John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
11–1
CHAPTER 9
REPORTING AND ANALYZING CURRENT LIABILITIES
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Describe current and long-term
liabilities and their
characteristics.
1, 14, 15
9-1, 9-14
9-1
9-5
C2. Identify and describe known
current liabilities.
3, 4, 16, 17
9-2, 9-3,
9-14
9-2
SP 9
9-6
C3. Explain how to account for
contingent liabilities.
11
9-10
9-13
9-4
Analytical objectives:
A1. Compute the times interest
earned ratio and use it to
analyze liabilities.
9-11
9-14
9-5
9-1, 9-2,
9-5, 9-7,
9-9
Procedural objectives:
P1. Prepare entries to account for
short-term notes payable.
14
9-4
9-3, 9-4
9-1, GL9-1
9-6
P2. Compute and record employee
payroll deductions and
liabilities.
5, 6, 8, 12,
13
9-5
9-5, 9-6,
9-8, 9-9
9-2, 9-3,
9-6, SP 9
9-8
P3. Compute and record employer
payroll expenses and liabilities.
5, 7, 9
9-6
9-5, 9-7,
9-2, 9-3,
liabilities, including warranties
and bonuses
9-9, 9-13
9-12, 9-15,
9-18
of payroll reports, records, and
procedures (Appendix 9A)
4, 5, 6, 11,
12
9-12
9-16, 9-17
9-6
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
11–2
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 Serial Problem for Success Systems continues in this chapter.
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
Synopsis of Chapter Revisions
• NEW opener—Noodles & Co.
• Updated data in Exhibit 9.2.
• Clarified bonus explanation and computations.
• Updated payroll rates to 2015.
• New explanation of Additional Medicare Tax.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
11–3
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:
3. Future payment of assets or services.
B. Classifying Liabilities
2. Long-term liabilities—Obligations not expected to be paid
within the longer of one year or operating cycle.
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
C. Uncertainties in Liabilities—requires addressing three important
questions that are sometime uncertain at the time liability is
incurred:
1. Whom to pay? (Ex. A note “Payable to Bearer”)
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:
Amounts received in advance from customers for future products
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
John J. Wild, Financial Accounting: Information for Decisions, 8th 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. Creditor requires the substitution of an interest-bearing note
2. Note given to borrow money from bank.
Ex. 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.
E. Payroll Liabilities
1. Gross pay—total compensation an employee earns. (Includes
2. Net pay—gross less all deductions; also called take-home pay
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
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
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Chapter Outline
Notes
c. Voluntary deductions (charitable contributions, health
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).
accounts for the individual taxes.
a. FICA taxes—employers must pay and amount equal to
employee contribution. The taxes are credited to the same
FICA taxes payable account used to record the amounts
withheld from the employees.
b. Unemployment taxes—(state and federal) current tax rate
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:
vacation time. Appropriate proportion accrued at time of each
payroll.
A. Health and Pension Benefits—benefits beyond salaries and wages
provided by business. Appropriate proportion accrued at time of
each payroll.
John J. Wild, Financial Accounting: Information for Decisions, 8th 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
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:
3. Remote (unlikely)—omit (do not record or footnote).
1. Probable (likely)—record if amount can be reasonably
B. Reasonably Possible Contingent Liabilities (category 2 above).
Examples:
2. Debt guarantees (of a debt owed by another company)—
tax assessments, insurance losses, and government
liabilities because they are future events not arising from past
1. Potential legal claims—recorded in the accounts only if
payment for damages is probable and the amount can be
V. Global View—Compares U.S. GAAP to IFRS
A. Characteristics of liabilities—both systems are broadly similar in
their definitions and characteristics of current liabilities.
B. Known (determinable) liabilities—Both systems are similar for
John J. Wild, Financial Accounting: Information for Decisions, 8th 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 9A—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)
VIII. Payroll Records
A. Payroll Register
A record for a pay period that shows the pay period dates and the
B. Payroll Check
Generally accompanied with a detachable statement of earnings
showing gross pay, deductions, and net pay.
John J. Wild, Financial Accounting: Information for Decisions, 8th 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
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
account or an electronic funds transfer for this amount is
Appendix 9B—Corporate Income Taxes
X. Income Tax Liabilities
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.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
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Alternate Demonstration Problem
Chapter 9
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.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
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Solution: Alternate Demonstration Problem
Chapter 9
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