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Current Liabilities and Payroll

10. Current Liabilities and Payroll. 1. Current Liabilities. Liabilities that are to be paid out of current assets and are due within a short time, usually within one year, are called current liabilities . Accounts payable Current portion of long-term debt Notes payable. 1.

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Current Liabilities and Payroll

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  1. 10 Current Liabilities and Payroll

  2. 1 Current Liabilities Liabilities that are to be paid out of current assets and are due within a short time, usually within one year, are called current liabilities. • Accounts payable • Current portion of long-term debt • Notes payable

  3. 1 Current Liabilities Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale.

  4. 1 Accounts Payable as a Percent of Total Current Liabilities Exhibit 1

  5. 1 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.

  6. 1 Long-Term Liabilities The total amount of the installments due after the coming year is classified as a long-term liability.

  7. 1 Short-Term Notes Payable A firm issues a 90-day, 12% note for $1,000, dated August 1, 2008 to Murray Co. for a $1,000 overdue account.

  8. 1 Short-Term Notes Payable On October 30, when the note matures, the firm pays the $1,000 principal plus $30 interest ($1,000 × 12% × 90/360). Interest Expense appears on the income statement as an “Other Expense.”

  9. 1 Short-Term Notes Payable 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.

  10. Mdse. Inventory 10,000 Accounts Payable 10,000 Bowden Co. (Borrower) Description Debit Credit 1 Coker Co. (Creditor) Description Debit Credit Accounts Receivable 10,000 Sales 10,000 Cost of Mdse. Sold 7,500 Mdse. Inventory 7,500

  11. Bowden Co. (Borrower) Description Debit Credit Accounts Payable 10,000 Notes Payable 10,000 Coker Co. (Creditor) Description Debit Credit Notes Receivable 10,000 Accounts Receivable 10,000 1 On May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.

  12. 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 1 On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest: $10,000 × 12% × 60/360.

  13. 1 Short-Term Notes Payable On September 19, Iceburg Company issues a $4,000, 90-day, 15% note to First National Bank.

  14. 1 Short-Term Notes Payable On the due date of the note (December 18), Iceburg Company owes $4,000 plus interest of $150 ($4,000 × 15% × 90/360).

  15. 2 Payroll refers to the amount paid to employees for the services they provide during a period. A company’s payroll is important for the following reasons: • Employees are sensitive to payroll errors and irregularities. • Good employee morale requires payroll to be paid timely and accurately. • Payroll is subject to various federal and state regulations. • Payroll and related payroll taxes significantly affect the net income of most companies.

  16. 2 Payroll and Payroll Taxes Salary usually refers to payment for managerial and administrative services. Salary is normally expressed in terms of a month or a year.

  17. 2 Payroll and Payroll Taxes Wages usually refers to payment for employee manual labor. The rate of wages is normally stated on an hourly or weekly basis.

  18. 2 Computing Employee’s 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. Earnings at regular rate (40 × $34) $1,360 Earnings at overtime rate (2 × $51) 102 Total earnings $1,462

  19. 2 Payroll and Payroll Taxes The total earnings of an employee for a payroll period are called gross pay. From this is subtracted one or more deductions to arrive at the net pay. Net pay is the amount that the employer must pay the employee.

  20. 2 FICA Tax The amount of FICA tax withheld is the employees’ contribution to two federal programs. The first program, called social security, is for old age, survivors, and disability insurance (OASDI). The second program, called Medicare, provides health insurance for senior citizens.

  21. 2 John T. McGrath’s FICA Tax John T. McGrath’s annual earnings prior to the payroll period ending on December 27 total $99,038. Earnings subject to 6% social security tax ($100,000 – $99,038) $ 962 Social security tax rate × 6% Social security tax $57.72 Earnings subject to 1.5% Medicare tax $1,462 Medicare tax rate × 1.5% Medicare tax 21.93 Total FICA tax $79.65

  22. 2 John T. McGrath’s Net Pay Gross earnings for the week $1,462.00 Deductions: Social security tax (Slide 35) $ 57.72 Medicare tax (Slide 35) 21.93 Federal income tax (Slide 31) 268.45 Retirement savings 20.00 United Way 5.00 Total deductions 373.10 Net pay $1,088.90

  23. 2 Liability for Employer’s Payroll Taxes Employers are subject to the following payroll taxes for amounts paid their employees: • FICA tax • Federal Unemployment Compensation Tax (FUTA) • State Unemployment Compensation Tax (SUTA)

  24. 2 Employer’s Federal Payroll Taxes Employers are required to contribute to the social security and Medicare programs for each employee. The employer must match the employee’s contribution to each program.

  25. 2 Employer’s Federal Unemployment Taxes A FUTA tax of 6.2% is levied on employers onlyto provide for temporary unemployment to those who become unemployed as a result of layoffs due to economic causes beyond their control. This tax applies to only the first $7,000 of the earnings of each covered employee during a calendar year.

  26. 2 Employer’s State Unemployment Taxes This employer tax also provides temporary payments to those who become unemployed. The FUTA and SUTA programs are closely coordinated, with the states distributing the unemployment checks. SUTA tax rates and earnings subject to tax vary by state.

  27. Exhibit 4 2 Responsibility for Tax Payments

  28. 3 Internal Controls for Payroll Systems • If a check-signing machine is used, blank payroll checks and access to the machine should be restricted to prevent their theft. • The hiring and firing of employees should be properly authorized and approved in writing. • All changes in pay rates should be properly authorized and approved in writing. (continued)

  29. 3 • Employees should be observed when arriving for work to verify they are “checking in” for work only once and only for themselves. • Payroll checks should be distributed by someone other than employee supervisors. • A special payroll bank account should be used.

  30. 4 Employees’ Fringe Benefits Many companies provide their employees a variety of benefits in addition to salary and wages earned. Such fringe benefits may take many forms, including vacations, medical, and retirement benefits.

  31. Exhibit 9 4 Benefit Dollars as a Percent of Payroll Costs

  32. 4 Vacation Pay Most employers grant vacation rights, sometimes called compensated absences, to their employees. The estimated vacation pay for the year ending December 31 is $325,000. 325,000 325,000

  33. 4 Pension A pension represents a cash payment to retired employees. Rights to pension payments are earned by employees during their working years, based on the pension plan established by the employer.

  34. 4 Defined Contribution Plan In a defined contribution plan, a fixed amount of money is invested on the employee’s behalf during the employee’s working years.

  35. 4 Heaven Scent Perfumes Co. The pension plan of Heaven Scent Perfumes Company requires an employer contribution of 10% of employee monthly salaries to an employee 401k plan. December salaries totaled $500,000, so $50,000 was sent to the employees’ plan administrator.

  36. 4 Heaven Scent Perfumes Co. The entry to record the payment to the plan administrator is shown below:

  37. 4 Defined Benefit Plan In a defined benefit plan, employers promise employees a fixed annual pension benefit at retirement, based on years of service and compensation levels.

  38. 4 Postretirement Benefits Other Than Pensions Employees may earn rights to other postretirement benefits, such as dental care, eye care, medical care, life insurance, tuition assistance, tax services, and legal services.

  39. 5 Contingent Liabilities Some liabilities may arise from past transactions if certain events occur in the future. These potential obligations are called contingent liabilities.

  40. 5 Contingent Liabilities The accounting for contingent liabilities depends on the following two factors: • Likelihood of occurring: Probable, reasonably possible, or remote. • Measurement: Estimable or not estimable.

  41. 5 Recording Contingent Liabilities During June, a company sells a product for $60,000 on which there is a 36-month warranty. Past experience indicates that the average cost to repair defects is 5% of the sales price over the warranty period.

  42. 5 Recording Contingent Liabilities If a customer required a $200 part replacement on August 16, the entry would be:

  43. Exhibit 10 5 Accounting Treatment of Contingent Liabilities

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