1. No. A discounted note payable has no stated interest rate, but provides interest by discounting the
2. a. Employee’s federal income taxes, social security, and Medicare
3. The deductions from employees’ earnings are for amounts owed (liabilities) to others for
such items as federal taxes, state and local income taxes, and contributions to pension plans.
4. 1. a
3. c
b
5.
b
5. An advantage of using a separate payroll bank account is that reconciling the bank statements
6. a. Constants are data that remain unchanged from payroll to payroll. These include employee
names, social security numbers, marital status, number of income tax withholding
7. The vacation pay expense should be recorded during the period in which the vacation privilege
is earned.
8. In a defined contribution plan, the company invests contributions on behalf of the employee
p
9. To match revenues and expenses properly, the liability to cover product warranties should be
recorded in the period during which the sale of the product is recorded.
CHAPTER 10
CURRENT LIABILITIES AND PAYROLL
DISCUSSION QUESTIONS
10-1
CHAPTER 10 Current Liabilities and Payroll
PE 10–1A
PE 10–1B
PE 10–2A
Total wage payment………………………………………………………
…
$2,500.00
One allowance (provided by IRS)………………………………………
…
$75.00
Multiplied by allowances claimed on Form W-4……………………
…
2150.00
PE 10–2B
Total wage payment………………………………………………………
…
$1,250.00
One allowance (provided by IRS)………………………………………
…
$75.00
Multiplied by allowances claimed on Form W-4……………………
…
175.00
PRACTICE EXERCISES
×
×
10-2
CHAPTER 10 Current Liabilities and Payroll
PE 10–3A
Total wage payment…………………………………………
…
$2,500.00
PE 10–3B
Total wage payment…………………………………………
…
$1,250.00
PE 10–4A
Salaries Expense 220,000
PE 10–4B
Salaries Expense 90,000
CHAPTER 10 Current Liabilities and Payroll
PE 10–5A
Payroll Tax Expense 18,670
PE 10–5B
Payroll Tax Expense 7,370
PE 10–6A
a. Vacation Pay Expense 19,500
PE 10–6B
a. Vacation Pay Expense 35,000
10-4
CHAPTER 10 Current Liabilities and Payroll
PE 10–7A
a. Jan. 31 Product Warranty Expense 15,000
PE 10–7B
July, 4.5% × $325,000.
PE 10–8A
a. December 31, current year
b. The quick ratio of Nabors Company has declined from 1.5 in the previous year to
1.2 in the current year. This decrease is the result of a large increase in accounts
10-5
CHAPTER 10 Current Liabilities and Payroll
PE 10–8B
a. December 31, current year
Quick Ratio = Quick Assets ÷ Current Liabilities
b. The quick ratio of Adieu Company has improved from 1.5 in the previous year to 1.6
10-6
CHAPTER 10 Current Liabilities and Payroll
Ex. 10–1
Current liabilities:
Federal income taxes payable*………………………………………………
…
$ 336,000
The nine months of unfilled subscriptions are a current liability because Bon Nebo
received payment prior to providing the magazines.
Ex. 10–2
a. 1. Merchandise Inventory 660,000
Notes Payable 660,000
2. Notes Payable 660,000
b. 1. Notes Receivable 660,000
Sales 660,000
2. Cash 663,300
EXERCISES
10-7
CHAPTER 10 Current Liabilities and Payroll
Ex. 10–3
a. $360,000 × 5% × 60 ÷ 360 = $3,000 for each alternative.
b. (1) $360,000 simple-interest note: $360,000 proceeds
(2) $360,000 discounted note: $360,000 – $3,000 interest = $357,000 proceeds
c. Alternative (1) is more favorable to the borrower. This can be verified by
comparing the effective interest rates for each loan as follows:
Situation (1): 5.0% effective interest rate
($3,000 × 360 ÷ 60) ÷ $360,000 = 5%
Ex. 10–4
a. Accounts Payable 210,000
Notes Payable 210,000
Ex. 10–5
a. Accounts Payable 74,125
Interest Expense* 875
10-8
CHAPTER 10 Current Liabilities and Payroll
Ex. 10–6
a. June 30 Building 560,000
Land 400,000
Note Payable 600,000
Cash 360,000
Ex. 10–7
a. $4,815 is the amount disclosed as the current portion of long-term debt.
Ex. 10–8
a. Regular pay (40 hrs. × $32)…………………………………
…
$1,280
Overtime pay (15 hrs. × $48)………………………………… 720
10-9
CHAPTER 10 Current Liabilities and Payroll
Ex. 10–9
Regular earnings…………………………
…
$3,800.00 $1,520.00 $1,680.00
Overtime earnings………………………
…
1,140.00 756.00
$3,800.00 $2,660.00 $2,436.00
6.0% × $2,660.00 = $159.60
1.5% × $3,800.00 = $57.00
1.5% × $2,436.00 = $36.54
Withholding supporting calculations:
Gross weekly pay…………………………
…
$3,800.00 $2,660.00 $2,436.00
Number of withholding allowances…… 1 2 2
Multiplied by: Value of one allowance
…
× $75.00 × $75.00 × $75.00
Amount to be deducted…………………
…
$ 75.00 $ 150.00 $ 150.00
…
bracket excess…………………………
…
52.47 217.84 155.12
Amount withheld…………………………
…
$ 910.19 $ 562.04 $ 499.32
Computer
Consultant Programmer Administrator
Consultant Programmer
Computer
Administrator
10-10
CHAPTER 10 Current Liabilities and Payroll
Ex. 10–10
a. Summary: (1) $460,000; (3) $540,000; (8) $6,750; (12) $135,000
Net amount paid……………………………………………
…
$338,850
Total deductions……………………………………………
…
201,150
Total deductions……………………………………………
…
$201,150
…
(8) Union dues…………………………………………………… $ 6,750
Total earnings………………………………………………
…
$540,000
…
(12) Sales salaries………………………………………………
…
$135,000
b. Factory Wages Expense 285,000
Sales Salaries Expense 135,000
Office Salaries Expense 120,000
Social Security Tax Payable 32,400
Medicare Tax Payable 8,100
10-11
…
CHAPTER 10 Current Liabilities and Payroll
Ex. 10–11
a. Social security tax (6% × $750,000)…………………………………………… $45,000
Medicare tax (1.5% × $750,000)………………………………………………
…
11,250
b. Payroll Tax Expense 59,350
Social Security Tax Payable 45,000
Ex. 10–12
a. Salaries Expense 1,500,000
Social Security Tax Payable 90,000
Medicare Tax Payable 22,500
Employees Federal Income Tax Payable 300,000
10-12
CHAPTER 10 Current Liabilities and Payroll
Ex. 10–13
a. Wages Expense 240,000
Social Security Tax Payable* 14,400
** 1.5% × $240,000
b. Payroll Tax Expense 20,170
*5.4% × $35,000
** 0.8% × $35,000
Ex. 10–14
Big Howie’s Hot Dog Stand does have an internal control procedure that should detect
the payroll error. Before funds are transferred from the regular bank account to the
payroll account, the owner/manager authorizes the total amount of the week’s payroll.
Ex. 10–15
a. Appropriate. All changes to the payroll system, including wage rate increases,
should be authorized by someone outside the Payroll Department.
10-13
CHAPTER 10 Current Liabilities and Payroll
Ex. 10–16
a. Vacation Pay Expense 3,500
Ex. 10–17
a. Dec. 31 Pension Expense 365,000
Unfunded Pension Liability 365,000
To record quarterly pension cost.
Ex. 10–18
The $5,599 million unfunded pension liability is the approximate amount of the pension
obligation that exceeds the value of the net assets of the pension plan. Apparently,
Procter & Gamble has underfunded its plan relative to the obligation that has accrued
over time. This can occur when the company contributes less to the plan than the
annual pension cost.
10-14
CHAPTER 10 Current Liabilities and Payroll
Ex. 10–19
a. Product Warranty Expense 22,400
Product Warranty Payable 22,400
To record warranty expense for June,
4% × $560,000.
Ex. 10–20
a. The warranty liability represents estimated outstanding automobile warranty
claims. Of these claims, $2,884 million is estimated to be due during Year 2, while
the remainder ($4,147 million) is expected to be paid after Year 2. The distinction
10-15
CHAPTER 10 Current Liabilities and Payroll
Ex. 10–21
a. Damage Awards and Fines 365,000
b. The company experienced a hazardous materials spill at one of its plants during
the previous period. This spill has resulted in a number of lawsuits to which the
company is a party. The Environmental Protection Agency (EPA) has fined the
company $240,000, which the company is contesting in court. Although the
Ex. 10–22
Quick Assets
Current Liabilities
$500,000 + $200,000
$500,000
Previous year =
a. Quick Ratio =
= 1.4
10-16
CHAPTER 10 Current Liabilities and Payroll
Ex. 10–23
a. Dell, Inc.
Quick Ratio 1.0
Quick Assets
Current Liabilities
b. It is clear that Apple Inc.’s short-term liquidity is stronger than Dell’s. Apple’s quick
ratio is 23% [(1.3 – 1.0) ÷ 1.0] higher. Apple has a much stronger relative cash and
short-term investment position than does Dell. Apple’s cash, accounts receivable,
and short-term investments are over 87% of total current assets (131% of current
Apple Inc.
1.3
Quick Ratio =
10-17
CHAPTER 10 Current Liabilities and Payroll
Prob. 10–1A
1. Mar. 1 Merchandise Inventory 360,000
Accounts Payable—Galston Co. 360,000
31 Accounts Payable—Galston Co. 360,000
Notes Payable 360,000
Apr. 30 Notes Payable 360,000
Interest Expense ($360,000 × 30 ÷ 360 × 5%) 1,500
Cash 361,500
PROBLEMS
10-18
CHAPTER 10 Current Liabilities and Payroll
Prob. 10–1A (Concluded)
2. a. Product Warranty Expense 27,500
Product Warranty Payable 27,500
10-19
CHAPTER 10 Current Liabilities and Payroll
Prob. 10–2A
1. a. Dec. 30 Sales Salaries Expense 350,000
Warehouse Salaries Expense 180,000
Office Salaries Expense 145,000
Employees Income Tax Payable 118,800
2. a. Dec. 30 Sales Salaries Expense 350,000
Warehouse Salaries Expense 180,000
Office Salaries Expense 145,000
Employees Income Tax Payable 118,800
Social Security Tax Payable140,500