Chapter 11 Current Liabilities Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning All rights reserved Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc Some Some of of the the action action has has been been automated, automated, so so click click the the mouse mouse when when you you see see this this lightning lightningbolt bolt in in the the lower lower right-hand right-hand corner corner of of the the screen screen You You can can point point and and click click anywhere anywhere on on the the screen screen Objectives Objectives Define and give examples of current liabilities Prepare journal entries for short-term notes After studying this After studying this payable and disclosure for the current portion of chapter, chapter, you you should should long-term debt be to: Describe the accounting for contingent be able abletreatment to: liabilities and journalize entries for product warranties Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings Objectives Objectives Describe payroll accounting systems that use a payroll register, employee earnings record, and a general journal Journalize entries for employee fringe benefits, including vacation pay and pensions Use the quick ratio to analyze the ability of a business to pay its current liabilities The The Nature Nature of of Current Current Liabilities Liabilities Liabilities Liabilities that that are are to to be be paid paid out out of of current current assets assets and and are are due due within within aa short short time, time, usually usually within within one one year, year, are are called called current current liabilities liabilities Examples:       Accounts payable Notes payable Unearned rent Taxes payable Wages payable Current portion of long term debt Short-Term Short-Term Notes Notes Payable Payable A A firm firm issues issues aa 90-day, 90-day, 12% 12% note note for for $1,000, $1,000, dated dated August August 1, 1, 2006 2006 to to Murray Murray Co Co for for aa $1,000 $1,000 overdue overdue account account Aug Payable—Murray Co Notes Payable Issued 000 00a 90-day, 12% note on account Accounts 000 00 Short-Term Short-Term Notes Notes Payable Payable On On October October 30, 30, when when the the note note matures, matures, the the firm firm pays pays the the $1,000 $1,000 principal principal plus plus $30 $30 interest interest ($1,000 ($1,000 xx 12 12 xx 90/360) 90/360) Oct 30 Payable 000 00 Interest CashExpense 030 00 Issued a 90-day, 12% note on Appears on account Appears on the the income income statement statement as as an an “Other “Other Expense.” Expense.” Notes 30 00 Short-Term Short-Term Notes Notes Payable Payable Bowden Co (Borrower) Description Credit Mdse Inventory Accounts Payable 10,000 Debit 10,000 Coker Co (Creditor) Description Credit Debit Accounts Receivable Sales 10,000 10,000 Cost of Mdse Sold Mdse Inventory 7,500 7,500 May May31 31 Bowden Bowden Co Co purchased purchased merchandise merchandise on on account account from from Coker Coker Co., Co., $10,000, $10,000, 2/10, 2/10, n/30 n/30 The The merchandise merchandise cost cost Coker Coker Co Co $7,500 $7,500 Short-Term Short-Term Notes Notes Payable Payable Bowden Co (Borrower) Description Credit Debit Mdse Inventory Accounts Payable Accounts Payable Notes Payable 10,000 10,000 10,000 10,000 Coker Co (Creditor) Description Credit Debit Accounts Receivable Sales 10,000 10,000 Cost of Mdse Sold Mdse Inventory Notes Receivable 7,500 Accounts Receivable 10,000 7,500 May May 31 31 Bowden Bowden Co Co issued issued aa60-day, 60-day, 12% 12% note note for for $10,000 $10,000 to to Coker Coker on on account account 10,000 Short-Term Short-Term Notes Notes Payable Payable Bowden Co (Borrower) Coker Co (Creditor) Description Debit Description Debit CreditCoker Credit July July 30 30 Bowden Bowden Co Co paid paid Coker Co Co the the Mdse Inventory 10,000 Accounts Receivable 10,000 amount due on the note of May 31 Interest: amount due on 10,000 the note ofSales May 31 Interest: Accounts Payable $10,000 60/360 $10,000 xx 12% 12% xx10,000 60/360 ==$200 $200 Accounts Payable Notes Payable 10,000 10,000 Cost of Mdse Sold Mdse Inventory Notes Receivable 7,500 Accounts Receivable 10,000 Notes Payable Interest Expense Cash 10,000 200 10,200 Cash Interest Revenue Notes Receivable 10,200 200 10,000 7,500 10,000 Federal Outlays National defense Physical, human, and Interest on community Social debt development programs 8% 13% 19% 24% 33% 3% Social security and Medicare Law enforcement and general government Payroll Payroll Register Register It’s It’s aa multicolumn multicolumn form form used used to to help help What What isis the theassemble assemble and and summarize summarize the the data data purpose purpose of of aa needed needed for for each each payroll payroll period period payroll payroll register? register? Payroll Register Summary Earnings: Regular Overtime Total $13,902.00 Deductions: Social security tax Medicare tax Federal income tax Retirement savings United Way Accounts receivable Total 5,383.60 Net amount paid 8,518.40 Accounts debited: Sales Salaries Expense $13,328.00 574.00 $ 643.07 208.53 3,332.00 680.00 470.00 50.00 $ Recording Recording Employees’ Employees’ Earnings Earnings Dec 27 Sales Salaries Expense Office Salaries Expense Social Security Tax Payable 643 07Tax Payable Medicare 208 53 Federal Inc Tax Pay Employees 332 00Savings Ded Payable Retirement 680 00 United Way Deductions Payable 470 00 Receivable—Fred Elrod Accounts 50 00 Payable Salaries Payroll 518 40for week ended December 27 11 122 00 780 00 Recording Recording Employer’s Employer’s Payroll Payroll Taxes Taxes Social Social security securitytax tax $$ 643.07 643.07Taxes for the Week Ended December 27 Employer Employertax Taxes for the Week Ended December 27 Medicare Medicare tax 208.53 208.53 State State unemployment unemployment compensation compensation tax tax (5.4% (5.4% xx $2,710) $2,710) 146.34 146.34 Federal Federal unemployment unemployment compensation compensation tax tax (0.8% (0.8% xx $2,710) $2,710) 21.68 21.68 Total Total payroll payroll tax tax expense expense $1,019.62 $1,019.62 Recording Recording Employer’s Employer’s Payroll Payroll Taxes Taxes Dec 27 Payroll Tax Expense Social Security Tax Payable 643 07Tax Payable Medicare 208Unemployment 53 State Tax Payable 146 34 Federal Unemployment Tax Pay 21 68 taxes for week ended Payroll December 27 019 62 Flow of Data in a Payroll System Wage and Tax Statements Current Period’s Variables (hours worked) Updated Variables (cumulative earnings, taxes) Constant Data (rates of pay, tax, etc.) EMPLOYEES’ EARNINGS RECORDS PAYROLL REGISTER GENERAL LEDGER W-2 W-2 Payroll Tax Returns Payroll Checks and Statements Financial Statements Employees’ Employees’ Fringe Fringe Benefits Benefits Benefit Benefit Dollars Dollars as as aa Percent Percent of of Total Total Retirement and savings plans Other 2% 18% 29% Vacation and sick pay 25% Social security and Medicare 26% Medical Employees’ Employees’ Fringe Fringe Benefits Benefits Vacation pay Vacation pay becomes the employer’s liability as the employee earns vacation rights Pensions Cash payment to retired employees Could be a defined contribution plan or a defined benefit plan Postretirement Benefits In addition to pension benefits, employees may earn rights to other postretirement benefits such as dental care, eye care, life insurance, etc Amount is recorded by debiting Postretirement Benefits Expense and crediting cash Pensions Pensions Defined contribution plan Under this plan, a fixed amount of money is invested on the employee’s behalf during the employee’s working years Example: 401K Defined benefit plan Under this plan, the pension benefits are based on a formula and the employer bears the investment risk in funding a future retirement income benefit Solvency Measures — Quick Ratio Noble Co Hart Quick assets: Cash 55,000 Cash equivalents 65,000 Accounts receivable (net) 472,000 Total $592,000 Quick assets Current liabilities Current liabilities $740,000 Co $ 100,000 $ 47,000 84,000 $231,000 $220,000 Solvency Measures — Quick Ratio Noble Co Hart Quick assets: Cash 55,000 Cash equivalents 65,000 Accounts receivable (net) 472,000 Total $231,000 assets $592,000 Quick Current liabilities Current liabilities $220,000 $740,000 Co $ 100,000 $ 47,000 84,000 $231,000 Noble $220,000 Quick ratio = 1.05 Company Solvency Measures — Quick Ratio Noble Co Hart Quick assets: Cash 55,000 Cash equivalents 65,000 Accounts receivable (net) 472,000 Total $592,000 assets $592,000 Quick Current liabilities Current liabilities $740,000 $740,000 Co $ 100,000 $ 47,000 84,000 $231,000 Hart $220,000 Quick ratio = 0.80 Company Use: Use: To To indicate indicate instant instant debt-paying debt-paying ability ability Chapter 11 The The End End ... studying this payable and disclosure for the current portion of chapter, chapter, you you should should long-term debt be to: Describe the accounting for contingent be able abletreatment to: liabilities... 16 Warranty Payable Supplies 200 00 Replaced defective part under warranty Product 200 00 Accounting Accounting Treatment Treatment of of Contingent Contingent Liabilities Liabilities Likelihood... arising from employee earnings and deductions from earnings Objectives Objectives Describe payroll accounting systems that use a payroll register, employee earnings record, and a general journal