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Chapter 11
Current Liabilities and Payroll Accounting
QUESTIONS
1. A current liability is expected to be paid within one year or the company’s operating
cycle, whichever is longer. Any liability that is not current is considered to be long
term.
4. The amount of the sale for the item only is $950 ($988/1.04).
5. The combined Social Security tax rate (assuming the maximum wage amount is not
6. The Medicare tax rate is 1.45%. This rate is applied to all wages earned by an
employee—no maximum limit exists.
7. The employee is responsible for federal income taxes, state income taxes, local
8. An employee’s gross earnings along with the number of withholding allowances that
9. An unemployment merit rating is based on an evaluation of an employer’s
experience in creating or avoiding unemployment with its employees. The merit
10. The obligation to correct or replace defective products (or services) is created when
the products are sold with the warranties. Even though the seller does not know
Fundamental Accounting Principles, 21st Edition
654
11. There are no conditions in which a probable loss tied to a future event can create a
12.A A wage bracket withholding table shows for a pay period of a given length (weekly,
13.A Single employee earning $725 with two allowances has $76 taxes withheld.
Single employee earning $625 with no allowances has $81 taxes withheld.
14. At December 31, 2011, Polaris reports the following Accrued expenses:
15. At March 31, 2011, Arctic Cat reports Accounts payable of $41,666 thousand.
16. At December 31, 2011, KTM reports eight current liabilities: Bank loans, Accounts
corporate tax, Prepayments and Other short-term liabilities.
17. Piaggio’s current liabilities include one income-tax-related liability titled “Tax
QUICK STUDIES
Quick Study 11-1 (5 minutes)
Items 3, 4, 5 and 6 are current liabilities for this company.
Quick Study 11-2 (10 minutes)
Oct. 31
Cash ..........................................................................
5,000,000
Unearned Ticket Revenue ................................
5,000,000
To record sales in advance of concerts.
Nov. 5
Unearned Ticket Revenue ................................
1,250,000
Earned Ticket Revenue ................................
1,250,000
To record concert revenues earned.
Quick Study 11-3 (10 minutes)
Sept. 30
Cash ..........................................................................
6,300
Sales ................................................................
6,000
Sales Taxes Payable ................................
300
To record cash sales and 5% sales tax.
Sept. 30
Cost of Goods Sold .................................................
3,900
Merchandise Inventory ................................
3,900
To record cost of Sept. 30 sales.
Oct. 15
Sales Taxes Payable ...............................................
300
Cash ................................................................
300
To record remittance of sales taxes to govt.
Quick Study 11-4 (10 minutes)
1. (b); reason—is reasonably estimated but not a probable loss.
Quick Study 11-5 (15 minutes)
1. Computation of interest payable at December 31, 2013:
Days from November 7 to December 31 ....................
54 days
Accrued interest (8% x $160,000 x 54/360) ................
$1,920
2. 2013
Dec.31
Interest Expense ......................................................
1,920
Interest Payable ................................................
1,920
To record accrued interest (8% x $160,000 x 54/360).
3. 2014
Feb. 5
Interest Expense ......................................................
1,280
Interest Payable .......................................................
1,920
Notes Payable ..........................................................
160,000
Cash ................................................................
163,200
To record payment of note plus interest
(8% x $160,000 x 90/360 = 3,200).
Quick Study 11-6 (15 minutes)
Jan. 15
Sales Salaries Expense ...........................................
35,000.00
FICA—Social Sec. Taxes Payable* ..................
2,170.00
FICA—Medicare Taxes Payable** ....................
507.50
Employee Fed. Inc. Taxes Payable ..................
6,500.00
Employee Medical Insurance Payable .............
772.50
Employee Union Dues Payable ........................
120.00
Salaries Payable ................................................
24,930.00
To record payroll for period.
* $35,000 x 6.2%
** $35,000 x 1.45%
Quick Study 11-7 (15 minutes)
[Note: Two months (January and February) of earnings have
Mar. 31
Payroll Taxes Expense ............................................
2,770.00
FICA—Social Security Taxes Payable1 ............
1,240.00
FICA—Medicare Taxes Payable2 .......................
290.00
State Unemployment Taxes Payable3 ..............
1,080.00
Federal Unemployment Taxes Payable4 ..........
160.00
To record employer payroll taxes.
1(10 x $2,000) x 6.2% = $1,240.00
2(10 x $2,000) x 1.45% = $290.00
3(10 x $2,000 [check $2,000 under max: $7,000 – {$2,000 x 2}]) x 5.4% = $1,080.00
4(10 x $2,000 [check $2,000 under max: $7,000 – {$2,000 x 2}]) x 0.8% = $160.00
Quick Study 11-8 (5 minutes)
Dec. 31
Employee Bonus Expense ......................................
15,000
Bonus Payable .................................................
15,000
To record expected bonus costs.
Quick Study 11-9 (5 minutes)
Vacation Benefits Expense* ...................................
500
Vacation Benefits Payable ..............................
500
To record vacation benefits accrued.
* ($6,500-6,000)
Quick Study 11-10 (10 minutes)
2012
Sep 11
Cash ..........................................................................
500
Sales ....................................................................
500
To record mower sales.
Sep 11
Warranty Expense ...................................................
40
Estimated Warranty Liability .............................
40
To record estimated warranty expense.
2013
July 24
Estimated Warranty Liability ................................
35
Repair Parts Inventory .......................................
35
To record cost of warranty repairs.
Quick Study 11-11 (10 minutes)
Quick Study 11-12A (15 minutes)
Gross Pay ............................................................................
$740.00
Social Security tax deduction (6.2%) ..............................
$45.88
Medicare tax deduction (1.45%) ......................................
10.73
Federal income tax deduction (from Exhibit 11A.6) ......
96.00
State income tax deduction (1.0%) ................................
7.40
Total deductions ...............................................................
160.01
Net Pay .................................................................................
$579.99
Quick Study 11-13B (10 minutes)
Dec. 31
Income Taxes Expense ...........................................
40,000
Income Taxes Payable ......................................
34,000
Deferred Income Tax Liability ..........................
6,000
To record tax expense and deferred tax liability.
Quick Study 11-14 (10 minutes)
a. The definitions and characteristics of current liabilities are broadly
similar for both U.S. GAAP and IFRS. Although differences exist, the
similarities vastly outweigh any differences.
$145,000
EXERCISES
Exercise 11-1 (10 minutes)
1.
C
3.
C
5.
L
7.
N
9.
C
2.
L
4.
C
6.
C
8.
C
10.
C
Exercise 11-2 (10 minutes)
[Note: All entries dated December 31, 2013]
1.
Cash ..........................................................................
10,400,000
Sales ....................................................................
10,000,000
Sales Taxes Payable ..........................................
400,000
To record sales and sales taxes.
Cost of Goods Sold ..................................................
5,000,000
Merchandise Inventory ......................................
5,000,000
To record cost of sales.
2.
Unearned Services Revenue ...................................
50,000
Earned Services Revenue .................................
50,000
To record revenue earned.
Exercise 11-3 (10 minutes)
[Note: All entries dated December 31, 2013.]
1. No adjusting entry is required since it is not probable that the supplier will
the guarantee in its financial statement notes as a contingent liability.
2. No adjusting entry can be made since the loss cannot be reasonably
Exercise 11-4 (30 minutes)
2a.
May 15
Cash ..........................................................................
110,000
Notes Payable ....................................................
110,000
Borrowed cash by issuing an interest-bearing note.
Exercise 11-4 (Concluded)
2b.
July 14
Interest Expense* ....................................................
2,200
Notes Payable ..........................................................
110,000
Cash ....................................................................
112,200
Repaid note plus interest.
* Principal ................................
$110,000
x Interest rate .........................
12%
x Fraction of year ..................
60/360
Total interest ..........................
$ 2,200
Exercise 11-5 (30 minutes)
1. Maturity date = November 1 + 90 days = January 30, 2014.
2.
Principal .....................................................
$200,000
x Interest rate .............................................
9%
x Fraction of year (Nov. 1 – Dec. 31)........
60/360
Total interest in 2013 ................................
$ 3,000
3.
Principal .....................................................
$200,000
x Interest rate .............................................
9%
x Fraction of year (Jan. 1 – Jan. 30).........
30/360
Total interest in 2014 ................................
$ 1,500
4a.
2013
Nov. 1
Cash ..........................................................................
200,000
Notes Payable ....................................................
200,000
Borrowed cash by issuing an interest-bearing note.
4b.
2013
Dec. 31
Interest Expense ......................................................
3,000
Interest Payable .................................................
3,000
Accrued interest on note payable.
4c.
2014
Jan. 30
Interest Expense ......................................................
1,500
Interest Payable .......................................................
3,000
Notes Payable ..........................................................
200,000
Cash ....................................................................
204,500
Repaid note plus interest.
Exercise 11-6 (20 minutes)
Subject
to Tax
Rate
Tax
Explanation
a.
FICA--Social Security ...........
$ 800
6.20%
$ 49.60
Full amount is subject to tax.
FICA—Medicare .....................
800
1.45
11.60
Full amount is subject to tax.
FUTA ..........................................
600
0.80
4.80
$200 is over the maximum.
SUTA ..........................................
600
2.90
17.40
$200 is over the maximum.
b.
FICA--Social Security ...........
$2,100
6.20%
$130.20
Full amount is subject to tax.
FICA—Medicare .....................
2,100
1.45
30.45
Full amount is subject to tax.
FUTA ..........................................
0
0.80
0.00
Full amount is over maximum.
SUTA ..........................................
0
2.90
0.00
Full amount is over maximum.
c.
FICA--Social Security ...........
$6,300
6.20%
$390.60
$1,700 is over the maximum.
FICA—Medicare .....................
8,000
1.45
116.00
Full amount is subject to tax.
FUTA ..........................................
0
0.80
0.00
Full amount is over maximum.
SUTA ..........................................
0
2.90
0.00
Full amount is over maximum.
Exercise 11-7 (10 minutes)
Sept. 30
Salaries Expense .....................................................
800.00
FICA—Social Security Taxes Payable .............
49.60
FICA—Medicare Taxes Payable .......................
11.60
Employee Federal Income Taxes Payable .........
80.00
Accrued Payroll Payable ...................................
658.80
To record payroll for pay period ended September 30.
Exercise 11- 8 (10 minutes)
Sept. 30
Payroll Taxes Expense ............................................
83.40
FICA—Social Security Taxes Payable .............
49.60
FICA—Medicare Taxes Payable .......................
11.60
Federal Unemployment Taxes Payable ...........
4.80
State Unemployment Taxes Payable ...............
17.40
To record employer payroll taxes.
Exercise 11-9 (25 minutes)
1. Warranty Expense = 4% of dollar sales = 4% x $6,000 = $240
2. The December 31, 2013, balance of the liability equals the expense
3. The company should report no additional warranty expense in 2014 for
this copier.
4. The December 31, 2014, balance of the Estimated Warranty Liability
account equals the 2014 beginning balance minus the costs incurred in
2014 to repair the copier:
Ending 2013 balance .......................
$240
Less parts cost ................................
(209)
Ending 2014 balance .......................
$ 31
5. Journal entries
2013
(a)
Aug. 16
Cash ..........................................................................
6,000
Sales ...................................................................
6,000
To record cash sale of copier.
Aug. 16
Cost of Goods Sold .................................................
4,800
Merchandise Inventory .....................................
4,800
To record cost of August 16 sale.
(b)
Dec. 31
Warranty Expense ...................................................
240
Estimated Warranty Liability ............................
240
To record warranty expense for copier sold in 2013.
2014
(c)
Nov. 22
Estimated Warranty Liability ..................................
209
Repair Parts Inventory ......................................
209
To record cost of warranty repairs.
Exercise 11-10 (15 minutes)
1. B = 0.03 ($500,000 – B)
2.
2013
Dec. 31 Employee Bonus Expense ................................ 14,563
To record expected bonus costs.
3.
2014
Jan. 19 Bonus Payable .................................................... 14,563
Exercise 11-11 (10 minutes)
[Note: All entries dated December 31, 2013.]
1.
Vacation Benefits Expense ...........................................
3,200
Vacation Benefits Payable ......................................
3,200
To record vacation benefits expense
[20 employees x 1 day x $160].
2.
Warranty Expense..........................................................
18,000
Estimated Warranty Liability ................................
18,000
To record warranty expense [12,000 units x 10% x $15].
Exercise 11-12 (15 minutes)
(a)
(b)
(c)
(d)
(e)
(f)
Numerator
Income before
interest & taxes ....
$194,000
$176,000
$182,000
$379,000
$103,000
$ 5,000
Denominator
Interest expense ......
$ 44,000
$ 16,000
$ 12,000
$ 14,000
$ 14,000
$10,000
Ratio ......................
4.41
11.00
15.17
27.07
7.36
0.50
Analysis: Company (d) has the strongest ability to pay interest expense as it
Exercise 11-13B (25 minutes)
1.
Income Taxes Payable (target balance) ...............................................
$28,300
Total accrued [($28,600 + $19,100 + $34,600) x .30] ............................
24,690
Adjustment (additional expense) ..........................................................
$ 3,610
2.
2013
(a)
Dec. 31
Income Tax Expense ................................................
3,610
Income Taxes Payable .......................................
3,610
To adjust tax expense and liability.
2014
(b)
Jan. 20
Income Taxes Payable .............................................
28,300
Cash .....................................................................
28,300
To make the final quarterly payment
of income taxes for 2013.
Exercise 11-14A (15 minutes)
Regular pay (40 hours @ $14) ...........................................
$560.00
Overtime premium pay (8 hours @ [$14 x 150%]) ...........
168.00
Gross pay ..........................................................................
728.00
FICA—Social Security tax deduction (6.2%) ....................
$ 45.14
FICA—Medicare tax deduction (1.45%) ............................
10.56
Income tax deduction (from Exhibit 11A.6) ......................
76.00
Total deductions ...............................................................
131.70
Net pay .................................................................................
$596.30
Exercise 11-15 (30 minutes)
1. July 31
Sales Salaries Expense ...........................................
300,000
Office Salaries Expense ..........................................
60,000
FICA—Social Sec. Taxes Payable ....................
22,320
FICA—Medicare Taxes Payable ........................
5,220
Employee Fed. Inc. Taxes Payable ...................
90,000
Employee State Inc. Taxes Payable .................
20,000
Employee Medical Insurance Payable* ............
2,800
Employee Life Insurance Payable** .................
1,600
Employee Union Dues Payable .........................
1,000
Salaries Payable .................................................
217,060
To record payroll for period.
* $7,000 x 40% ** $4,000 x 40%
2. July 31
Salaries Payable .......................................................
217,060
Cash ................................................................
217,060
To record payment of payroll.*
*Check numbers may be entered in the Payroll Register.
3. July 31
Payroll Taxes Expense ............................................
30,640
FICA⎯Social Sec. Taxes Payable ....................
22,320
FICA⎯Medicare Taxes Payable ........................
5,220
State Unemployment Taxes Payable................
2,700
Federal Unemployment Taxes Payable ...........
400
To record employer payroll taxes.
SUTA = $50,000 x 5.4% = $2,700
FUTA = $50,000 x 0.8% = $400
FICA—Social Sec. & Medicare = Same as employees
July 31
Employee Benefits Expense ................................
6,600
Employee Medical Insurance Payable* ............
4,200
Employee Life Insurance Payable** .................
2,400
To record costs of employee benefits.
* $7,000 x 60% ** $4,000 x 60%
4. July 31
FICA⎯Social Security Taxes Payable....................
44,640
FICA⎯Medicare Taxes Payable ..............................
10,440
Employee Fed. Income Taxes Payable. .................
90,000
Employee State Income Taxes Payable. ................
20,000
Employee Medical Insurance Payable ...................
7,000
Employee Life Insurance Payable ..........................
4,000
Employee Union Dues Payable ...............................
1,000
State Unemployment Taxes Payable ......................
2,700
Federal Unemployment Taxes Payable..................
400
Cash ................................................................
180,180
To record payment of FICA, income taxes, SUTA,
FUTA, union dues, and insurance premiums.
Exercise 11-16 (30 minutes)
a.
Employee
Cumulative
Pay
Pay Subject to
FICA Social
Security
Pay Subject
to FICA
Medicare
Pay Subject
to FUTA
Taxes
Pay Subject
to SUTA
Taxes
Steve S ................
$ 6,000
$ 6,000
$ 6,000
$ 6,000
$ 6,000
Tim V ....................
60,000
60,000
60,000
7,000
7,000
Brent G ................
87,000
87,000
87,000
7,000
7,000
Christina S ..........
156,600
110,100
156,600
7,000
7,000
Kathleen K ...........
106,900
106,900
106,900
7,000
7,000
Michelle H ............
110,100
110,100
110,100
7,000
7,000
Lori K ...................
116,800
110,100
116,800
7,000
7,000
Matt B ..................
36,800
36,800
36,800
7,000
7,000
Sankha B .............
4,000
4,000
4,000
4,000
4,000
Totals ...................
$684,200
$631,000
$684,200
$59,000
$59,000
b. FICA Social Security taxes
$78,244.00 = $631,000 x 6.2% x 2 (for employer and employee)
FICA Medicare taxes
FUTA taxes
$ 472.00 = $59,000 x 0.8%
SUTA taxes
Exercise 11-17 (30 minutes)
(a)
Employee
Cumulative
Pay (Excludes
Current Period)
Current Period Gross Pay
FIT
Withholding
FUTA
FICA S.S.
Employee
FICA
Medicare
Employee
Employee—
Benefits Plan
Withholding
Employee
Net Pay
Pay
Type
Pay
Hours
Gross Pay
SIT
Withholding
SUTA
FICA S.S.
Employer
FICA
Medicare
Employer
Employer—
Benefits Plan
Expense
Kathleen
108,300.00
Salary
---
7,000.00
2,000.00
0.00
111.60
101.50
350.00
4,136.90
300.00
0.00
111.60
101.50
700.00
Anthony
6,800.00
Salary
---
500.00
80.00
1.60
31.00
7.25
25.00
336.75
20.00
10.80
31.00
7.25
50.00
Nichole
15,000.00
Regular
80
800.00
110.00
0.00
57.04
13.34
46.00
668.62
Overtime
8
120.00
920.00
25.00
0.00
57.04
13.34
92.00
Zoey
6,500.00
Regular
80
800.00
100.00
4.00
53.32
12.47
43.00
629.21
Overtime
4
60.00
860.00
22.00
27.00
53.32
12.47
86.00
Gracie
5,000.00
Regular
74
740.00
90.00
5.92
45.88
10.73
37.00
535.39
Overtime
0
0.00
740.00
21.00
39.96
45.88
10.73
74.00
Totals
141,600.00
10,020.00
2,380.00
11.52
298.84
145.29
501.00
6,306.87
388.00
77.76
298.84
145.29
1,002.00
