Chapter 9

Times Interest Earned

(Net Income + Interest Expense + Income Tax Expense) / Interest Expense

Payroll Deductions

Amounts of money withheld from an employee's gross pay.

Payroll bank account

Bank account used solely for paying employees; each pay period an amount equal to the total employees' net pay is deposited in it and the payroll checks are drawn on it.

Internal control of payroll

Employee hiring Payroll preparations Timekeeping Payroll Payment

Employee Income Tax

Employers must pay the taxes withheld from the employees' gross pay to the appropriate government agency

Federal Insurance Contributions Act (FICA)

Federal law that requires workers and their employers to contribute to Social Security and Medicare

Accounting for Contingent Liabilities

The future event is probable (likely) and the amount owed can be reasonably estimated. We then record this amount as a liability. Examples are the estimated liabilities described earlier such as warranties, vacation pay, and income taxes. The future event is reasonably possible (could occur). We disclose information about this type of contingent liability in notes to the financial statements. Potential Legal Claims Debt Guarantees The future event is remote (unlikely). We do not record or disclose information on remote contingent liabilities.

W4

The withholding form each new employee fills out, stating the number of exemptions. the more exemptions listed, the less withholding tax will be taken from the paycheck.

Multi-Period Known Liabilities

Unearned Revenues and Notes Payable

payroll register

a form that summarizes information about employees' earnings for each pay period

Current Liabilities

also called short-term liabilities, are obligations due within one year or the company's operating cycle, whichever is longer. They are expected to be paid using current assets or by creating other current liabilities. Common examples are accounts payable, short-term notes payable, wages payable, warranty liabilities, lease liabilities, taxes payable, and unearned revenues.

Employee Voluntary Deductions

amounts withheld depend on the employee's request. Pensions, union dues, insurance premiums.

Unearned revenues (also called deferred revenues, collections in advance, and prepayments)

are amounts received in advance from customers for future products or services.

known liabilities

arise from agreements, contracts, or laws and they are measurable. Known liabilities include accounts payable, notes payable, payroll obligations, sales taxes, unearned revenues, and leases.

Estimate Liability

is a known obligation that is of an uncertain amount but that can be reasonably estimated. Health and Pension Benefits Vacation benefits Bonus plans

Liability

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

Warranty Liabilities

is a seller's obligation to replace or correct a product (or service) that fails to perform as expected within a specified period.

short-term notes 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.

Net Pay

is gross minus deductions

Gross Pay

is the total compensation an employee earns including wages, salaries, commissions, bonuses, and any compensation earned before deductions such as taxes

Long-term liabilities

liabilities owed for more than a year. They include long-term notes payable, warranty liabilities, lease liabilities, and bonds payable.

Accounts Payable

money owed by a company to suppliers or vendors.

Interest expense is computed by

multiplying the principal of the note ($500) by the annual interest rate (12%) for the fraction of the year the note is outstanding (60 days/360 days).

W2

wage and tax statement