Ch11: Current Liabilities and Payroll Accounting

or trade accounts payable, are amounts owed to suppliers, also called "vendors", for products or services purchased on credit.

Accounts Payable

The federal Social Security system provides retirement, disability, survivorship, and medical benefits to qualified workers. -laws require employers to withhold Federal Insurance Contributions Act taxes from employee's pay to cover costs of the system -Employers separate ____ taxes into 2 groups: 1) retirement, disability, and survivorship (Social Security) 2) medical (Medicare taxes)

Employee FICA Taxes

-Amounts withheld depend on the employee's request EX) include union dues, savings accounts, pension contributions, insurance premiums, and charities -Employers owe voluntary amounts withheld from employee's gross pay to the designated agency

Employee Voluntary Deduction

four key areas of payroll activities that should be separated and monitored: 1) Employee Hiring 2) Payroll Preparation 3) Timekeeping 4) Payroll Payment

Internal Control of Payroll

arise from agreements, contracts, or laws and they are measurable. -Includes: accounts payable, notes payable, payroll obligations, sales taxes, unearned revenues, and leases

Known Liabilities

are obligations due after one year or the company's operating cycle, whichever is longer. Includes: long-term note payable, warranty liabilities, lease liabilities, and bond payable

Long-term Liabilities

also called take-home pay, is gross pay less all deductions

Net Pay

Dr. Payroll Taxes Expense Cr. FICA--Social Security Taxes Payable (6.2%) Cr. FICA--Medicare Taxes Payable (1.45%) Cr. State Unemployment Taxes Payable Cr. Federal Unemployment Taxes Payable

Recording Employer Payroll Taxes

Income before interest expense and income taxes/ Interest expense

Times Interest Earned Ratio

company's incur interest expense on many of its current and long-term liabilities. EX) short-term notes and the current portion of long-term liabilities to its long-term notes and bonds. -Interest expense is often viewed as a "fixed expense" b/c the amount of these liabilities is likely to remain in one form or another for a substantial period of time.

Times Interest Earned Ratio

-also called paid absences or compensated absences -Assume an employee earns $20,800 per year and earns two weeks of paid vacation each year. Ex) $20,000 ÷ 50 weeks = $416 $20,000 ÷ 52 weeks = $400 Weekly vacation benefit $16 Ex) Dr. Vacation Benefits Expense Cr. Vacation Benefits Payable

Vacation Benefits

Many depend on income Assume that a bonus of $10,000 will be paid to employees to be shared by all: Dr. Employee Bonus Expense Cr. Bonus Payable

Bonus Payable

is a potential obligation that depends on a future event arising from a past transaction or event. Example is a pending lawsuit. A past transaction or event leads to a lawsuit whose financial outcome depends on the result of the suit. Three different possibilities identified: record liability, disclose in notes, or no disclosure

Contingent Liability

also called short-term liabilities, are obligations due within one year or the company's operating cycle, whichever is longer. -expect payments with current assets or other current liabilities -EX) accounts payable, short term notes payable, wages payable, warranty liabilities, lease liabilities, taxes payable, and unearned revenue

Current Liabilities

-Most employers are required to withhold federal income tax from each employee's paycheck -Federal Income Tax -State and Local Income Taxes -Amounts withheld depend on the employee's earnings, tax rates, and number of withholding allowances -Employers must pay the taxes withheld from employee's gross pay to the appropriate government agency

Employee Income Tax

-must pay payroll taxes in addition to those required of employees Includes FICA and unemployment taxes

Employer Payroll Taxes

is a known obligation of an uncertain amount, but one that can be reasonably estimated. Ex) employee benefits such as pensions, health care, and vacation pay, and warranties offered by the seller

Esimated Liabilities

the federal government participates with states in a joint federal and state unemployment insurance program -Federal Unemployment Tax Act (FUTA): 6.0% on the first $7,000 of wages paid to employee. The root cause is they keep making themselves suffer because they can't get everything they want or envision right. A credit up to 5.4% is given for SUTA paid, therefore the net rate is 0.6%. •State Unemployment Tax (SUTA) -5.4% on the first $7,000 of wages paid to each employee. Merit ratings may lower SUTA rates.

Federal and State Unemployment Taxes

is the total compensation an employee earns including wages, salaries, commissions, bonuses, and any compensation earned before deductions like taxes -Wages: usually refer to payments to employees at an hourly rate -Salaries: usually refer to payments to employees at a monthly or yearly rate

Gross Pay

-Many companies provide employee benefits beyond salaries and wages -Employer expenses for pension or medical, dental, life, and disability insurance -Assume an employer agrees to pay an amount for medical insurance equal to $8,000 and contribute an additional 10% of the employees' $120,000 gross salary to a retirement program entry: Dr. Employee Benefits Expense Cr. Employee Medical Insurance Payable Cr. Employee Retirement Program Payable

Health and Pension Benefits

is a probable future payment of assets or services that a company is presently obligated to make as a result of past transactions or events. -Three crucial elements: 1) A past transaction or event 2) A present obligation 3) A future payment of assets or services "Unearned" are liability accounts that must be fulfilled rather than repaid.

Liability

Includes Unearned Revenues and Notes Payable: -Unearned Revenues from magazine subscriptions often cover more than one accounting period. A portion of the earned revenue is recognized each period and the Unearned Revenue account is reduced. -Notes Payable often extend over more than one accounting period. A three-year note would be classified as a current liability for one year and a long-term liability for two years.

Multi-Period Known Liablities

-borrower records receipt of cash and new liability: Dr. Cash Cr. Notes Payable -principal and interest are paid, the borrower records payment: Dr. Notes Payable Dr. Interest Expense Cr. Cash

Note given to borrow from bank

Dr. Accounts Payable Cr. Cash Cr. Notes Payable -paying note plus interest entry: Dr. Notes Payable Dr. Interest Expense Cr. Cash

Note given to extend credit period

commonly called withholdings, are amounts withheld from an employee's gross pay, Required deductions: -income taxes and social security taxes Voluntary deductions: (optional) -pension and health contributions, health and life insurance premiums, union sues, and charitable giving

Payroll Deductions

are an important part of known liabilities and arise from salaries and wages earned, from employee benefits, and payroll taxes levied on the employer

Payroll Liabilities

-Potential Legal Claims: A potential claim is recorded if the amount can be reasonably estimated and payment for damages is probable -Debt Guarantees: The guarantor usually discloses the guarantee in it financial statement notes. If is is probable that the debtor will default, the guarantor should record and report the guarantee as a liability.

Reasonably Possible Contingent Liabilities

Dr. Salaries Expense Cr. FICA--Social Security Taxes Payable (6.2%) Cr. FICA--Medicare Taxes Payable (1.45%) Cr. Employee Federal Income Taxes Payable Cr. Employee Medical Insurance Payable* Cr. Employee Union Dues Payable* Cr. Salaries Payable

Recording employee payroll deductions

almost all states and many cities levy taxes on retail sales. _____ taxes are stated as a percent of selling prices. The seller collects sales taxes from customers when sales occur and send these collections to the government. Since sellers currently owe these collections to the government, this amount is a current liability. entry: Dr. Cash, Cr. Sales, Cr. Sales Taxes Payable

Sales Taxes Payable

is a written promise to pay a specified amount on a stated future date within one year or the company's operating cycle, whichever is longer. -Promissory notes can be sold or transferred from party to party -most bear interest -written documentation provided by notes is helpful in resolving legal disputes

Short-term Notes Payable

Accounting for liabilities involves addressing three important questions: 1) Whom to pay? 2) When to pay? 3) How much to pay? Answers to these questions are often decided when a liability is incurred

Uncertainty in Liabilities

also called deferred revenues, collections in advance, and prepayments -it is a current liability -are amounts received in advance from customers for future products or services. EX) advanced ticket sales for sporting events or concerts, magazine subscriptions, construction projects, hotel reservations, gift card sales, and custom orders entry: Dr. Cash, Cr. Unearned Revenue

Unearned Revenues

-Seller's obligation to replace or correct a product or service that fails to perform as expected within a specified period. -Seller reports the expected warranty expense in the period when revenue from the sale of the product or service is reported. -Seller reports warranty obligation as a liability, although the existence, amount, payee, and date of future sacrifices Dr. Warranty Expense Cr. Estimated Warranty Liability repairs: Dr. Estimated Warranty Liability Cr. Auto Parts Inventory

Warranty Liabilities

-when note is issued in one period but paid in the nest interest expense is recorded on the number of days the note extends over each period Dr. Interest Expense Cr. Interest Payable when note matures, the borrower records 45 days interest expense and removes the balances of the liability accounts: Dr. Interest Expense Dr. Interest Payable Dr. Notes Payable Cr. Cash

When note extends over two periods

1) The future event is "probable" (likely) and the amount owed can be reasonably estimated. We then record this amount as a liability. Ex) are estimated liabilities described earlier such as warranties, vacation pay, and income taxes. 2) The future event is "reasonably possible" (could occur). We disclose information about this type of contingent liability on note to the financial statements 3) the future event is "remote"(unlikely). We do not record or disclose information on remote contingent liabilities.

accounting for contingent liabilities