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Chapter 11
Current Liabilities and Payroll
Review Questions
1. What are the three main characteristics of liabilities?
The three main characteristics of liabilities are:
2. What is a current liability? Provide some examples of current liabilities.
Current liabilities must be paid with cash or with goods and services within one year or
3. How is sales tax recorded? Is it considered an expense of a business? Why or why not?
Sales tax is recorded as a liability when it is charged to the customer; it is usually calculated
4. How do unearned revenues arise?
Unearned revenue arises when a business has received cash in advance of providing goods or
5. What do short-term notes payable represent?
Short-term notes payable represent a written promise by the business to pay a debt, usually
involving interest, within one year or less.
6. Coltrane Company has a $5,000 note payable that is paid in $1,000 installments over five
years. How would the portion that must be paid within the next year be reported on the
balance sheet?
7. What is the difference between gross pay and net pay?
8. List the required employee payroll withholding deductions, and provide the tax rate for each.
Required payroll withholding deductions are:
Withholding Deductions Tax Rate
Federal, State and Local Income Tax The amount withheld depends on the
employee’s gross pay, filing status,
and the number of withholding
9. How might a business use a payroll register?
Many companies use a payroll register to help summarize the earnings, withholdings, and net
pay for each employee.
10. What payroll taxes is the employer responsible for paying?
11. What are the two main controls for payroll? Provide an example of each.
There are two main controls for payroll: controls for efficiency and controls to safeguard
payroll disbursements.
When do businesses record warranty expense, and why?
The matching principle requires businesses to record Warranty Expense in the same period
that the company records the revenue related to that warranty. The expense, therefore, is
incurred when the company makes a sale, not when the company pays the warranty claims.
12. What is a contingent liability? Provide some examples of contingencies.
A contingent liability is a potential, rather than an actual, liability because it depends on a
13. Curtis Company is facing a potential lawsuit. Curtis’s lawyers think that it is reasonably
possible that it will lose the lawsuit. How should Curtis report this lawsuit?
14. How is the times-interest-earned ratio calculated, and what does it evaluate?
The times-interest-earned ratio is calculated as earnings before interest and taxes or EBIT
Short Exercises
For all payroll calculations, use the following tax rates and round amounts to the nearest
cent.
Employee: OASDI: 6.2% on first $118,500 earned; Medicare: 1.45% up to $200,000, 2.35%
on earnings above $200,000.
Employer: OASDI: 6.2% on first $118,500 earned; Medicare: 1.45%; FUTA: 0.6% on first
$7,000 earned; SUTA: 5.4% on first $7,000 earned.
S11-1 Determining current versus long-term liabilities
Learning Objective 1
Rios Raft Company had the following liabilities.
a. Accounts Payable
b. Note Payable due in 3 years
c. Salaries Payable
d. Note Payable due in 6 months
e. Sales Tax Payable
f. Unearned Revenue due in 8 months
g. Income Tax Payable
Determine whether each liability would be considered a current liability (CL) or a long-term
liability (LTL).
SOLUTION
S11-2 Recording sales tax
Learning Objective 1
On July 5, Williams Company recorded sales of merchandise inventory on account, $55,000. The
sales were subject to sales tax of 4%. On August 15, Williams Company paid the sales tax owed
to the state from the July 5 transaction.
Requirements
1. Journalize the transaction to record the sale on July 5. Ignore cost of goods sold.
2. Journalize the transaction to record the payment of sales tax to the state on August 15.
S11-2, cont.
SOLUTION
Requirement 1
S11-3 Recording unearned revenue
Learning Objective 1
On June 1, Hunting Man Magazine collected cash of $63,000 on future annual subscriptions
starting on July 1.
Requirements
1. Journalize the transaction to record the collection of cash on June 1.
2. Journalize the transaction required at December 31, the magazine’s year-end, assuming no
revenue earned has been recorded. (Round adjustment to the nearest whole dollar.)
SOLUTION
S11-4 Accounting for a note payable
Learning Objective 1
On December 31, 2017, Franklin purchased $13,000 of merchandise inventory on a one-year, 9%
note payable. Franklin uses a perpetual inventory system.
Requirements
1. Journalize the company’s purchase of merchandise inventory on December 31, 2017.
2. Journalize the company’s accrual of interest expense on June 30, 2018, its fiscal year-end.
3. Journalize the company’s payment of the note plus interest on December 31, 2018.
SOLUTION
S11-5 Determining current portion of long-term note payable
Learning Objective 1
On January 1, Irving Company purchased equipment of $280,000 with a long-term note payable.
The debt is payable in annual installments of $56,000 due on December 31 of each year. At the
date of purchase, how will Irving Company report the note payable?
SOLUTION
S11-6 Computing and journalizing an employee’s total pay
Learning Objective 2
Lucy Rose works at College of Fort Worth and is paid $12 per hour for a 40-hour workweek and
time-and-a-half for hours above 40.
Requirements
1. Compute Rose’s gross pay for working 60 hours during the first week of February.
2. Rose is single, and her income tax withholding is 15% of total pay. Rose’s only payroll
deductions are payroll taxes. Compute Rose’s net (take-home) pay for the week. Assume
Rose’s earnings to date are less than the OASDI limit.
3. Journalize the accrual of wages expense and the payment related to the employment of Lucy
Rose.
SOLUTION
Requirement 1
S11-6, cont.
Requirement 3
S11-7 Computing payroll amounts considering FICA tax limits
Learning Objective 2
Lily Carter works for JDK all year and earns a monthly salary of $12,100. There is no overtime
pay. Lily’s income tax withholding rate is 10% of gross pay. In addition to payroll taxes, Lily
elects to contribute 5% monthly to United Way. JDK also deducts $250 monthly for co-payment
of the health insurance premium. As of September 30, Lily had $108,900 of cumulative earnings.
Requirements
1. Compute Lily’s net pay for October.
2. Journalize the accrual of salaries expense and the payment related to the employment of Lily
Carter.
S11-7, cont.
SOLUTION
Requirement 1
S11-8 Computing and journalizing the payroll expense and payments
Learning Objective 2
Macintosh Company has monthly salaries of $26,000. Assume Macintosh pays all the standard
payroll taxes, no employees have reached the payroll tax limits, total income tax withheld is
$2,000, and the only payroll deductions are payroll taxes. Journalize the accrual of salaries
expense, accrual of employer payroll taxes, and payment of employee and employer payroll
taxes for Macintosh Company.
SOLUTION
