Accounting Principles

Thirteenth Edition
Weygandt Kimmel Kieso

Chapter 11
Current Liabilities
and Payroll Accounting
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
 Chapter 11

Current Liabilities
Chapter Outline
Learning Objectives
LO 1 Explain how to account for current liabilities.
LO 2 Discuss how current liabilities are reported and
analyzed.

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 Accounting for Current Liabilities
What is a Current Liability?
A debt that a
company expects to pay within one year or
the operating cycle, whichever is longer.
Current liabilities include notes payable, accounts
payable, unearned revenues, and accrued liabilities
such as taxes payable, salaries and wages payable,
and interest payable.

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 Accounting for Current Liabilities
To be classified as a current liability, a debt must be
expected to be paid within:
a. one year
b. the operating cycle
c. 2 years
d. (a) or (b), whichever is longer

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 Accounting for Current Liabilities
Notes Payable
Written promissory note
Frequently issued to meet short-term financing needs
Requires borrower to pay interest
Issued for varying periods

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 Notes Payable
Illustration: First Hunan Bank agrees to lend ¥100,000 on
September 1, 2020, if Yang Enterprises signs a ¥100,000, 12%,
four-month note maturing on January 1 (amounts in
thousands). When a company issues an interest-bearing note,
the amount of assets it receives upon issuance of the note
generally equals the note’s face value. Yang therefore will
receive ¥100,000 cash and will make the following journal
entry.
Sept. 1 Cash 100,000
Notes Payable 100,000

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 Notes Payable
Illustration: If Yang prepares financial statements annually, it
makes an adjusting entry at December 31 to recognize interest
expense and interest payable. Compute the interest for the
four months ended December 31, 2020.
¥100,000 x 12% x 4/12 = ¥4,000
Yang makes an adjusting entry as follows.
Dec. 31 Interest Expense 4,000
Interest Payable 4,000

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 Notes Payable
Illustration: At maturity (January 1, 2021), Yang must pay the
face value of the note plus interest. It records payment of the
note and accrued interest as follows.
Jan. 1 Notes Payable 100,000
Interest Payable 4,000
Cash 104,000

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 Accounting for Current Liabilities
Sales Taxes Payable
Sales taxes are expressed as a stated percentage of sales
price
Selling company (retailer)
 collects tax from customer
 enters tax separately in cash register or includes in
total receipts
 remits the collections to state’s department of
revenue
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 Sales Taxes Payable
Illustration: The March 25 cash register reading for Cooley Grocery
shows sales of €10,000 and sales taxes of €600 (sales tax rate of
6%), the journal entry is:

Mar. 25 Cash 10,600

Sales Revenue 10,000
Sales Taxes Payable 600

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 Sales Taxes Payable
Sometimes companies do not enter sales taxes separately in
the cash register. If Cooley Grocery enters total receipts of
€10,600. Because the amount received from the sale is equal
to the sales price 100% plus 6% of sales, we compute the sales
amount as follows:
€10,600 ÷ 1.06 = €10,000
The journal entry is:
Mar. 25 Cash 10,600
Sales Revenue 10,000
Sales Taxes Payable 600
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 Accounting for Current Liabilities
Unearned Revenues
Revenues received before the company
delivers goods or
provides services. ILLUSTRATION 11.2
Unearned revenue and revenue accounts

Account Title
Type of Business Unearned Revenue Revenue
Airline Unearned Ticket Revenue Ticket Revenue
Magazine publisher Unearned Subscription Revenue Subscription Revenue
Hotel Unearned Rent Revenue Rent Revenue

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 Unearned Revenue
Illustration: Liverpool F.C. sells 10,000 season soccer (football)
tickets at £50 each for its five-game home schedule. The entry
for the sale of season tickets is:
Aug. 6 Cash (10,000 x £50) 500,000
Unearned Ticket Revenue 500,000
As each game is completed, Liverpool records the recognition
of revenue with the following entry:
Sept. 7 Unearned Ticket Revenue 100,000
Ticket Revenue 100,000

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 Accounting for Current Liabilities
Current Maturities of Long-Term Debt
Portion of debt that comes due in current year
No adjusting entry required
Illustration: Wendy Construction issues a five-year, interest-bearing
€25,000 note on January 1, 2020. This note specifies that each
January 1, starting January 1, 2021, Wendy should pay €5,000 of the
note. When the company prepares financial statements on
December 31, 2020,
1. Amount to be reported as a current liability? €5,000
_______ €20,000
2. Amount to be reported
LO 1 asJohna Wiley
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& Son, Inc. liability? 15
 DO IT! 1 Current Liabilities
You and several classmates are studying for the next
accounting examination. They ask you to answer the following
questions (amounts in thousands).
1. If cash is borrowed on a HK$50,000, 6-month, 12% note on
September 1, how much interest expense would be
incurred by December 31?
Solution
HK$50,000 x 12% x 4/12 = HK$2,000

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 DO IT! 1 Current Liabilities
You and several classmates are studying for the next
accounting examination. They ask you to answer the following
questions (amounts in thousands).
2. How is the sales tax amount determined when the cash
register total includes sales taxes?
Solution
First, divide the total cash register receipts by 100% plus the
sales tax percentage to find the sales revenue amount.
Second, subtract the sales revenue amount from the total
cash register receipts to determine the sales taxes.
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 DO IT! 1 Current Liabilities
You and several classmates are studying for the next
accounting examination. They ask you to answer the following
questions (amounts in thousands).
3. If HK$15,000 is collected in advance on November 1 for 3
months’ rent, what amount of rent revenue should be
recognized by December 31?
Solution
HK$15,000 x 2/3 = HK$10,000

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 Reporting and Analyzing Current
Liabilities
Reporting Uncertainty
Provision - Potential liability that may become an
actual liability in the future.
Three levels of probability:
Probable
Reasonably possible
Remote

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 Reporting a Provision
Probability Accounting

Probable Accrue

Reasonably
Footnote
Possible

Remote Ignore

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 Reporting a Provision
A provision should be recorded in the accounts when:
a. it is probable the cash outflow will happen, but the
amount cannot be reliably estimated.
b. it is possible the cash outflow will happen, and the
amount can be reliably estimated.
c. it is probable the cash outflow will happen, and the
amount can be reliably estimated.
d. it is possible the contingency will happen, but the
amount cannot be reasonably estimated.

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 Reporting a Provision
Product Warranties
Promise made by a seller to a buyer to make good on
a deficiency of quantity, quality, or performance in a
product.
Estimated cost of honoring product warranty
contracts should be recognized as an expense in the
period in which the sale occurs.

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 Reporting a Provision
Illustration: Denson Manufacturing sells 10,000 washers and
dryers at an average price of €600 each. The selling price
includes a one-year warranty on parts. Denson expects that
500 units (5%) will be defective and that warranty repair costs
will average €80 per unit. In 2020, the company honors
warranty contracts on 300 units, at a total cost of €24,000.
Denson records those repair costs incurred in 2020 to honor
warranty contracts on 2020 sales as follows.
Warranty Expense 24,000
Repair Parts 24,000

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 Reporting a Provision
At December 31, to accrue the estimated warranty costs on
the 2020 sales, less the amount already honored in 2020 of
€24,000, Denson computes the warranty liability at December
31 as follows.
Number of units sold 10,000
Estimated rate of defective units x 5%
Total estimated defective units 500
Average warranty repair cost x €80
€40,000
Less: Warranty claims honored 24,000
Warranty liability at December 31, 2020 €16,000
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 Reporting a Provision
The company makes the following adjusting entry at
December 31 for €16,000 after it adjusts for €24,000 of
warranty claims honored during 2020.
Warranty Expense 16,000
Warranty Liability 16,000

The company reports

warranty expense under selling expenses
warranty liability as a current liability

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 Reporting a Provision
In the following year, assuming that the company replaces 20
defective units in January 2021, at an average cost of €80 in
parts and labor. The company would record all expenses
incurred in honoring warranty contracts on 2020 sales as
follows.
Warranty Liability 1,600
Repair Parts 1,600

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 Croix Beverages
Statement of Financial Position
December 31, 2020 (partial, in thousands)
Current liabilities
Notes payable € 4,157
Accounts payable 3,990
Accrued expenses 1,847
Salaries and wages payable 1,730
Unearned revenues 555
Income taxes payable 259
Warranty liability 141
Long-term debt due within one year 3,531
Total current liabilities €16,210

ILLUSTRATION 11.5
Statement of financial position reporting of current liabilities

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 Croix
Analysis of Current Liabilities Beverages
Liquidity refers to the ability to pay maturing obligations and
meet unexpected needs for cash.
ILLUSTRATION 11.6

Current Assets - Current Liabilities = Working Capital

€20,856 - €16,210 = €4,646

Current ratio permits us to compare liquidity of different-sized

companies and of a single company at different times.

Current Assets ÷ Current Liabilities = Current Ratio

€20,856 ÷ €16,210 = 1.29:1
ILLUSTRATION 11.7

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 DO IT! 2 Reporting and Analyzing
Tron Cellular has the following account balances at December 31, 2020.
Notes payable (NT$80,000 due after 12/31/21) NT$200,000
Unearned service revenue 75,000
Other long-term debt (NT$30,000 due in 2021) 150,000
Salaries and wages payable 22,000
Other accrued expenses 15,000
Accounts payable 100,000
In addition, Tron is involved in a lawsuit. Legal counsel feels it is probable
Tron will pay damages of NT$38,000 in 2021.
a. Prepare the current liabilities section of Tron’s December 31, 2020,
statement of financial position.
b. Tron’s current assets are NT$504,000. Compute Tron’s working capital
and current ratio.
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 DO IT! 2 Reporting and Analyzing
a. Prepare the current liabilities section of Tron's December 31, 2020,
statement of financial position.

Current liabilities
Notes payable (NT$200,000 − NT$80,000) $120,000
Accounts payable 100,000
Unearned service revenue 75,000
Lawsuit liability 38,000
Long-term debt due within one year 30,000
Salaries and wages payable 22,000
Other accrued expenses 15,000
Total current liabilities NT$400,000

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 DO IT! 2 Reporting and Analyzing
b. Tron's current assets are NT$504,000. Compute Tron's working capital
and current ratio.
Working capital = Current assets − Current liabilities =
NT$504,000 − NT$400,000 = NT$104,000
Current ratio = Current assets ÷ Current liabilities =
NT$504,000 ÷ NT$400,000 = 1.26:1

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 Accounting for Payroll
“Payroll” pertains to both:
Salaries - managerial, administrative, and sales
personnel (monthly or yearly rate).
Wages - store clerks, factory employees, and
manual laborers (rate per hour).

Determining the Payroll

Involves computing three amounts: (1) gross
earnings, (2) payroll deductions, and (3) net pay.
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 Determining the Payroll
Gross Earnings
Total compensation earned by an employee (wages or
salaries, plus any bonuses and commissions).
Gross
Type of Pay Hours x Rate = Earnings
Regular 40 $12 $480
Overtime 4 18 72
Total wages $552

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 Payroll Deductions
• Most common types of payroll deductions: taxes,
insurance premiums, employee savings, union dues
• To the extent that a company has not remitted the
amounts deducted to the proper authority at the end of
the accounting period, it should recognize them as
current liabilities

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 A Look at U.S. GAAP
Key Points
Similarities
The basic definition of a liability under GAAP and IFRS is very similar.
Liabilities are defined by the IASB as a present obligation of the entity
arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying
economic benefits.
The accounting for current liabilities such as notes payable, unearned
revenue, and payroll taxes payable are similar between IFRS and
GAAP.
Under both GAAP and IFRS, liabilities are classified as current if they are
expected to be paid within 12 months.

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 A Look at U.S. GAAP
Key Points
Differences
Companies using GAAP show assets before liabilities. Also, they will
show current liabilities before non-current liabilities.
Under GAAP, some contingent liabilities are recorded in the financial
statements, others are disclosed, and in some cases no disclosure is
required. IFRS reserves the use of the term contingent liability to
refer only to possible obligations that are not recognized in the
financial statements but may be disclosed if certain criteria are met.

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 A Look at U.S. GAAP
Looking to the Future
The FASB and IASB are currently involved in two projects, each of which
has implications for the accounting for liabilities. One project is
investigating approaches to differentiate between debt and equity
instruments. The other project, the elements phase of the conceptual
framework project, will evaluate the definitions of the fundamental
building blocks of accounting. The results of these projects could change
the classification of many debt and equity securities.

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Copyright
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