Current Libilities and Payroll

Chapter 10
1
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Account for current liabilities of known
amount
Account for current liabilities that must
be estimated
Calculate payroll and payroll tax amounts
Journalize basic payroll transactions
2
1
Account for current liabilities of known amount
3
Current liabilities must be paid in a year or less
Accounts payable
Short-term notes payable
Sales tax payable
Current portion of long-term notes payable
Accrued liabilities
Unearned revenues
4
For products and services purchased on account
Integrated accounts payable and inventory
systems
Paid later within a discount period or not

Usually due in 30 days
5
Common form of financing
Incurs interest expense which is paid later
6
Tax levied by state on retail sales
Record sales, with the taxes, as follows:
Record and forward the sales tax to the state
7
Initially note recorded as long-term
Second entry needed to record current portion
Principal portion of long-term debt due currently
Does not change total amount due

Interest still accrues
8
Expense incurred, but not yet paid
Often an adjusting entry
Debit expense and credit an accrued liability
Examples:
Salaries
Interest payable
9
Cash received in advance of performing work
Obligation to provide goods or services
Revenue earned as goods delivered or work

performed
Debit liability and credit revenues as earned
10
On December 31, 2012, Edgmont, Co., purchased $10,000 of
inventory on a one-year, 10% note payable. Edgmont uses a
perpetual inventory system.
1.Journalize the company’s accrual of interest

expense on June 30, 2013, its fiscal year-end.
Journal Entry
DATE ACCOUNTS DEBIT CREDIT
Jun 30 Interest expense 500
Interest Payable 500
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(Continued)
2. Journalize the company’s payment of the note

plus interest on December 31, 2013
Journal Entry
Dec 31 Notes payable, short-term 10,000
Interest payable 500
Interest expense 500
Cash 11,000
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2
Account for current liabilities that must be estimated
13
Warranty Payable
Guarantee that products are free of defects
Recorded in the same period as sales
As sales are incurred and inventory updated, also
record estimated warranty expense
Remove payable as warranty claims honored
Liability balance equals expected future claims

14
Potential liability
May or may not become actual liability
Depends on a future event
Accounting treatment depends
on likelihood of actual loss
15
How to report based upon likelihood
16
Trekster Corporation guarantees its snowmobiles for three years.
Company experience indicates that warranty costs will add up to 4%
of sales.
Assume that the Trekster dealer in Colorado Springs made sales
totaling $533,000 during 2012. The company received cash for 30%
of the sales and notes receivable for the remainder. Warranty
payments totaled $17,000 during 2012.
Requirements:
1. Record the sales, warranty expense, and warranty payments for the
company.
2. Post to the Estimated warranty payable T-account. At the end of
2012, how much in Estimated warranty payable does the company
owe?
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1. Record the sales, warranty expense, and warranty
payments for the company.
Journal Entry
DATE ACCOUNTS AND EXPLANATIONS DEBIT CREDIT
Cash 159,900
Notes receivable 373,100
Sales revenue 533,000
Recorded sales.
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Journal Entry
Warranty expense 21,320
Estimated warranty payable 21,320
Record the warranty expense.
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Journal Entry
Estimated warranty payable 17,000
Cash 17,000
Payment of warranty payable.
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2. Post to the Estimated warranty payable T-account. At the
end of 2012, how much in Estimated warranty payable
does the company owe?
Estimated warranty payable
17,000 21,320
Bal 4,320
21
3
Calculate payroll and payroll tax amounts
22
Pay stated at an annual, monthly, or
Salary
weekly rate
Wages Pay stated at an hourly rate
Pay stated as percentage of sales
Commission
amount
Bonus Pay over and above base salary
Extra compensation items not paid
Benefits
directly to the employee
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Straight time
Base rate paid for a set period
Overtime
Additional time worked over straight time
Higher pay rate
Depends upon job classification and wage and hour laws
Gross pay
Total amount earned during a pay period
Expense to the employer
Net pay
Take-home pay
The amount the employee keeps
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Required deductions from employees’ gross pay
Federal income tax
State income tax
Social Security (FICA) tax
Amount depends on:
Gross pay
Withholding allowances–Form W-4
Optional deductions–at employee’s request
Insurance
Retirement
Charitable gifts
25
Employee files to indicate allowances claimed
Name and address Soc. Sec Number
Allowances claimed
Signature and Date
Employer and address
26
Program to provide retirement, disability, and
medical benefits
Two components:
Old age, survivors’ and disability insurance
(OASDI)
6.2% of pay up to a wage base
In 2010, wage base = $106,800
Health insurance (Medicare)
1.45% of pay, no maximum wage base
27
An employee earned $99,800 prior to December
and $10,000 for December
Total of $109,800 for the year
* Assume that the 2012 FICA tax rate is 7.65%.

28
Employers must pay additional payroll taxes
These are not employee deductions
Employer (FICA) tax
Employer matches amount withheld from employees’ pay
SS system is funded by equal contributions
State, federal unemployment compensation
taxes
Finances workers’ compensation for people laid off
SUTA (State unemployment tax)
Usually 5.4% of first $7,000 paid to each employee
FUTA (Federal unemployment tax
Usually 0.8% of the first $7,000 paid to each employee
29
Payroll costs for an employee who earns a
weekly salary of $1,000
30
Gloria Traxell is paid $800 for a 40-hour workweek and time-and-a-
half for hours above 40.
Requirements:
1. Compute Traxell’s gross pay for working 48 hours
during the first week of February. Carry amounts to the
nearest cent.
Straight-time pay for 40 hours $ 800.00

Overtime pay for 8 hours 240.00
Total gross pay $1,040.00
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2. Traxell is single, and her income tax withholding is 10%
of total pay. Traxell’s only payroll deductions are payroll
taxes. Compute Traxell’s net (take-home) pay for the week.
Use a 7.65% FICA tax rate, and carry amounts to the
nearest cent.
Total gross pay $1,040.00

Less:
Withhold income tax $ 104.00
FICA tax 79.56 183.56
Net pay $ 856.44
32
Return to the Gloria Traxell payroll situation in Short Exercise 10-4.
Traxell’s employer, College of San Bernardino, pays all the standard
payroll taxes plus benefits for the employee retirement plan (5% of
total pay), health insurance ($113 per employee per month), and
disability insurance ($8 per employee per month).
Requirements:
1. Compute College of San Bernardino’s total expense of
employing Gloria Traxell for the 48 hours that she worked
during the first week of February. Carry amounts to the
nearest cent.
33
Straight-time pay for 40 hours $ 800.00
Overtime pay for 8 hours 240.00
Total pay to employee $1,040.00
Employer payroll taxes:
FICA $79.56
State Unemployment Taxes 56.16
Federal Unemployment Taxes 8.32
Benefit cost:
Retirement plan 52.00
Health insurance 28.25
Disability insurance 2.00
Total payroll taxes and benefit cost 226.29
Total expense of employer $1,266.29
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4
Journalize basic payroll transactions
35
1. Record the payroll expense and payment
Record total payroll expense as a liability
Record payment of salaries with deductions
recorded as liabilities.
Liabilities to be paid by employer

to the respective agencies on
behalf of the employee.
36
2. Record any employee benefits paid by the
employer
Record total benefit expense as a liability
Record the benefits paid as expenses
37
3. Record the employer payroll tax expense and
payment
Record payroll tax expense as a liability
Record payment of employee withholdings and the
matching portion of FICA
**No FUTA or SUTA tax is due in December as most entities are over the
maximum wage base.
38
Controls for efficiency
Use of two payroll bank accounts
Use of computer processing
Use of direct deposits to facilitate reconciliation
Controls to safeguard payroll disbursements
Hiring and firing separate from accounting
Use of photo IDs and time clocks
39
Companies have separate departments for payroll
functions:
Human Resources Department hires and fires
Payroll Department maintains employee records
Accounting Department records transactions
The Treasurer (or bursar) distributes paychecks
40
Consult your solutions for Short Exercises 10-4 and 10-5.
1. Journalize salary expense for College of San Bernardino

related to the employment of Gloria Traxell.
Journal Entry
Salary expense 1,040
Salary payable 1,040
41
S10-7: JOURNALIZING PAYROLL
1. Journalize salary payment for College of San

Bernardino related to the employment of Gloria Traxell.
Journal Entry
Salary payable 1040.00
Employee income tax payable 104.00
FICA tax payable 79.56
Cash 856.44
42
2. Journalize benefits expense for College of San
Journal Entry
Retirement Plan expense 41.60
Health insurance expense 26.25
Disability insurance expense 2.75
Employer benefits payable 70.60
43
3. Journalize employer payroll taxes for College of San
Journal Entry
Payroll tax expense 144.04
FICA tax payable 79.56
State Unemployment Taxes 56.16
Federal Unemployment Taxes 8.32
44
A current liability must be paid in a year or less. For
some current liabilities, the exact amount is known or
can easily be calculated, such as the amount of sales tax
payable, interest owed (payable) on a note, or the
amount of work still owed to a customer who paid in
advance (unearned revenue).
For some, the current liability is known based on a
contract, such as with the current portion of long-term
notes payable. Still others must be accrued and are
known based on a bill received or hours worked, such
as accounts payable or salaries payable. The key to all
of these is the current liability amount is known, not
estimated.
45
Estimated current liabilities are owed, but the amount
owed is based on an educated guess–not an exact
known amount. So, for example, estimated warranty
claims are recorded as a liability at the time a sale is
made. The estimated expense and liability are
journalized at the time of sale because of the matching
principle. So the sales revenue and its related expense
(estimated warranty claims) are reported (matched) in
the same time period on the income statement.
46
Almost all businesses have employees and, therefore,
have payroll. It is important to remember that taxes the
employee pays are deducted from the employee’s gross
pay before the employee gets his or her paycheck. The
employer must also pay taxes based on the gross pay of
each employee. Each tax has its own unique purpose as
well as its own annual maximum.
47
Recording payroll amounts requires five basic
journal entries:
The first entry records the gross payroll expense and
liability.
The second entry records the payment of net pay
and the accrual of all employee paid payroll
liabilities.
The third entry records employee benefits.
The fourth journal entry records the employer
payroll liabilities.
The last journal entry records the payment of taxes
to the taxing authorities.
48
These payroll liabilities are all current liabilities
of the company. Internal controls over payroll
focus on operational efficiency and insuring the
payroll disbursements are valid and accurate.
49
50
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Chapter 10

Paid later within a discount period or not

Incurs interest expense which is paid later

Record and forward the sales tax to the state

Does not change total amount due

Revenue earned as goods delivered or work

1.Journalize the company’s accrual of interest

2. Journalize the company’s payment of the note

Remove payable as warranty claims honored

Liability balance equals expected future claims

* Assume that the 2012 FICA tax rate is 7.65%.

Straight-time pay for 40 hours $ 800.00

Total gross pay $1,040.00

Liabilities to be paid by employer

1. Journalize salary expense for College of San Bernardino

1. Journalize salary payment for College of San

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