg. Bal.
118,000 End Bal.
Interest Payable
0 Beg. Bal.
18,150 a.
18,150 End Bal.
Salaries Payable
0 Beg. Bal.
3,512 b.
3,512 End Bal.

P-F:11-30B, cont.
Requirements 1 and 2, cont.
Employee Income Taxes Payable

0 Beg. Bal.
920 b.
920 End Bal.
FICA—OASDI Taxes Payable

0 Beg. Bal.
298 b.
298 c.
596 End Bal.
FICA—Medicare Taxes Payable

0 Beg. Bal.
70 b.
70 c.
140 End Bal.
Unearned Rent Revenue

5,400 Beg. Bal.
d. 2,250
3,150 End Bal.
Long-term Notes Payable

198,000 Beg. Bal.
198,000 End Bal.

P-F:11-30B, cont.
Requirement 3
PROMPT SHIP
Balance Sheet (Partial)
June 30, 2024
Liabilities
Current Portion of Notes Payable 39,600
Interest Payable 18,150
Total Current Liabilities $ 184,068
P-F:11-31B
Computing and journalizing payroll amounts
1. Net Pay $134,380
Lee Werner is general manager of Worldwide Salons. During 2024, Werner worked for the company all year
at a $12,400 monthly salary. He also earned a year-end bonus equal to 20% of his annual salary.
Werner’s federal income tax withheld during 2024 was $1,860 per month, plus $4,464 on his bonus
check. State income tax withheld came to $90 per month, plus $70 on the bonus. FICA tax was withheld on
the annual earnings. Wallace authorized the following payroll deductions: Charity Fund contribution of 3%
of total earnings and life insurance of $5 per month.
Worldwide incurred payroll tax expense on Werner for FICA tax. The company also paid state
unemployment tax and federal unemployment tax.
Requirements
1. Compute Werner’s gross pay, payroll deductions, and net pay for the full year 2024. Round all amounts
to the nearest dollar.
2. Compute Worldwide’s total 2024 payroll tax expense for Wallace.
3. Make the journal entry to record Worldwide’s expense for Werner’s total earnings for the year, his
payroll deductions, and net pay. Debit Salaries Expense and Bonus Expense as appropriate. Credit
liability accounts for the payroll deductions and Cash for net pay. An explanation is not required.
4. Make the journal entry to record the accrual of Worldwide’s payroll tax expense for Werner’s total
earnings.
5. Make the journal entry for the payment of the payroll withholdings and taxes.

P-F:11-31B SOLUTION
Requirement 1
Lee Werner
Payroll for the year ended December 31, 2024
Calculation Annual
Gross Pay:
Salary $12,400 × 12 $ 148,800
Bonus $148,800 × 20% 29,760
Total Gross Pay 178,560
Deductions:
Federal Income Tax ($1,860 × 12) + $4,464 26,784
State Income Tax ($90 × 12) + $70 1,150
FICA—OASDI 6.2% first $132,900 8,240
FICA—Medicare 1.45% × $178,560 2,589
Charity Fund 3% × $178,560 5,357
Life Insurance $5 × 12 60
Total Deductions 44,180
Net Pay $ 134,380
Requirement 2
Lee Werner
Employer Payroll Expense for the year ended December 31, 2024
Calculation Annual
Gross Pay $178,560
Employer Payroll Taxes:

FICA—OASDI 6.2% first $132,900 8,240
FICA—Medicare 1.45% × $178,560 2,589
FUTA 0.6% × $7,000 42
SUTA 5.4% × $7,000 378
Total Employer Payroll Tax 11,249
Total Payroll Expense $ 167,311

P-F:11-31B, cont.
Requirement 3

2024
Dec. 31 Salaries Expense 148,800
Bonus Expense 29,760
Employee Federal Income Taxes Payable 26,784
Employee State Income Taxes Payable 1,150
Cash 134,380
Requirement 4

2024
Dec. 31 Payroll Tax Expense 11,249
Requirement 5

2024
Dec. 31 Employee Federal Income Taxes Payable 26,784
Employee State Income Taxes Payable 1,150
FICA—Medicare Taxes Payable ($2,589 + $2,589) 5,178
Cash 55,429

P-F:11-32B
Jan. 29 Cash $18,020
The following transactions of Philadelphia Pharmacies occurred during 2023 and 2024:
2023
Jan. 9 Purchased computer equipment at a cost of $7,000, signing a six-month, 8% note payable
for that amount.
29 Recorded the week’s sales of $68,000, three-fourths on credit and one-fourth for cash.
Sales amounts are subject to a 6% state sales tax. Ignore cost of goods sold.
Feb. 5 Sent the last week’s sales tax to the state.
Jul. 9 Paid the six-month, 8% note, plus interest, at maturity.
Aug. 31 Purchased merchandise inventory for $3,000, signing a six-month, 10% note payable. The
company uses a perpetual inventory system.
Dec. 31 Accrued warranty expense, which is estimated at 2% of sales of $609,000.
31 Accrued interest on all outstanding notes payable.
2024
Feb. 28 Paid the six-month 10% note, plus interest, at maturity.
Journalize the transactions in Philadelphia’s general journal. Explanations are not required.

P-F:11-32B SOLUTION

2023
Jan. 9 Computer Equipment 7,000
Notes Payable 7,000
29 Cash ($68,000 × ¼) + ($17,000 × 6%) 18,020

Accounts Receivable ($68,000 × ¾) + (51,000 × 54,060
6%)
Sales 68,000
Sales Tax Payable ($68,000 × 6%) 4,080
Feb. 5 Sales Tax Payable 4,080

Cash 4,080
Jul. 9 Notes Payable 7,000

Cash 7,280
Aug. 31 Merchandise Inventory 3,000

Notes Payable 3,000

31 Interest Expense ($3,000 × 10% × 4/12) 100

2024
Feb. 28 Notes Payable 3,000
Cash 3,150

P-F:11-33B
The following transactions of Belkin Howe occurred during 2024:
Apr. 30 Howe is party to a patent infringement lawsuit of $230,000. Howe’s attorney is
certain it is remote that Howe will lose this lawsuit.
Jun. 30 Estimated warranty expense at 3% of sales of $390,000.
Jul. 28 Warranty claims paid in the amount of $6,300.
Sep. 30 Howe is party to a lawsuit for copyright violation of $90,000. Howe’s attorney
advises that it is probable Howe will lose this lawsuit. The attorney estimates the loss
at $90,000.
Dec. 31 Howe estimated warranty expense on sales for the second half of the year of
$520,000 at 3%.
Requirements
1. Journalize required transactions, if any, in Howe’s general journal. Explanations are not required.
2. What is the balance in Estimated Warranty Payable assuming a beginning balance of $0?
SOLUTION
Requirement 1

2024
Apr. 30 No entry required
Jun. 30 Warranty Expense (3% × $390,000) 11,700

Jul. 28 Estimated Warranty Payable 6,300

Cash 6,300
Sep. 30 Estimated Loss from Lawsuit 90,000

Estimated Lawsuit Payable 90,000

Requirement 2

11,700 Jun. 30
Jul. 28 6,300 15,600 Dec. 31
21,000 End Bal.

P-F:11-34B
The income statement for Vermont Communications follows. Assume Vermont Communications signed a 3-
month, 3%, $6,000 note on June 1, 2024, and that this was the only note payable for the company.
Requirements
1. Fill in the missing information for Vermont’s year ended July 31, 2024, income statement. Round to the
nearest dollar.
2. Compute the times-interest-earned ratio for the company. Round to two decimals.

P-F:11-34B SOLUTION
Requirement 1
Interest Expense = $6,000 × 3% × 2/12 = $30
VERMONT COMMUNICATIONS
Income Statement
Year Ended July 31, 2024
Net Sales Revenue $ 26,500

Cost of Goods Sold 12,200
Gross Profit 14,300
Operating Expenses:
Selling Expenses 690
Administrative Expenses 1,550
Total Operating Expenses 2,240
Operating Income 12,060
Other Income and (Expenses):
Interest Expense (30)
Total Other Income and (Expenses) (30)
Net Income before Income Tax Expense 12,030
Income Tax Expense 2,410
Net Income $ 9,620
Requirement 2
Net Income $ 9,620
Total $ 12,060
Ratio for 2024 402.00

Excel Skill Problem
The student templates for Using Excel are available online in MyLab Accounting in the Multimedia
Library or at http://www.pearsonhighered.com/Horngren. The solution to Using Excel is available online
in MyLab Accounting in the Instructor Resource Center or at
http://www.pearsonhighered.com/Horngren.

Continuing Problem
P-F:11-35
Accounting for liabilities of a known amount
This problem continues the Canyon Canoe Company situation from Chapter 10. Amber and Zack Wilson are
continuing their analysis of the company’s position and believe the company will need to borrow $15,000 in
order to expand operations. They consult Rivers Nation Bank and secure a 6%, one-year note on September
1, 2025, with interest due at maturity. Additionally, the company hires an employee, John Vance, on
September 1. John will receive a salary of $3,000 per month. Payroll deductions include federal income tax
at 25%, OASDI at 6.2%, Medicare at 1.45%, and monthly health insurance premium of $250. The company
will incur matching FICA taxes, FUTA tax at 0.6%, and SUTA tax at 5.4%. Round calculations to two
decimals. Omit explanations on journal entries.
Requirements
1. Record the issuance of the $15,000 note payable on September 1, 2025.
2. Record the employee payroll and employer payroll tax entries on September 30, 2025.
3. Record all payments related to September’s payroll. Payments are made on October 15, 2025.
4. Record the entry to accrue interest due on the note at December 31, 2025.
5. Record the entry Canyon Canoe Company would make to record the payment to the bank on September
1, 2026.

P-F:11-35 SOLUTION
Requirements 1-5

2025
Sep. 1 Cash 15,000.00
Notes Payable 15,000.00
30 Salaries Expense 3,000.00

FICA—OASDI Taxes Payable ($3,000 × 6.2%) 186.00
FICA—Medicare Taxes Payable ($3,000 × 1.45%) 43.50
Employee Income Taxes Payable ($3,000 × 25%) 750.00
30 Payroll Tax Expense 409.50

FICA—OASDI Taxes Payable ($3,000 × 6.2%) 186.00
FICA—Medicare Taxes Payable ($3,000 × 1.45%) 43.50
Federal Unemployment Taxes Payable ($3,000 × 0.6%) 18.00
State Unemployment Taxes Payable ($3,000 × 5.4%) 162.00
Oct. 15 Salaries Payable 1,770.50

Cash 1,770.50
15 FICA—OASDI Taxes Payable ($186.00 + $186.00) 372.00

FICA—Medicare Taxes Payable ($43.50 + $43.50) 87.00
Cash 1,639.00
Dec. 31 Interest Expense ($15,000 × 6% × 4/12) 300.00

Interest Payable 300.00
2026
Sep. 1 Notes Payable 15,000.00
Interest Payable 300.00
Interest Expense ($15,000 × 6% × 8/12) 600.00
Cash 15,900.00

Critical Thinking
Tying It All Together Case F:11-1
Before you begin this assignment, review the Tying It All Together feature in the chapter. It will also be helpful if you review
UnitedHealth Group Incorporated’s 2018 annual report
(https://www.unitedhealthgroup.com/content/dam/UHG/PDF/investors/2018/UNH-Q4-2018-Form-10-K.pdf).
UnitedHealth Group Incorporated is a diversified health and well-being company dedicated to helping people live
healthier lives. The company operates under two distinct platforms: health benefits (UnitedHealthcare) and health
services (Optum).
Requirements
1. What are contingent liabilities?
2. Review Note 12 (Commitments and Contingencies), specifically the section labeled Legal Matters. Does
UnitedHealth Group Incorporated report any contingencies? If so, provide a summary.
3. How should a company handle contingent liabilities that are reasonably possible or probable but cannot
be estimated?
4. Review Note 12 (Commitments and Contingencies), specifically the section labeled Department of
Justice (DOJ). How did UnitedHealth Group Incorporated handle the recording of this contingent
liability?
SOLUTION
Requirement 1
Contingent liabilities are potential liabilities that depend upon a future event.
Requirement 2
In the notes to the financial statements, UnitedHealth Group Incorporated states the company is
frequently made party to a variety of legal actions including medical malpractice and employment
claims. The company records liabilities for its estimates of probable costs resulting from these matters.
Requirement 3
Contingent liabilities that are either reasonably possible or probable but cannot be estimated should be
disclosed in the notes to the financial statements.
Requirement 4
UnitedHealth Group Incorporated states that the company cannot reasonably estimate the outcome
associated with the Department of Justice (DOJ) whistleblower’s complaint. Therefore, the company
does not need to record a liability on its balance sheet but should instead disclose of the matter in its
notes, which it does.

Decision Case F:11-1
Golden Bear Construction operates throughout California. The owner, Gaylan Beavers, employs 15 work
crews. Construction supervisors report directly to Beavers, and the supervisors are trusted employees. The
home office staff consists of an accountant and an office manager.
Because employee turnover is high in the construction industry, supervisors hire and fire their own
crews. Supervisors notify the office of all personnel changes. Also, supervisors forward the employee W-4
forms to the home office. Each Thursday, the supervisors submit weekly time sheets for their crews, and the
accountant prepares the payroll. At noon on Friday, the supervisors come to the office to get paychecks for
distribution to the workers at 5 p.m.
The company accountant prepares the payroll, including the paychecks. Beavers signs all paychecks. To
verify that each construction worker is a bona fide employee, the accountant matches the employee’s
endorsement signature on the back of the canceled paycheck with the signature on that employee’s W-4
form.
Requirements
1. Identify one way that a supervisor can defraud Golden Bear Construction under the present system.
2. Discuss a control feature that the company can use to safeguard against the fraud you identified in
Requirement 1.
SOLUTION
Requirement 1
A supervisor can enter a fictitious employee on a weekly time sheet, submit the time sheet to the
company, and receive and keep the paycheck. The supervisor may forge a W-4 form with a fake
signature and use that same signature to endorse the check. Alternatively, a supervisor could hire a real
person, say a relative, who will not actually work, but will receive paychecks and kick back the money
to the supervisor.
Also, a supervisor can keep submitting hours worked for a worker who has been terminated. The
supervisor can take the paycheck made payable to that employee and keep it for personal use.
Requirement 2
To safeguard against the company fraud identified in Requirement 1, Beavers (or a home office
employee) should make unscheduled visits to construction sites and distribute payroll checks. If a
paycheck is payable to an employee not present to receive it, Beavers can ask other workers if the absent
person has been working on that job. If the workers say no, Beavers will have uncovered a possible
fraud.
The separation of hiring and terminating employees from the duty of distributing paychecks would
safeguard the company against fraud. However, this separation of duties is not customary in the
construction business because it is more economical for supervisors to distribute paychecks on the job
site than for all the workers to come to the home office to receive their pay.

Decision Case F:11-2
Sell-Soft is the defendant in numerous lawsuits claiming unfair trade practices. Sell-Soft has strong
incentives not to disclose these contingent liabilities. However, GAAP requires that companies report their
contingent liabilities.
Requirements
1. Why would a company prefer not to disclose its contingent liabilities?
2. Describe how a bank could be harmed if a company seeking a loan did not disclose its contingent
liabilities.
3. What ethical tightrope must companies walk when they report contingent liabilities?
SOLUTION
Requirement 1
A company would prefer not to disclose its contingent liabilities because they cast a shadow on the
business and create a negative impression. Additionally, they reveal possible future problems that could
negatively impact the company’s financial position and hamper the company’s ability to attract investors
or borrow money. In addition, disclosure about a lawsuit can sometimes jeopardize the outcome of a
lawsuit. If the plaintiff or the jury sees this information, they may interpret it to mean the defendant is
admitting blame for the situation and expects to lose the lawsuit.
Requirement 2
A contingent liability creates risk for a company. If the contingent liability is not reported, the bank may
view the company as low-risk. This may lead the bank to loan money at low interest rates and with easy
payment terms. With knowledge of the contingent liability, the bank might not have made the loan at all.
Or the bank might have required a higher interest rate or more stringent payment terms. In the most
extreme case, a bank may be harmed if the company cannot repay its loan—a loan that had been granted
on the basis of incomplete or misleading information.
Requirement 3
Reporting of contingent liabilities often depends on subjective judgment about whether an outcome is
remote, reasonably possible, or probable. A company may have strong incentive to skew judgment in
one direction or another. The ethical tightrope consists in acting in good faith and not deliberately
misrepresenting what are often complex situations, while at the same time, exercising reasonable
judgment, often in the face of intense pressure to distort the facts.

Ethical Issue F:11-1
Many small businesses have to squeeze down costs any way they can just to survive. One way many
businesses do this is by hiring workers as “independent contractors” rather than as regular employees. Unlike
rules for regular employees, a business does not have to pay Social Security (FICA) taxes and unemployment
insurance payments for independent contractors. Similarly, it does not have to withhold federal, state, or local
income taxes or the employee’s share of FICA taxes. The IRS has a “20 factor test” that determines whether
a worker should be considered an employee or a contractor, but many businesses ignore those rules or
interpret them loosely in their favor. When workers are treated as independent contractors, they do not get a
W-2 form at tax time (they get a 1099 instead), they do not have any income taxes withheld, and they find
themselves subject to “self-employment” taxes, by which they bear the brunt of both the employee’s and the
employer’s shares of FICA taxes.
Requirements
1. When a business abuses this issue, how is the independent contractor hurt?
2. If a business takes an aggressive position—that is, interprets the law in a very slanted way—is there an
ethical issue involved? Who is hurt?
SOLUTION
Requirement 1
The contractor must pay “self-employment tax” which represents both the employer’s and the
employee’s share of normal FICA taxes. In addition, because no federal income taxes were withheld
during the year, the contractors have to come up with quarterly payments of expected taxes due. This is
a heavy burden on many lower-wage workers who are treated as independent contractors.
Requirement 2
Businesses may take aggressive positions on tax issues, and those positions may be tested in court. It is
unethical if a business knowingly treats workers as independent contractors when they are aware that
those workers should be treated as employees. This is the moral equivalent of lying. Contractors are
hurt because they pay a heavier share of taxes, and do not receive employee benefits such as medical
insurance.

Financial Statement Case F:11-1
Details about a company’s liabilities appear in a number of places in the annual report. Visit
http://www.pearsonhighered.com/Horngren to view a link to Target Corporation’s Annual Report. Use
Target Corporation’s fiscal 2018 financial statements to answer the following questions.
Requirements
1. Give the breakdown of Target’s current liabilities at February 2, 2019.
2. Calculate Target’s times-interest-earned ratio for the year ending February 2, 2019. How does Target’s
ratio compare to Kohl’s Corporation’s ratio?
SOLUTION
Requirement 1
TARGET CORPORATION
Balance Sheet (partial)
February 2, 2019 (In millions)
Liabilities
Accounts payable $ 9,761
Accrued and other current liabilities 4,201
Current portion of long-term debt and other borrowings 1,052
Total current liabilities $ 15,014
Requirement 2
Times-Interest-Earned Ratio
(In millions) February 2, 2019
Net Income $ 2,937
+ Income Tax Expense + 746
Total $ 4,144
Target’s Ratio 8.99
Target’s times-interest-earned ratio at 8.99 is higher than Kohl’s ratio of 5.07. This indicates Target can
cover its interest expense better than Kohl’s.

Communication Activity F:11-1
In 150 words or fewer, explain how contingent liabilities are accounted for.
SOLUTION
How businesses record or don’t record contingent liabilities is based on one of three likelihoods of the
event occurring in the future: remote, reasonably possible, or probable.
A contingency that is remote has little chance of the event occurring in the future. If a contingency is
remote, the company does not need to record a liability and does not need to disclose it in the notes to
the financial statements.
Contingencies that are reasonably possible have a higher chance of occurring but are not likely. A
reasonably possible contingency should be described in the notes to the financial statements.
If a contingency is probable, it means that the future event is likely to occur. Only contingencies that are
probable and can be estimated are recorded as a liability and a loss or expense is accrued.
Contingencies that are probable but cannot be estimated are disclosed in the notes to the financial
statements. A liability is not recorded because the amount of the contingency cannot be estimated.

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Chapter 11

Current Liabilities and Payroll, Global Edition

1. What are the three main characteristics of liabilities?

2. What is a current liability? Provide some examples of current liabilities.

4. How do unearned revenues arise?

5. What do short-term notes payable represent?

7. What is the difference between gross pay and net pay?

© 2022 Pearson Education, Ltd. 11-1

Withholding Deductions Tax Rate

9. How might a business use a payroll register?

10. What payroll taxes is the employer responsible for paying?

© 2022 Pearson Education, Ltd. 11-2

13. What is a contingent liability? Provide some examples of contingencies.

Rios Raft Company had the following liabilities.

a. current liability (CL)

Date Accounts and Explanation Debit Credit

© 2022 Pearson Education, Ltd. 11-4

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

© 2022 Pearson Education, Ltd. 11-5

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

© 2022 Pearson Education, Ltd. 11-6

Straight-time pay for 40 hours ($12 × 40 hours) $ 480

Gross pay $ 840.00

© 2022 Pearson Education, Ltd. 11-7

Date Accounts and Explanation Debit Credit

Wages Payable 649.74

© 2022 Pearson Education, Ltd. 11-8

Gross pay $ 12,300.00

*Calculation of tax for OASDI

Date Accounts and Explanation Debit Credit

Salaries Payable 9,101.05

© 2022 Pearson Education, Ltd. 11-9

Date Accounts and Explanation Debit Credit

Payroll Tax Expense 3,549

FICA—OASDI Taxes Payable ($1,612 + $1,612) 3,224

© 2022 Pearson Education, Ltd. 11-10

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

© 2022 Pearson Education, Ltd. 11-11

Employees 3 Weekly salary $1,250

Date Accounts and Explanation Debit Credit

© 2022 Pearson Education, Ltd. 11-12

Date Accounts and Explanation Debit Credit

Warranty Expense (5% × $600,000) 30,000

Estimated Warranty Payable 10,000

Estimated Warranty Payable

© 2022 Pearson Education, Ltd. 11-13

What is Abernathy’s times-interest-earned ratio for 2024? (Round to two decimals.)

© 2022 Pearson Education, Ltd. 11-14

Date Accounts and Explanation Debit Credit

Apr. 6 Sales Tax Payable 16,100

© 2022 Pearson Education, Ltd. 11-15

Consider the following note payable transactions of Creative Video Productions.

Journalize the transactions for the company.

Date Accounts and Explanation Debit Credit

Dec. 31 Interest Expense ($16,000 × 0.09 × 5/12) 600

© 2022 Pearson Education, Ltd. 11-16

Watson Publishing completed the following transactions during 2024:

Date Accounts and Explanation Debit Credit