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Ch10 wrd12e instructor_final

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1) Current liabilities include accounts payable, the current portion of long-term debt due within one year, and short-term notes payable. 2) Payroll liabilities include wages and salaries owed to employees, as well as payroll tax liabilities such as Social Security, Medicare, unemployment taxes that are withheld from employee paychecks. 3) Payroll accounting systems use a payroll register to record employee earnings and deductions, employee earnings records to track individual pay, and journal entries to record payroll expenses and related tax liabilities.

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i es ilit iab roll tL ren d Pay ur C an 10 ter ap Ch c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Objectives 1. Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. 2. Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings. 3. Describe payroll accounting systems that use a payroll register, employee earnings records, and a general journal.
Learning Objectives 4. Journalize entries for employee fringe benefits, including vacation pay and pensions. 5. Describe the accounting treatment for contingent liabilities and journalize entries for product warranties. 6. Describe and illustrate the use of the quick ratio in analyzing a company’s ability to pay its current liabilities.
Lear ning Obje ctive Desc ribe and liabi i llustr ilities paya ate c relat ble, term current ed to ac urrent po r t debt ion o counts , and f lon n ot e s pay gable 1 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Current Liabilities o When a company or a bank advances credit, it is making a loan. o The company or bank is called a creditor (or lender). o The individuals or companies receiving the loans are called debtors (or borrowers). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Current Liabilities o Long-term liabilities are debts due beyond one year. o Current Liabilities are debts that will be paid out of current assets and are due within one year. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Accounts Payable o Accounts payable transactions arise from purchasing goods or services for use in a company’s operations or from purchasing merchandise for resale. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
ACCOUNTS PAYABLE
Current Portion of Long-Term Debt o Long-term liabilities are often paid back in periodic payments, called installments. Installments that 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. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Short-Term Notes Payable o 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. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Short-Term Notes Payable o 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.” c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Short-Term Notes Payable o 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. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
SHORT-TERM NOTES PAYABLE Bowden Co. (Borrower) Description Debit Credit 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 Mdse. Inventory 7,500 7,500
Short-Term Notes Payable o On May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
SHORT-TERM NOTES PAYABLE Bowden Co. (Borrower) Description Accounts Payable Notes Payable Debit Credit 10,000 10,000 Coker Co. (Creditor) Description Debit Credit Notes Receivable 10,000 Accounts Receivable 10,000
Short-Term Notes Payable o 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). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
SHORT-TERM NOTES PAYABLE Bowden Co. (Borrower) Description Debit Notes Payable Interest Expense Cash Credit 10,000 200 10,200 Coker Co. (Creditor) Description Cash Interest Revenue Notes Receivable Debit Credit 10,200 200 10,000
Short-Term Notes Payable o On September 19, Iceburg Company borrowed cash from First National Bank by issuing a $4,000, 90-day, 15% note to the bank. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Short-Term Notes Payable o On December 18, Iceburg Company paid First National Bank $4,000 plus interest of $150 ($4,000 x 15% x 90/360). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Short-Term Notes Payable o 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. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Short-Term Notes Payable o 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 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Short-Term Notes Payable o The entry when Cary Company pays the discounted note on November 8 is as follows: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Lear ning Obje Dete ctive rmin payr oll, in e emplo y c c from luding li er liabili t abili emp ties a ies for dedu loyee earn rising ction ings s fro and m ea r ni ng s. 2 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Payroll and Payroll Taxes o 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. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Liability for Employee Earnings o Salary usually refers to payment for managerial and administrative services. Salary is normally expressed in terms of a month or a year. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Liability for Employee Earnings o Wages usually refers to payment for employee manual labor. The rate of wages is normally stated on an hourly or weekly basis. (concluded) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Liability for Employee Earnings o 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 (40 x $34) Earnings at overtime rate (2 x $51) Total earnings $1,360 102 $1,462 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Deductions from Employee Earnings o The total earnings of an employee for a payroll period, including any overtime pay, are called gross pay. o From this amount is subtracted one or more deductions to arrive at the net pay. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
DEDUCTIONS FROM EMPLOYEE EARNINGS
Deductions from Employee Earnings o John T. McGrath made $1,462 for the week ending December 27. McGrath’s W-4 (previous slide) claims one withholding allowance of $70. Thus, the wages used to determine McGrath’s withholding bracket in Exhibit 3 (next slide) are $1,392 ($1,462 – $70). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
DEDUCTIONS FROM EMPLOYEE EARNINGS
Deductions from Employee Earnings o 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.) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Deductions from Employee Earnings o 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  Social security tax rate $1,462 x 6%  Social security tax $ 87.72  Earnings subject to 1.5% Medicare tax $1,462  Medicare tax rate x 1.5% Medicare tax 21.93 $109.65 Total FICA tax c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Computing Employee Net Pay o John T. McGrath’s Net Pay c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Liability for Employer’s Payroll Taxes o 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) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
LIABILITY FOR EMPLOYER’S PAYROLL TAXES
Lear ning Obje ctive Desc syste m s t h r i b e pa e y empl h y oyee at use a roll acco payr ear n oll re unting i n gs giste reco gene rds, and r, ral jo u r na a l. 3 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Accounting Systems for Payroll and Payroll Taxes o Payroll systems should be designed to:  Pay employees accurately and timely.  Meet regulatory requirements of federal, state, and local agencies.  Provide useful data for management decision- making needs. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Payroll Register o The payroll register is a multicolumn report used for summarizing the data for each payroll period. Exhibit 5 illustrates a payroll register for McDermott Supply Co. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
PAYROLL REGISTER (left side, continued)
PAYROLL REGISTER (right side)
RECORDING EMPLOYEES’ EARNINGS
Recording and Paying Payroll Taxes o Employers must match the employee’s social security and Medicare tax contributions. In addition, the employer must pay SUTA tax of 5.4% and FUTA tax of 0.8% (assume on $2,710). For McDermott Supply’s payroll of December 27, these payroll taxes are computed as follows: Social security tax Medicare tax SUTA FUTA Total payroll taxes $ 834.12 208.53 146.34 21.68 $1,210.67 ($13,902 x 6%) ($13,902 x 1.5%) ($2,710 x 5.4%) ($2,710 x 0.8%) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Recording and Paying Payroll Taxes o The entry to journalize the payroll tax expense for Exhibit 5 is shown below. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Employee’s Earnings Record o A detailed payroll record must be kept for each employee. This record is called an employee’s earnings record. Exhibit 6 (next two slides) shows a portion of John T. McGrath’s employee’s earnings record. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
EARNINGS RECORD
EARNINGS RECORD
EMPLOYEE’S EARNINGS RECORD
Payroll Checks o At the end of each payroll period, payroll checks are prepared. Each check includes a detachable statement showing the details of how the net pay was computed. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
PAYROLL CHECK
Payroll System Design o The inputs into a payroll system may be classified as:  Constants, which are data that remain unchanged from payroll to payroll. • Employee names • Social security numbers  Variables, which are data that change from payroll to payroll. • Number of hours or days worked • Accrued sick leave c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Internal Controls for Payroll Systems o Some examples of payroll controls include the following:  If a check-signing machine is used, blank payroll checks and access to the machine should be restricted to prevent their theft or misuse.  The hiring and firing of employees should be properly authorized and approved in writing. (continued) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Internal Controls for Payroll Systems  All changes in pay rates should be properly authorized and approved in writing.  Employees should be observed when arriving for work to verify that employees 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. (continued) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Lear ning Obje ctive Journ alize fring entr eb i enef its, in es for em p clud ing v loyee pay acati and pe n s o n ions. 4 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Employees’ Fringe Benefits o Many companies provide their employees benefits in addition to salary and wages earned. Such fringe benefits may include:  Vacation pay (sometimes called compensated absences)  Medical benefits  Retirement benefits c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Vacation Pay o Assume that employees earn one day of vacation for each month worked. The estimated vacation pay for the year ending December 31 is $325,000. The adjusting entry for the accrued vacation is shown below. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Pensions o A pension is a cash payment to retired employees. Pension rights are accrued by employees as they work, based on the employer’s pension plan. Two types of pension plans are:  Defined contribution plan  Defined benefit plan c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Pensions o In a defined contribution plan, the company invests contributions on behalf of the employee during the employee’s working years.  Normally, the employee and employer contribute to the plan.  The employee’s pension depends on the total contributions and the investment returns earned on those contributions. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Pensions o Heaven Scent Perfumes Company contributes 10% of employee monthly salaries to an employee 401K plan. Assuming $500,000 of monthly salaries, the journal entry to record the monthly contribution is shown below. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Pensions o In a defined benefit plan, the employer is obligated to pay for (fund) the employee’s future pension benefits.  Many companies are replacing their defined benefit plans with defined contribution plans.  A retired employee receives a specific amount based on his or her salary history and years of service. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Pensions o The defined benefit plan of Hinkle Co. requires an annual pension cost of $80,000. The annual contribution is based on estimates of Hinkle’s future pension liability. On December 31, Hinkle Co. pays $60,000 to the pension fund. The entry to record the payment and unfunded liability is shown below. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Postretirement Benefits Other than Pensions o 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. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
CURRENT LIABILITIES ON THE BALANCE SHEET
Lear ning Obje Desc ctive r ibe the a ccou f or c journ ontinge nting tre nt lia a alize biliti tment entri e s f o es and r pro warr duct antie s. 5 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Contingent Liabilities o Some liabilities may arise from past transactions if certain events occur in the future. These potential obligations are called 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 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Contingent Liabilities o During June, a company sold a product for $60,000 that includes a 36-month warranty for repairs. The average cost of repairs over the warranty period is 5% of the sales price. The entry to record the estimated product warranty expense for June is shown below. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Contingent Liabilities o If a $200 part is replaced under warranty on August 16, the entry is as follows: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
CONTINGENT LIABILITIES
Lear ning Obje Desc ctive r ibe the q and illu co qu ompa st ny’s ick ratio rate the abili u ty to in analy se of z pay its cu ing a liabi rrent lities . 6 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Quick Ratio o Current position analysis helps creditors evaluate a company’s ability to pay its current liabilities. It is based on:  Working capital, the excess of current assets over current liabilities  Current ratio, determined by dividing the current assets by the current liabilities  Quick ratio, an indicator of a company’s short-term liquidity c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Quick Ratio o The quick ratio measures the “instant” debt- paying ability of a company and is computed as follows: Quick Assets Quick Ratio = Current Liabilities o Quick assets are cash and other current assets that can be easily converted to cash. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
i es ilit iab roll tL ren d Pay ur C an nd eE Th c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

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Ch10 wrd12e instructor_final

  • 1. i es ilit iab roll tL ren d Pay ur C an 10 ter ap Ch c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 2. Learning Objectives 1. Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. 2. Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings. 3. Describe payroll accounting systems that use a payroll register, employee earnings records, and a general journal.
  • 3. Learning Objectives 4. Journalize entries for employee fringe benefits, including vacation pay and pensions. 5. Describe the accounting treatment for contingent liabilities and journalize entries for product warranties. 6. Describe and illustrate the use of the quick ratio in analyzing a company’s ability to pay its current liabilities.
  • 4. Lear ning Obje ctive Desc ribe and liabi i llustr ilities paya ate c relat ble, term current ed to ac urrent po r t debt ion o counts , and f lon n ot e s pay gable 1 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 5. Current Liabilities o When a company or a bank advances credit, it is making a loan. o The company or bank is called a creditor (or lender). o The individuals or companies receiving the loans are called debtors (or borrowers). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 6. Current Liabilities o Long-term liabilities are debts due beyond one year. o Current Liabilities are debts that will be paid out of current assets and are due within one year. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 7. Accounts Payable o Accounts payable transactions arise from purchasing goods or services for use in a company’s operations or from purchasing merchandise for resale. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 9. Current Portion of Long-Term Debt o Long-term liabilities are often paid back in periodic payments, called installments. Installments that 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. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 10. Short-Term Notes Payable o 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. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 11. Short-Term Notes Payable o 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.” c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 12. Short-Term Notes Payable o 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. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 13. SHORT-TERM NOTES PAYABLE Bowden Co. (Borrower) Description Debit Credit 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 Mdse. Inventory 7,500 7,500
  • 14. Short-Term Notes Payable o On May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 15. SHORT-TERM NOTES PAYABLE Bowden Co. (Borrower) Description Accounts Payable Notes Payable Debit Credit 10,000 10,000 Coker Co. (Creditor) Description Debit Credit Notes Receivable 10,000 Accounts Receivable 10,000
  • 16. Short-Term Notes Payable o 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). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 17. SHORT-TERM NOTES PAYABLE Bowden Co. (Borrower) Description Debit Notes Payable Interest Expense Cash Credit 10,000 200 10,200 Coker Co. (Creditor) Description Cash Interest Revenue Notes Receivable Debit Credit 10,200 200 10,000
  • 18. Short-Term Notes Payable o On September 19, Iceburg Company borrowed cash from First National Bank by issuing a $4,000, 90-day, 15% note to the bank. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 19. Short-Term Notes Payable o On December 18, Iceburg Company paid First National Bank $4,000 plus interest of $150 ($4,000 x 15% x 90/360). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 20. Short-Term Notes Payable o 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. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 21. Short-Term Notes Payable o 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 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 22. Short-Term Notes Payable o The entry when Cary Company pays the discounted note on November 8 is as follows: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 23. Lear ning Obje Dete ctive rmin payr oll, in e emplo y c c from luding li er liabili t abili emp ties a ies for dedu loyee earn rising ction ings s fro and m ea r ni ng s. 2 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 24. Payroll and Payroll Taxes o 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. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 25. Liability for Employee Earnings o Salary usually refers to payment for managerial and administrative services. Salary is normally expressed in terms of a month or a year. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 26. Liability for Employee Earnings o Wages usually refers to payment for employee manual labor. The rate of wages is normally stated on an hourly or weekly basis. (concluded) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 27. Liability for Employee Earnings o 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 (40 x $34) Earnings at overtime rate (2 x $51) Total earnings $1,360 102 $1,462 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 28. Deductions from Employee Earnings o The total earnings of an employee for a payroll period, including any overtime pay, are called gross pay. o From this amount is subtracted one or more deductions to arrive at the net pay. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 30. Deductions from Employee Earnings o John T. McGrath made $1,462 for the week ending December 27. McGrath’s W-4 (previous slide) claims one withholding allowance of $70. Thus, the wages used to determine McGrath’s withholding bracket in Exhibit 3 (next slide) are $1,392 ($1,462 – $70). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 32. Deductions from Employee Earnings o 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.) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 33. Deductions from Employee Earnings o 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  Social security tax rate $1,462 x 6%  Social security tax $ 87.72  Earnings subject to 1.5% Medicare tax $1,462  Medicare tax rate x 1.5% Medicare tax 21.93 $109.65 Total FICA tax c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 34. Computing Employee Net Pay o John T. McGrath’s Net Pay c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 35. Liability for Employer’s Payroll Taxes o 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) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 37. Lear ning Obje ctive Desc syste m s t h r i b e pa e y empl h y oyee at use a roll acco payr ear n oll re unting i n gs giste reco gene rds, and r, ral jo u r na a l. 3 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 38. Accounting Systems for Payroll and Payroll Taxes o Payroll systems should be designed to:  Pay employees accurately and timely.  Meet regulatory requirements of federal, state, and local agencies.  Provide useful data for management decision- making needs. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 39. Payroll Register o The payroll register is a multicolumn report used for summarizing the data for each payroll period. Exhibit 5 illustrates a payroll register for McDermott Supply Co. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 43. Recording and Paying Payroll Taxes o Employers must match the employee’s social security and Medicare tax contributions. In addition, the employer must pay SUTA tax of 5.4% and FUTA tax of 0.8% (assume on $2,710). For McDermott Supply’s payroll of December 27, these payroll taxes are computed as follows: Social security tax Medicare tax SUTA FUTA Total payroll taxes $ 834.12 208.53 146.34 21.68 $1,210.67 ($13,902 x 6%) ($13,902 x 1.5%) ($2,710 x 5.4%) ($2,710 x 0.8%) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 44. Recording and Paying Payroll Taxes o The entry to journalize the payroll tax expense for Exhibit 5 is shown below. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 45. Employee’s Earnings Record o A detailed payroll record must be kept for each employee. This record is called an employee’s earnings record. Exhibit 6 (next two slides) shows a portion of John T. McGrath’s employee’s earnings record. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 49. Payroll Checks o At the end of each payroll period, payroll checks are prepared. Each check includes a detachable statement showing the details of how the net pay was computed. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 51. Payroll System Design o The inputs into a payroll system may be classified as:  Constants, which are data that remain unchanged from payroll to payroll. • Employee names • Social security numbers  Variables, which are data that change from payroll to payroll. • Number of hours or days worked • Accrued sick leave c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 52. Internal Controls for Payroll Systems o Some examples of payroll controls include the following:  If a check-signing machine is used, blank payroll checks and access to the machine should be restricted to prevent their theft or misuse.  The hiring and firing of employees should be properly authorized and approved in writing. (continued) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 53. Internal Controls for Payroll Systems  All changes in pay rates should be properly authorized and approved in writing.  Employees should be observed when arriving for work to verify that employees 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. (continued) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 54. Lear ning Obje ctive Journ alize fring entr eb i enef its, in es for em p clud ing v loyee pay acati and pe n s o n ions. 4 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 55. Employees’ Fringe Benefits o Many companies provide their employees benefits in addition to salary and wages earned. Such fringe benefits may include:  Vacation pay (sometimes called compensated absences)  Medical benefits  Retirement benefits c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 56. Vacation Pay o Assume that employees earn one day of vacation for each month worked. The estimated vacation pay for the year ending December 31 is $325,000. The adjusting entry for the accrued vacation is shown below. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 57. Pensions o A pension is a cash payment to retired employees. Pension rights are accrued by employees as they work, based on the employer’s pension plan. Two types of pension plans are:  Defined contribution plan  Defined benefit plan c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 58. Pensions o In a defined contribution plan, the company invests contributions on behalf of the employee during the employee’s working years.  Normally, the employee and employer contribute to the plan.  The employee’s pension depends on the total contributions and the investment returns earned on those contributions. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 59. Pensions o Heaven Scent Perfumes Company contributes 10% of employee monthly salaries to an employee 401K plan. Assuming $500,000 of monthly salaries, the journal entry to record the monthly contribution is shown below. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 60. Pensions o In a defined benefit plan, the employer is obligated to pay for (fund) the employee’s future pension benefits.  Many companies are replacing their defined benefit plans with defined contribution plans.  A retired employee receives a specific amount based on his or her salary history and years of service. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 61. Pensions o The defined benefit plan of Hinkle Co. requires an annual pension cost of $80,000. The annual contribution is based on estimates of Hinkle’s future pension liability. On December 31, Hinkle Co. pays $60,000 to the pension fund. The entry to record the payment and unfunded liability is shown below. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 62. Postretirement Benefits Other than Pensions o 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. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 64. Lear ning Obje Desc ctive r ibe the a ccou f or c journ ontinge nting tre nt lia a alize biliti tment entri e s f o es and r pro warr duct antie s. 5 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 65. Contingent Liabilities o Some liabilities may arise from past transactions if certain events occur in the future. These potential obligations are called 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 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 66. Contingent Liabilities o During June, a company sold a product for $60,000 that includes a 36-month warranty for repairs. The average cost of repairs over the warranty period is 5% of the sales price. The entry to record the estimated product warranty expense for June is shown below. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 67. Contingent Liabilities o If a $200 part is replaced under warranty on August 16, the entry is as follows: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 69. Lear ning Obje Desc ctive r ibe the q and illu co qu ompa st ny’s ick ratio rate the abili u ty to in analy se of z pay its cu ing a liabi rrent lities . 6 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 70. Quick Ratio o Current position analysis helps creditors evaluate a company’s ability to pay its current liabilities. It is based on:  Working capital, the excess of current assets over current liabilities  Current ratio, determined by dividing the current assets by the current liabilities  Quick ratio, an indicator of a company’s short-term liquidity c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 71. Quick Ratio o The quick ratio measures the “instant” debt- paying ability of a company and is computed as follows: Quick Assets Quick Ratio = Current Liabilities o Quick assets are cash and other current assets that can be easily converted to cash. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 72. i es ilit iab roll tL ren d Pay ur C an nd eE Th c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.