1. No. A discounted note payable has no stated interest rate, but provides interest by discounting the
note proceeds. The discount, which is the difference between the proceeds and the face of the
note, is the interest and is accounted for as such.
2. a. Employee’s federal income taxes, social security, and Medicare
b. Employees Federal Income Tax Payable, Social Security Tax Payable, and Medicare Tax
Payable
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
allowances, rates of pay, tax rates, and withholding tables.
b. Variables are data that change from payroll to payroll. These include number of hours or
days worked for each employee, accrued days of sick leave, vacation credits, total earnings
to date, and total taxes withheld.
7. The vacation pay expense should be recorded during the period in which the vacation privilege
is earned.
8. In a defined contribution pension plan, the company invests contributions on behalf of the employee
during the employee’s working years. Normally, the employee and employer contribute to the
p
lan. The employee’s pension depends on the total contributions and the investment returns
earned on those contributions.
b
CHAPTER 11
CURRENT LIABILITIES AND PAYROLL
DISCUSSION QUESTIONS
b
b
p
CHAPTER 11 Current Liabilities and Payroll
PE 11-1A
PE 11-1B
a. $324,000
b. $319,950 [$324,000 – ($324,000 × 10% × 45 ÷ 360)]
PE 11-2A
…
…
Multiplied by allowances claimed on Form W-4…………………
…
2162.00
…
…
PE 11-2B
Total wage payment……………………………………………………
…
$1,370.00
One allowance …………………………………………………………
…
$81.00
Multiplied by allowances claimed on Form W-4…………………
…
181.00
Amount subject to withholding……………………………………… $1,289.00
Initial withholding from wage bracket in Exhibit 2………………
…
$ 87.34
Plus additional withholding: 22% of excess over $832*………… 100.54
Federal income tax withholding……………………………………
…
$ 187.88
* ($1,289 – $832) × 22%
PRACTICE EXERCISES
×
×
CHAPTER 11 Current Liabilities and Payroll
PE 11-3A
Total wage payment………………………………………… $2,400.00
Less: Federal income tax withholding………………
…
$407.58
Social security tax ($2,400 × 6%)………………
…
144.00
Medicare tax ($2,400 × 1.5%)…………………… 36.00 587.58
Net pay………………………………………………………… $1,812.42
PE 11-3B
Total wage payment………………………………………… $1,370.00
PE 11-4A
Salaries Expense 189,000
Social Security Tax Payable 11,340
Medicare Tax Payable 2,835
Employees Federal Income Tax Payable 37,420
Salaries Payable 137,405
PE 11-4B
Salaries Expense 54,000
…
…
CHAPTER 11 Current Liabilities and Payroll
PE 11-5A
Payroll Tax Expense 15,315
Social Security Tax Payable 11,340
Medicare Tax Payable 2,835
State Unemployment Tax Payable* 1,026
Federal Unemployment Tax Payable** 114
*$19,000 × 5.4%
** $19,000 × 0.6%
PE 11-5B
Payroll Tax Expense 4,350
PE 11-6A
a. Vacation Pay Expense 25,500
Vacation Pay Payable 25,500
Vacation pay accrued for the period.
b. Pension Expense 20,400
Cash 20,400
To record pension contribution
(6% × $340,000).
PE 11-6B
a. Vacation Pay Expense 62,000
CHAPTER 11 Current Liabilities and Payroll
PE 11-7A
a. Jan. 31 Product Warranty Expense 11,730
Product Warranty Payable 11,730
To record warranty expense for
January (3% × $391,000).
b. Aug. 15 Product Warranty Payable 165
Supplies 110
Wages Payable 55
Replaced defective part under warranty.
PE 11-7B
a. July 31 Product Warranty Expense 19,620
PE 11-8A
a. December 31, current year:
Quick Ratio = Quick Assets ÷ Current Liabilities
= ($2,070 + $4,780 + $2,160) ÷ $5,300
= 1.7
December 31, previous year:
Quick Ratio = Quick Assets ÷ Current Liabilities
= ($2,230 + $5,030 + $2,420) ÷ $4,400
= 2.2
CHAPTER 11 Current Liabilities and Payroll
PE 11-8B
a. December 31, current year:
Quick Ratio = Quick Assets ÷ Current Liabilities
= ($1,760 + $2,130 + $1,430) ÷ $2,800
= 1.9
December 31, previous year:
Quick Ratio = Quick Assets ÷ Current Liabilities
= ($1,680 + $2,090 + $1,330) ÷ $3,400
= 1.5
b. The quick ratio of Aloha Company has improved from 1.5 in the previous year to 1.9
CHAPTER 11 Current Liabilities and Payroll
Ex. 11-1
Current liabilities:
Federal income taxes payable*………………………………………………
…
$ 336,000
Advances on magazine subscriptions**……………………………………
…
1,593,750
Total current liabilities………………………………………………………
…
$1,929,750
Ex. 11-2
a. 1. Merchandise Inventory 130,000
Notes Payable 130,000
2. Notes Payable 130,000
Interest Expense* 975
Cash 130,975
Ex. 11-3
a. 1. Merchandise Inventory 793,000
Interest Expense* 7,000
Notes Payable 800,000
b. 1. Notes Receivable 800,000
Sales 793,000
Interest Revenue* 7,000
EXERCISES
CHAPTER 11 Current Liabilities and Payroll
Ex. 11-4
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
Ex. 11-5
a. Accounts Payable 210,000
Notes Payable 210,000
b. Notes Payable 210,000
Interest Expense* 1,575
Cash 211,575
*$210,000 × 6% × 45 ÷ 360
Ex. 11-6
CHAPTER 11 Current Liabilities and Payroll
Ex. 11-7
2. Notes Payable 100,000
Interest Expense* 875
Cash 100,875
b. 1. Accounts Payable 100,000
Notes Payable 100,000
Ex. 11-8
a. $3,953 is the amount disclosed as the current portion of long-term debt.
b. The current liabilities decreased by $67 ($3,953 – $4,020).
c. $28,295 ($32,248 – $3,953)
Ex. 11-9
a. Regular pay (40 hrs. × $22)…………………………………
…
$ 880.00
Overtime pay (10 hrs. × $44)…………………………………
…
440.00
Gross pay………………………………………………………
…
$1,320.00
…
CHAPTER 11 Current Liabilities and Payroll
Ex. 11-10
Regular earnings…………………………
…
$5,000.00 $3,200.00 $2,000.00
Overtime earnings………………………
…
720.00 1,000.00
Gross pay…………………………………
…
$5,000.00 $3,920.00 $3,000.00
1
6.0% × $5,000.00 = $300.00
2
6.0% × $3,920.00 = $235.20
3
6.0% × $3,000.00 = $180.00
Withholding supporting calculations:
Gross weekly pay………………………… $5,000.00 $3,920.00 $3,000.00
Number of withholding allowances…
…
212
Multiplied by: Value of one allowance
…
× $81.00 × $81.00 × $81.00
Amount to be deducted…………………
…
$ 162.00 $ 81.00 $ 162.00
Amount subject to withholding………
…
$4,838.00 $3,839.00 $2,838.00
Initial withholding from wage bracket
…
Computer
Consultant Programmer Administrator
Consultant Programmer
Computer
Administrator
…
CHAPTER 11 Current Liabilities and Payroll
Ex. 11-11
Total deductions……………………………………………
…
$201,150
Social security tax…………………………………………
…
$ 32,400
Medicare tax…………………………………………………
…
8,100
Income tax withheld………………………………………
…
135,000
Medical insurance…………………………………………
…
18,900 194,400
(8) Union dues…………………………………………………… $ 6,750
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
c. Salaries Payable 338,850
Cash 338,850
…
CHAPTER 11 Current Liabilities and Payroll
Ex. 11-12
a. Social security tax (6% × $560,000)…………………………………………
…
$33,600
Medicare tax (1.5% × $560,000)………………………………………………
…
8,400
State unemployment tax (5.4% × $60,000)…………………………………
…
3,240
Federal unemployment (0.6% × $60,000)……………………………………
…
360
$45,600
Ex. 11-13
a. Salaries Expense 1,380,000
Social Security Tax Payable 82,800
Medicare Tax Payable 20,700
Employees Federal Income Tax Payable 276,000
Salaries Payable 1,000,500
*5.4% × $245,000
** 0.6% × $245,000
CHAPTER 11 Current Liabilities and Payroll
Ex. 11-14
*6.0% × $320,000
** 1.5% × $320,000
b. Payroll Tax Expense 26,400
Social Security Tax Payable 19,200
Medicare Tax Payable 4,800
State Unemployment Tax Payable* 2,160
Federal Unemployment Tax Payable** 240
Ex. 11-15
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 authorizes the total amount of the week’s payroll. The
owner should catch the error, since the extra 60 hours will cause the weekly payroll to
be substantially higher than usual. The owner should sign the paychecks, thereby
restricting access to cash by employees who are responsible for record keeping.
Ex. 11-16
a. Appropriate. All changes to the payroll system, including wage rate increases,
should be authorized by someone outside the Payroll Department.
b. Inappropriate. Each employee should record his or her own time out for lunch.
Under the current procedures, one employee could clock in several employees
who are still out to lunch. The company would be paying employees for more time
CHAPTER 11 Current Liabilities and Payroll
Ex. 11-17
a. Vacation Pay Expense 11,500
Vacation Pay Payable 11,500
Vacation pay accrued for January ($138,000 ÷ 12 ).
Ex. 11-18
a. Dec. 31 Pension Expense 365,000
Unfunded Pension Liability 365,000
To record quarterly pension cost.
b. In a defined contribution plan, the company invests contributions on behalf of the
employee during the employee’s working years. Normally, the employee and
employer contribute to the plan. The employee’s pension depends on the total
contributions and the investment return on those contributions. In a defined benefit
plan, the company pays the employee a fixed annual amount based on a formula.
The employer is obligated to pay for (fund) the employee’s future pension benefits.
Ex. 11-19
The $4,391 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.
CHAPTER 11 Current Liabilities and Payroll
Ex. 11-20
a. Product Warranty Expense 9,950
Product Warranty Payable 9,950
To record warranty expense for January
(2.5% × $398,000).
Ex. 11-21
a. The warranty liability represents estimated outstanding automobile warranty
claims. Of these claims, $2,994 million is estimated to be due during Year 2, while
the remainder ($5,338 million) is expected to be paid after Year 2. The distinction
between short- and long-term liabilities is important to creditors in order to
accurately evaluate the near-term cash demands on the business relative to the
quick current assets and other longer-term demands.
b. Product Warranty Expense
Product Warranty Payable
2,258,000,000
2,258,000,000
CHAPTER 11 Current Liabilities and Payroll
Ex. 11-22
a. Damage Awards and Fines 365,000
EPA Fines Payable 240,000
Litigation Claims Payable 125,000
Note to Instructors: The “damage awards and fines” would be disclosed on the
income statement under “Other expenses.”
Ex. 11-23
Quick Assets
Current Liabilities
$500,000 + $200,000
$500,000
$486,000 + $210,000
$580,000
b. The quick ratio decreased between the two balance sheet dates. The major reason
is a significant increase in inventory that likely drove the increase in accounts
Current year: = 1.2
Previous year:
a. Quick Ratio =
= 1.4
CHAPTER 11 Current Liabilities and Payroll
Ex. 11-24
Quick Assets
Current Liabilities
b. It is clear that Apple Inc.’s short-term liquidity is stronger than HP’s. Apple’s quick
ratio is 150% [(1.0 – 0.4) ÷ 0.4] higher. Apple has a much stronger relative
short-term investment position than does HP. Apple’s cash, accounts receivable,
and short-term investments are 88% of total current assets (and almost 100% of
a. Quick Ratio =
CHAPTER 11 Current Liabilities and Payroll
Prob. 11-1A
1. Jan. 10 Merchandise Inventory 420,000
Accounts Payable—Beckham Co. 420,000
Feb. 9 Accounts Payable—Beckham Co. 420,000
Notes Payable 420,000
June 1 Tools 309,400
Interest Expense ($312,000 × 5% × 60 ÷ 360) 2,600
Notes Payable 312,000
July 30 Notes Payable 240,000
Interest Expense ($240,000 × 7% × 45 ÷ 360) 2,100
Cash 242,100
30 Notes Payable 312,000
Cash 312,000
Dec. 1 Office Equipment 700,500
Notes Payable 540,000
Cash 160,500
PROBLEMS
CHAPTER 11 Current Liabilities and Payroll
Prob. 11-1A (Concluded)
2. a. Product Warranty Expense 19,500
Product Warranty Payable 19,500
CHAPTER 11 Current Liabilities and Payroll
Prob. 11-2A
1. a. Dec. 30 Sales Salaries Expense 402,000
Warehouse Salaries Expense 210,000
Office Salaries Expense 165,000
Employees Federal Income Tax Payable 135,975
1
$777,000 × 6%
2
$777,000 × 1.5%
b. Dec. 30 Payroll Tax Expense 60,675
Social Security Tax Payable 46,620
Medicare Tax Payable 11,655
State Unem
p
lo
y
ment Tax Pa
y
able32,160
Federal Unem
p
lo
y
ment Tax Pa
y
able4240
3
$40,000 × 5.4%
4
$40,000 × 0.6%
2. a. Dec. 30 Sales Salaries Expense 402,000
Warehouse Salaries Expense 210,000
Office Salaries Expense 165,000
Employees Federal Income Tax Payable 135,975
1
$777,000 × 6%
2
$777,000 × 1.5%
b. Jan. 5 Payroll Tax Expense 104,895
Social Security Tax Payable 46,620
3
$777,000 × 5.4%
4
$777,000 × 0.6%
y