Chapter 11 – Current Liabilities and Payroll Accounting
CHAPTER 11
CURRENT LIABILITIES AND PAYROLL ACCOUNTING
Related Assignment Materials
Student Learning Objectives Questions
Quick
Studies* Exercises* Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Describe current and long-term
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C2. Identify and describe known
current liabilities.
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C3. Explain how to account for
contingent liabilities.
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Analytical objectives:
A1. Compute times interest earned
ratio and use it to analyze
liabilities.
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Procedural objectives:
P1. Prepare entries to account for
short-term notes payable.
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P2. Compute and record employee
payroll deductions and
liabilities.
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P3. Compute and record employer
payroll expenses and liabilities.
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P4. Account for estimated liabilities,
including warranties and
bonuses
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P5AIdentify and describe the details
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Chapter 11 – Current Liabilities and Payroll Accounting
Additional Information on Related Assignment Material
The Serial Problem for Success Systems continues in this chapter. A Comprehensive Problem for
Bug-off Exterminators is also available. Problems 11-1A and 11-3A can be completed using Excel.
Problems 11-1A and 11-4A can be completed with Sage 50 Software or QuickBooks.
Connect (Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all
Exercises and Problems Set A. Connect provides new numbers each time the Quick Study, Exercise or
Problem is worked. It allows instructors to monitor, promote, and assess student learning. It can be
used in practice, homework, or exam mode.
Synopsis of Chapter Revisions
Skai Blue Media: NEW opener with new entrepreneurial assignment
Updated payroll rates to 2014
New explanation of Additional Medicare Tax
Updated FUTA rate
Clarified bonus explanation and computations
Enhanced payroll reports and exhibits
New evidence on payroll fraud.
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Chapter 11 – Current Liabilities and Payroll Accounting
1. Due to past transaction or event.
2. Present obligation.
3. Future payment of assets or services.
B. Classifying Liabilities
1. Current liabilities (short-term liabilities)—Obligations due
within one year or the company’s operating cycle, whichever
is longer. Expected to be paid using current assets or by
creating other current liabilities.
2. Long-term liabilities—Obligations not expected to be paid
within the longer of one year or operating cycle.
C. Uncertainties in Liabilities—requires addressing three important
questions that are sometime uncertain at the time liability is
incurred:
1. Whom to pay? (Ex. A note “Payable to Bearer”)
2. When to pay? (Ex. Unearned revenues—may not know
when service will be provided to satisfy)
3. How much to pay? (Ex. Accrued expense that needed to be
estimated prior to receipt of bill)
II. Known Liabilities—Set by agreements, contracts, or laws and are
measurable. (also called definitely determinable liabilities) Examples
of these liabilities in the current classification include:
A. Accounts Payable
Amounts owed to suppliers (also called vendors) for products or
services purchased with credit.
B. Sales Taxes Payable
Amounts the retailer (seller) collects as sales taxes from
customers when sales occur, and currently owes to the
government until remitted.
C. Unearned Revenues— also known as deferred revenues,
collections in advance and prepayments.
Amounts received in advance from customers for future products
or services.
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1. Creditor requires the substitution of an interest-bearing note
for an overdue account payable that does not bear interest.
(Dr Accounts Payable, Cr Notes Payable)
2. Note given to borrow money from bank.
Ex. Face value equals amount borrowed (principal) and at
maturity a larger amount is repaid. The difference between
amount borrowed and repaid is the interest. The note is
1. Gross pay—total compensation an employee earns. (Includes
wages, salaries, commissions, bonuses). Gross pay amount is
recorded as Salaries Expense (Dr).
2. Net pay—gross less all deductions; also called take-home pay
Net pay is recorded as Salaries Payable (Cr).
3. Payroll deductions—amounts withheld from an employee’s
gross pay, either involuntary or voluntary; also called
withholdings. Each is recorded as a separate liability (Cr).
a. FICA (Federal Insurance Contributions Act) taxes can be
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Chapter 11 – Current Liabilities and Payroll Accounting
Chapter Outline Notes
c. Voluntary deductions (charitable contributions, health
insurance premiums, union dues) result in various
payables.
(Note: All the payroll components, gross pay, each
deduction and net pay, are recorded in one journal entry.)
4 Employer Payroll Taxes—payroll taxes in addition to those
required of employees. These taxes result in expenses (Dr)
and current liabilities (Cr).
6.0% of the first $7000 earned by each employee. The
federal rate can be reduced by a credit of up to 5.4% for
taxes paid to a state program—as a result a net FUTA rate
is often only 0.6%
c. Recording Employer Payroll Taxes: additional expense
beyond Wages and Salaries Expense. Debit Payroll Tax
Expense for the Total and Credit the individual liability
accounts for the individual taxes.
F. Multi-Period Known Liabilities—known liabilities that extend
over many periods. Ex. Unearned Revenues and Notes Payable.
Classification is based upon period in which they will be satisfied.
1. Current Liability—portion that will be fulfilled in next year.
2. Long- term Liability—portion that will be fulfilled after next
year.
III. Estimated Liabilities—Known obligations of uncertain amounts that
can be reasonably estimated. Recorded as expenses (Dr) and payables
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Chapter 11 – Current Liabilities and Payroll Accounting
Chapter Outline Notes
1. Probable (likely)—record if amount can be reasonably
estimated; if cannot be estimated, disclose in footnotes to
financial statements.
2. Possible (could occur)—disclose in financial statement notes
3. Remote (unlikely)—omit (do not record or footnote).
B. (Reasonably) Possible Contingent Liabilities (category 2 above).
Examples:
1. Potential legal claims—recorded in the accounts only if
payment for damages is probable and the amount can be
reasonably estimated. If can’t be reasonably estimated or less
than probable but reasonably possible, disclose in notes.
2. Debt guarantees (of a debt owed by another company)—
require disclosure in financial statement notes if potential
liabilities are reasonably possible.
3. Other Contingencies (e.g., environmental damages, possible
tax assessments, insurance losses, and government
investigations)—require disclosure in notes if potential
liabilities are reasonably possible.
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Chapter 11 – Current Liabilities and Payroll Accounting
Chapter Outline Notes
VI. Decision Analysis—Times Interest Earned Ratio
A. Used to describe the risk of covering interest commitments when
income varies.
B. Calculated as income before interest expense and income taxes
divided by interest expense.
Appendix 11A—Payroll Reports, Records and Procedures
VII. Payroll Reports—employers are required to prepare and submit the
following reports:
A. Employer’s Quarterly Federal Tax Return (IRS Form 941)
Filed within one month after the end of each calendar quarter to
report FICA and income withholding taxes owed and remitted.
covered by the report; employers must give each employee an
annual report of the employee’s wages subject to FICA and federal
income taxes and the amounts of these taxes withheld.
VIII. Payroll Records
A. Payroll Register
Generally accompanied with a detachable statement of earnings
showing gross pay, deductions, and net pay.
C. Employee’s Earnings Report
A cumulative record of an employee’s hours worked, gross pay,
deductions, net pay, and certain personal information about the
employee; contains the data the employer needs to prepare a Form
W-2.
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Chapter 11 – Current Liabilities and Payroll Accounting
1. Withholding allowance—a number that is used to reduce the
amount of federal income tax withheld from an employee’s
pay, and which corresponds to the personal exemptions the
employee is allowed to subtract from annual earnings in
calculating taxable income.
2. Form W-4—withholding allowance certificate form. Filed by
employee with employer to identify personal exemptions
1. One check for total payroll is drawn on the regular bank
account or an electronic funds transfer for this amount is
executed to provide deposit for the payroll bank account.
2. Individual payroll checks are drawn on payroll account.
3. Helps with internal control and reconciling the regular bank
account.
Appendix 11B—Corporate Income Taxes
X. Income Tax Liabilities
A. Corporations (not sole proprietorships or partnerships) are subject
to income taxes and must estimate their income tax liability when
preparing financial statements. Adjusting entry: Dr Income Taxes
Expense, Cr Income Taxes Payable. Quarterly payments remove
(Dr) the liability, and credit Cash.
B. Deferred Income Tax Liabilities
Arise from temporary differences between GAAP and income tax
rules. This results in temporary differences between the tax return
and the income statement. This difference results in a deferred
income tax liability. Adjusting entry: Dr Income Taxes Expense,
Cr Deferred Income Tax Liability.
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Chapter 11 – Current Liabilities and Payroll Accounting
Alternate Demonstration Problem
Chapter Eleven
On November l, 2013, Orleaon Co. borrowed $200,000 for 90 days at 9% by
signing a note.
Required:
1. Assume that the face value of the note equals the principal of the loan.
Prepare the general journal entries to record issuing the note, accrual
of interest at the end of 2011 and the payment of the note at maturity.
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