Financial and Managerial Accounting, 9th Edition
9-1
CHAPTER 9
ACCOUNTING FOR CURRENT LIABILITIES
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
AA, BTN, DA
characteristics.
current liabilities.
C3. Explain how to account for
contingent liabilities.
10
9-15
9-17
BTN 9-2
C1. Describe current and long-term
liabilities and their
1
9-1, 9-2,
9-16
9-1, 9-18
BTN 9-3
A1. Compute the times interest
earned ratio and use it to
analyze liabilities.
9-17
9-19
9-5
AA 9-1, AA 9-2,
AA 9-3, BTN 9-3,
BTN 9-5
P1. Prepare entries to account for
short-term notes payable.
13
9-5
9-4, 9-5,
9-1,
GL9-1
BTN 9-4
liabilities.
9-16
9-15, 9-18
P3. Compute and record employer
payroll expenses and liabilities.
4, 6, 8
9-9, 9-10,
9-14, 9-16
9-7, 9-9,
9-2, 9-3,
SP
9-15, 9-18
P4. Account for estimated
liabilities, including warranties
and bonuses.
2, 9, 10
9-11, 9-12,
9-13, 9-14
9-12, 9-13,
9-14, 9-15,
9-16, 9-22
9-4
DA 9-1, DA 9-2,
DA 9-3, AA 9-1,
BTN 9-1
of payroll reports, records, and
procedures (Appendix 9A).
4, 5, 6, 11,
12
9-6
P6 BAccount for corporate income
taxes (Appendix 9B).
9-20
*See additional information on next page that pertains to these quick studies, exercises, and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
Known Liabilities – Sales Taxes Payable
1:30
Known Liabilities – Unearned Revenues
1:03
Accounting for Contingent Liabilities – Lawsuits and Debt Guarantees
1:11
Financial and Managerial Accounting, 9th Edition
9-2
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in
Connect.
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints without
Need-to-Know Videos
LO
Need–to-Know
Title
Time
P1, C2
9-1
Accounting for Known Liabilities
4:02
9-2
Payroll Liabilities
2:57
9-3
Estimated Liabilities
3:18
9-4
Contingent Liabilities
1:10
COMPREHENSIVE
9-5
Income Taxes
Req. A
1:46
Req. B
2:32
Req. C
1:10
Req. D
2:15
Req. E
1:18
Req. F
1:00
Accounting for Current Liabilities Including
Warranties, Notes, Contingencies, Payroll, and
Concept Overview Videos
LO
Title
Time
C1
Describe current and long-term liabilities and their characteristics.
1:13
Defining and Classifying Liabilities
2:06
Uncertainty in Liabilities
Financial and Managerial Accounting, 9th Edition
9-3
Times Interest Earned Ratio
0:42
Times Interest Earned Ratio – Illustration
2:05
P1
Prepare entries to account for short-term notes payable.
Short-Term Notes Payable – Extension of Credit
1:52
Short-Term Notes Payable – Borrow from Bank
1:04
Short-Term Notes Payable – Note Extends Over Two Periods
1:51
P2
Compute and record employee payroll deductions and liabilities.
Employee Payroll and Deductions
2:57
Employee and Payroll Deductions – Illustration
1:55
Employer Payroll Expenses and Liabilities
1:14
Employer Payroll Expenses and Liabilities – Illustration
1:16
P4
Account for estimated liabilities, including warranties and bonuses.
Health and Pension Benefits
1:14
Vacation Benefits
0:57
Bonus Plans
0:24
Warranty Liabilities
2:06
P5
Identify and describe the details of payroll reports, records, and procedures
(Appendix 9A).
Payroll Reports – Form 941
1:11
Payroll Reports – Form 940
0:48
Payroll Reports – Form W-2
0:45
Payroll Records: Register
1:34
Payroll Records: Payroll Check
0:12
Payroll Records: Employee Earnings Report
0:27
Payroll Records: Form W-4
1:31
P6
Account for corporate income taxes (Appendix 9B).
Corporate Income Taxes
1:13
Deferred Income Tax Liabilities
1:43
Synopsis of Chapter Revisions
NEW opener— Zumba and entrepreneurial assignment.
Updated payroll tax rates and explanations.
New employee and employer payroll taxes summary table.
Financial and Managerial Accounting, 9th Edition
9-4
Chapter Outline
I. Known Liabilities—Set by agreements, contracts, or laws and are
measurable (also called definitely determinable liabilities).
A. Characteristics of Liabilities
1. Defining Liabilities
Probable future payments of assets or services that a company is presently obligated to make
2. Classifying Liabilities
b. Long-term liabilities—Liabilities due after one year (or the company’s operating cycle if
a. Current liabilities (short-term liabilities)—Liabilities due within one year (or the
3. Uncertainty in Liabilities—requires answering three important questions that are sometime
uncertain at the time liability is incurred:
a. Whom to pay? (Ex. A note “Payable to Bearer”)
Examples of known liabilities in the current classification include:
When earned: (Dr Unearned Revenue, Cr Revenue).
B. Accounts Payable
Amounts owed to suppliers (also called vendors) for products or services purchased with credit.
C. Sales Taxes Payable
E. Short-Term Notes Payable
Written promise to pay a specified amount on a definite future date within one year. Can arise
from many transactions; two common examples:
account payable that does not bear interest.
1. Note Given to Extend Credit Period—creditor requires an interest-bearing note for an overdue
as end-of -period accrued interest adjustment.
2. Note Given to Borrow 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
Financial and Managerial Accounting, 9th Edition
9-5
II. Payroll Liabilities—arise from salaries and wages, employee benefits, and payroll taxes levied on the
employer.
A. Employee Payroll and Deductions—amounts withheld from an employee’s gross pay, either
involuntary or voluntary; also called withholdings. Each is recorded as a separate liability (Cr).
2. Employee Income Tax is determined from chart based on their gross pay, pay period, marital
• Gross pay—total compensation an employee earns, including wages, salaries, commissions,
and bonuses. Gross pay amount is recorded as Salaries Expense (Dr).
• Net pay—gross pay minus all deductions; also called take-home pay. Net pay is recorded as
Salaries Payable (Cr).
1. Employee FICA Taxes—FICA (Federal Insurance Contributions Act) taxes can be separated
into two groups: Social Security and Medicare taxes. FICA tax is computed as current rate
4. Employee Payroll Recording
B. Employer Payroll Taxes—payroll taxes in addition to those required of employees. These taxes
result in expenses (Dr) and current liabilities (Cr).
1. Employer FICA Tax—employers must pay an amount equal to employee contribution.
The taxes are credited to the same FICA taxes payable account used to record the amounts
C. Internal Control of Payroll—Four key areas of payroll activities that should be separate and
monitored include:
1. Employee hiring
D. Multi-Period Known Liabilities—known liabilities that extend over many periods; for example,
Unearned Revenues and Notes Payable. Classification is based upon the period in which they will
be satisfied.
1. Current liability—portion that will be due in the next year.
Financial and Managerial Accounting, 9th Edition
9-6
III. Estimated Liabilities—Known obligations of uncertain amounts that can be reasonably estimated.
Recorded as expenses (Dr) and payables (Cr). Examples include:
in the period when employees earn them. Appropriate proportion accrued at time of each payroll.
A. Health and Pension Benefits—benefits provided by a business, including benefits such as medical,
dental, life. and disability insurance. Appropriate proportion accrued at time of each payroll.
IV. Contingent Liabilities—a 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:
B. Applying Rules of Contingent Liabilities
Examples:
3. Other Contingencies (e.g., environmental damages, possible
investigations)—usually disclosed in as a contingent liability.
1. Potential Legal Claims—recorded in the accounts only if payment for damages is probable
and the amount can be reasonably estimated. If can’t be reasonably estimated or less than
C. Uncertainties That Are Not Contingencies—include natural disasters and new technologies. These
are not contingent liabilities because they are future events not arising from past transactions.
V. Decision Analysis—Times Interest Earned Ratio
A. Interest expense is often viewed as a fixed expense, which can be advantageous when a company
VI. Payroll Reports, Records, and Procedures (Appendix 9A)
A. Payroll Reports—employers are required to prepare and submit the following reports:
1. 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.
Financial and Managerial Accounting, 9th Edition
9-7
B. Payroll Records—employers are required to keep payroll records in addition to reporting and
paying taxes.
1. 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
C. Payroll Procedures
1. Computing Federal Income Taxes
Computed using a wage bracket withholding table based on gross pay, number of personal
2. Payroll Bank Account
A separate payroll bank account used in a company with many employees.
a. One check for total payroll is drawn on the regular bank account or an electronic funds
3. Who Pays What Payroll Taxes and Benefits
VII. Corporate Income Taxes (Appendix 9B)
A. Income Tax Liabilities
1. 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.
Financial and Managerial Accounting, 9th Edition
9-8
Financial and Managerial Accounting, 9th Edition
9-9
Chapter 9 Alternate Demonstration Problem
On November 1, 2021, 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. Prepare
Financial and Managerial Accounting, 9th Edition
9-10
Chapter 9 Solution: Alternate Demonstration Problem
Issuance:
11/1/21
Cash ………………………………………..
200,000
Notes Payable …………………….
200,000
12/31/21
($200,000 × 9% × 60/360 = $ 3,000 accrued interest)
204,500