Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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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
1, 14, 15
11-1, 11-14
11-1
11-5
C2. Identify and describe known
current liabilities.
3, 4, 16, 17
11-2, 11-3,
11-14
11-2
SP
11-6
contingent liabilities.
Analytical objectives:
C3. Explain how to account for
11
11-10
11-13
11-4
A1. Compute the times interest
earned ratio and use it to
analyze liabilities.
11-11
11-14
11-5
11-1, 11-2,
11-5, 11-7,
11-9
Procedural objectives:
P1. Prepare entries to account for
short-term notes payable.
14
11-4
11-3, 11-4
11-1,
GL11-1
11-6
payroll deductions and
liabilities.
12, 13
11-8, 11-9
11-6, SP
P2. Compute and record employee
5, 6, 7, 8,
11-5
11-5, 11-6,
11-2, 11-3,
11-8
P3. Compute and record employer
payroll expenses and liabilities.
5, 9
11-6
11-5, 11-7,
11-8, 11-9
11-2, 11-3,
11-6, SP
P4. Account for estimated
liabilities, including warranties
and bonuses
2, 10, 11
11-7, 11-8,
11-9, 11-13
11-10, 11-11,
11-12, 11-15,
11-18
11-4
11-1, 11-3
P5AIdentify and describe the details
of payroll reports, records, and
procedures (Appendix 11A)
4, 5, 6, 12.
13
11-12
11-16, 11-17
11-6
*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
GL refers to the General Ledger Problems
characteristics.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises and
Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and Problems. It allows
instructors to monitor, promote, and assess student learning. It can be used in practice, homework, or exam mode.
Connect Insight
The first and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed
by an intuitive question and provide at-a-glance information regarding how an instructor’s class is performing.
Connect Insight is available through Connect titles.
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
from the general journal all the way through the financial statements. Critical thinking and analysis components are
added to each GL problem to ensure understanding of the entire process. GL problems are auto-graded and provide
instant feedback to the student.
Excel Simulations
Assignable within Connect, Excel Simulations allow students to practice their Excel skills—such as basic formulas
and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me
tutorials (when enabled). Excel Simulations are auto-graded and provide instant feedback to the student.
Synopsis of Chapter Revisions
NEW opener—Hello Alfred and entrepreneurial assignment.
Updated data in Exhibit 11.2.
Updated payroll tax rates and explanations.
New explanation of Additional Medicare Tax.
Updated unemployment tax rate section.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
I. Characteristics of Liabilities
A. Defining Liabilities
Probable future payments of assets or services that a company is
presently obligated to make as a result of past transactions or
events. Note three crucial factors:
1. Due to past transaction or event.
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 due after one year or the
company’s operating cycle, whichever is longer.
C. Uncertainties in Liabilities—requires addressing three important
questions that are sometime uncertain at the time liability is
incurred:
service will be provided to satisfy)
1. Whom to pay? (Ex. A note “Payable to Bearer”)
2. When to pay? (Ex. Unearned revenues—may not know when
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.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
D. Short-Term Notes Payable
Written promise to pay a specified amount on a definite future
date within one year or the company’s operating cycle, whichever
is longer. Can arise from many transactions; two common
examples:
1. Note given to extend credit period – creditor requires
2. Note given to borrow money from bank – 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 recorded at and reported at
face value.
( Dr Cash, Cr Notes Payable)
In both examples above, interest is recorded as incurred. This
may be when paid with note or as end-of -period accrued
interest adjustment.
(Dr Interest Expense and Note Payable, Cr Cash)
3. When note extends over period-end –
(Dr Interest Expense and Cr Interest Payable) if accrued
interest is being recorded at end-of-period adjustment.
E. Payroll Liabilities
Net pay is recorded as Salaries Payable (Cr).
1. Gross pay—total compensation an employee earns. (Includes
wages, salaries, commissions, bonuses). Gross pay amount is
recorded as Salaries Expense (Dr).
3. Employee 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
separated into two groups—Social Security and Medicare
taxes. FICA tax is computed as current rate multiplied by
gross wages subject to tax. For year 2016, Social Security
tax is 6.2% of the first $118,500 earned by the employee
in the calendar year and Medicare tax is 1.45% of all
wages earned by the employee. A 0.9% additional
Medicare tax is imposed on the employee for pay in
excess of $200,000 – this additional tax is not imposed on
the employer.
b. Employee Income tax payable is determined from chart
based on their gross pay, pay period, marital status and
number of withholding allowances the employee claims.
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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).
a. FICA taxes—employers must pay and amount equal to
withheld from the employees.
b. Unemployment taxes—(state and federal) current tax rate
multiplied by wages subject to tax. The total rate is up to
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
5. Internal Control of Payroll – Four key areas of payroll
activities that should be separate and monitored include
Employee hiring; Payroll preparation; Timekeeping; and
Payroll payment.
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.
year.
III. Estimated Liabilities—Known obligations of uncertain amounts that
can be reasonably estimated. Recorded as expenses (Dr) and payables
(Cr).Examples are:
during the weeks the employees are working and earning the
vacation time. Appropriate proportion accrued at time of each
A. Health and Pension Benefits—benefits beyond salaries and wages
provided by business. Appropriate proportion accrued at time of
each payroll.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
D. Warranty Liabilities—reported to comply with the full disclosure
and matching principles. Seller reports the expected warranty
E. Multi-Period Estimated Liabilities can be current or long-term and
must be classified based upon when they will be satisfied.
IV. Contingent liabilities—Contingent liability is a potential liability that
depends on a future event arising from a past transaction.
A. Accounting for Contingent Liabilities—depends on likelihood that
a future event will occur and the ability to estimate the future
amount. (Accounting motivated by full-disclosure principle.)
Three categories and appropriate accounting for each:
1. Probable (likely)—record if amount can be reasonably
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
2. Debt guarantees (of a debt owed by another company)—
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.
C. Uncertainties That Are Not Contingencies – include natural
disasters and development of new competing products or services.
These are not contingent liabilities because they are future events
not arising from past transactions.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
VI. Decision Analysis—Times Interest Earned Ratio
A. Used to describe the risk of covering interest commitments when
income varies.
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.
B. Annual Federal Unemployment Tax Return (IRS Form 940).
Must be mailed on or before January 31 following the end of each
tax year to report an employer’s FUTA taxes.
C. Wage and Tax Statement (Form W-2).
VIII. Payroll Records
A. Payroll Register
A record for a pay period that shows the pay period dates and the
hours worked, gross pay, deductions, and net pay of each
employee; contains all the data needed to record payroll (for each
pay period) in the General Journal.
B. Payroll Check
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,
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
IX. Payroll Procedures
A. Federal Income Tax Withholdings
Computed using a wage bracket withholding table based on gross
pay, number of personal exemptions, the employee’s tax status,
and pay period.
1. Withholding allowance—a number that is used to reduce the
amount of federal income tax withheld from an employee’s
2. Form W-4—withholding allowance certificate form. Filed by
employee with employer to identify personal exemptions
claimed.
B. Payroll Bank Account
A separate payroll bank account used in a company with many
employees.
1. One check for total payroll is drawn on the regular bank
3. Helps with internal control and reconciling the regular bank
account.
Appendix 11B—Corporate Income Taxes
X. Income Tax Liabilities
income tax liability. Adjusting entry: Dr Income Taxes Expense,
A. Income Tax Liabilities: corporations (not sole proprietorships or
partnerships) are subject to income taxes and must estimate their
income tax liability when preparing financial statements.
B. Deferred Income Tax Liabilities
Arise from temporary differences between GAAP and income tax
rules. This results in temporary differences between the tax return
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter 11 Alternate Demonstration Problem
On November l, 2017, 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.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter 11 Solution: Alternate Demonstration Problem
Issuance:
11/1/17
Cash …………………………………………
200,000
Notes Payable ……………………..
200,000
Year end accrual:
12/31/17
($200,000 X 9% X 60/360 = $ 3,000 accrued interest)
Maturity date:
1/30/18
Notes Payable …………………………..
200,000
204,500