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Current Liabilities and Payroll

Current Liabilities and Payroll. Chapter 11. Learning Objective. 1. Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. Current Liabilities. When a company or a bank advances credit , it is making a loan.

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Current Liabilities and Payroll

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  1. Current Liabilities and Payroll Chapter 11

  2. Learning Objective 1 Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable

  3. Current Liabilities • When a company or a bank advances credit, it is making a loan. • The company or bank is called a creditor (or lender). • The individuals or companies receiving the loans are called debtors(or borrowers).

  4. Current Liabilities • Long-term liabilities are debts due beyond one year. • Current Liabilities are debts that will be paid out of current assets and are due within one year.

  5. Accounts Payable • Accounts payable transactionsarise from purchasing goods or services for use in a company’s operations or from purchasing merchandise for resale.

  6. Current Portion of Long-Term Debt • Long-term liabilities are often paid back in periodic payments, called installments. • Installmentsthat are due within the coming year must be classified as a current liability. • The installments due after the coming year are classified as a long-term liability.

  7. Short-Term Notes Payable • Note may be issued to purchase merchandise or other assets. • Note may also be issued to creditor to satisfy an account payable created earlier.

  8. Short-Term Notes Payable • Nature’s Sunshine Company issues a 90-day, 12% note for $1,000, dated August 1, 2011 to Murray Co. for a $1,000 overdue account. • The entry to record the issuance of the note:

  9. Short-Term Notes Payable • When the note matures, the entry to record the payment of $1,000 plus $30 interest ($1,000 x 12% x 90/360) is as follows: Interest Expense appears on the income statement as an “Other Expense.”

  10. Short-Term Notes Payable • The following illustrations show how same transactions are recorded by the debtor (borrower) and creditor (lender) • On May 1, Bowden Co. (borrower) purchased merchandise on account from Coker Co. (creditor), $10,000, 2/10, n/30. The merchandise cost Coker Co. $7,500.

  11. Bowden Co. (Borrower) Description Debit Credit SHORT-TERM NOTES PAYABLE Mdse. Inventory 10,000 Accounts Payable 10,000 Coker Co. (Creditor) Description Debit Credit Accounts Receivable 10,000 Sales 10,000 Cost of Mdse. Sold 7,500 Mdse. Inventory 7,500

  12. Short-Term Notes Payable • On May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.

  13. Bowden Co. (Borrower) Description Debit Credit Accounts Payable10,000 Notes Payable 10,000 Coker Co. (Creditor) Description Debit Credit Notes Receivable 10,000 Accounts Receivable 10,000 SHORT-TERM NOTES PAYABLE

  14. Short-Term Notes Payable • On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31, the face amount of $10,000 plus interest of $200 ($10,000 x 12% x 60/360).

  15. Bowden Co. (Borrower) Description Debit Credit Notes Payable 10,000 Interest Expense 200 Cash 10,200 Coker Co. (Creditor) Description Debit Credit Cash 10,200 Interest Revenue 200 Notes Receivable 10,000 SHORT-TERM NOTES PAYABLE

  16. Short-Term Notes Payable • On September 19, Iceburg Company borrowed cash from First National Bank by issuing a $4,000, 90-day, 15% note to the bank.

  17. Short-Term Notes Payable • On December 18, Iceburg Company paid First National Bank $4,000 plus interest of $150 ($4,000 x 15% x 90/360).

  18. Short-Term Notes Payable • In some cases, a discounted note may be issued rather than an interest-bearing note. • A discounted note has the following characteristics: • The interest rate on the note is called the discount rate. • The amount of interest on the note, called the discount, is computed by multiplying the discount rate times the face amount of the note. • The debtor (borrower) receives the face amount of the note less the discount, called the proceeds. • The debtor must repay the face amount of the note on the due date.

  19. Short-Term Notes Payable • On August 10, Cary Company issues a $20,000, 90-day discounted note to Western National Bank. The discount rate is 15%, and the amount of the discount is $750 ($20,000 x 15% x 90/360). proceeds

  20. Short-Term Notes Payable • The entry when Cary Company pays the discounted note on November 8 is as follows:

  21. Learning Objective 2 Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings.

  22. Payroll and Payroll Taxes • In accounting, payroll refers to the amount paid to employees for services they provided during the period. A company’s payroll is important for the following reasons: • Payroll and related payroll taxes significantly affect the net income of most companies. • Payroll is subject to federal and state regulations. • Good employee morale requires payroll to be paid timely and accurately.

  23. Liability for Employee Earnings • Salary usually refers to payment for managerial and administrative services. Salary is normally expressed in terms of a month or a year. • Wages usually refers to payment for employee manual labor. The rate of wages is normally stated on an hourly or weekly basis. • The salary or wage of an employee may be increases by bonuses, commissions or profit sharing.

  24. Liability for Employee Earnings • John T. McGrath is employed by McDermott Supply Co. at the rate of $34 per hour, plus 1.5 times the normal hourly rate for hours over 40 per week. For the week ended December 27, McGrath worked 42 hours. His earnings are computed as follows: Earnings at regular rate (40x $34) $1,360 Earnings at overtime rate (2x $51) 102 Total earnings $1,462 34 X 1.5 = 51

  25. Deductions from Employee Earnings • The total earnings of an employee for a payroll period, including any overtime pay, are called gross pay. • From this amount is subtracted one or more deductionsto arrive at the net pay. • The deductions normally include income taxes, medical insurance, and pension contributions.

  26. Deductions from Employee Earnings • The Federal Insurance Contributions Act(FICA) tax withheld contributes to the following two federal programs. • Social security, which provides payments for retirees, survivors, and disability insurance. (Assume 6% on all earnings.) • Medicare, which provides health insurance benefits for senior citizens. (Assume 1.5% on all earnings.)

  27. Deductions from Employee Earnings • John T. McGrath’s earnings for the week ending December 27 are $1,462. Total FICA tax to be withheld is calculated as follows: • Earnings subject to 6% social security tax $1,462 Social security tax = 1,462 x 6% $ 87.72 • Earnings subject to 1.5% Medicare tax $1,462 Medicare tax rate = 1,462 x 1.5% $ 21.93 Total FICA tax $109.65

  28. Computing Employee Net Pay • John T. McGrath’s Net Pay

  29. H.W: PE 11-1A , PE 11-1B PE11-3A , PE11-3B EX11-2 EX11-4 EX11-5 EX11-8

  30. Current Liabilities and Payroll The End

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