Financial and Managerial Accounting, 8e
9-1
CHAPTER 9
ACCOUNTING FOR CURRENT LIABILITIES
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
AA and BTN
C3. Explain how to account for
contingent liabilities.
10
9-11
9-14
BTN 9-2
C1. Describe current and long-term
liabilities and their
1, 13, 14
9-1, 9-14
9-1, 9-15
BTN 9-3
A1. Compute the times interest
earned ratio and use it to
analyze liabilities.
9-12
9-16
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
9-4
9-3, 9-4,
9-19
9-1,
GL9-1
BTN 9-4
9-15
P3. Compute and record employer
payroll expenses and liabilities.
4, 6, 8
9-6
9-5, 9-7,
9-8, 9-9,
9-15
9-2, 9-3,
9-6, SP
P4. Account for estimated
liabilities, including warranties
2, 9, 10
9-9, 9-10
9-10, 9-11,
9-12, 9-13,
9-4
AA 9-1, BTN 9-1
of payroll reports, records, and
procedures (Appendix 9A).
4, 5, 6, 11,
12
9-13,
9-18, 9-19
9-6
*See additional information on next page that pertains to these quick studies, exercises, and problems.
SP refers to the Serial Problem
Known Liabilities – Sales Taxes Payable
1:03
Known Liabilities – Unearned Revenues
C3
Explain how to account for contingent liabilities.
1:35
Accounting for Contingent Liabilities
1:11
Compute the times interest earned ratio and use it to analyze liabilities.
0:52
Times Interest Earned Ratio
2:11
Times Interest Earned Ratio – Illustration
Prepare entries to account for short-term notes payable.
1:52
Short-Term Notes Payable – Extension of Credit
1:04
Short-Term Notes Payable – Borrow from Bank
1:54
Short-Term Notes Payable – Note Extends Over Two Periods
Compute and record employee payroll deductions and liabilities.
2:57
Employee Payroll and Deductions
1:18
Financial and Managerial Accounting, 8e
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
Need–to-Know
Title
Time
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
Concept Overview Videos, (COV’s)
LO
Title
Time
C1
Describe current and long-term liabilities and their characteristics.
1:18
Defining and Classifying Liabilities
2:06
Uncertainty in Liabilities
C2
Identify and describe known current liabilities.
1:30
Financial and Managerial Accounting, 8e
9-3
Employee and Payroll Deductions – Illustration
1:55
P3
Compute and record employer payroll expenses and liabilities.
Employer Payroll Expenses and Liabilities
1:14
Employer Payroll Expenses and Liabilities – Illustration
1:16
Health and Pension Benefits
1:14
Vacation Benefits
1:09
Bonus Plans
0:24
Warranty Liabilities
1:58
P5
Identify and describe the details of payroll reports, records, and procedures
(Appendix 9A).
Payroll Reports – Form 941
1:08
Payroll Reports – Form 940
0:48
Payroll Reports – Form W-2
0:45
Payroll Records: Register
1:30
Payroll Records: Payroll Check
0:12
Payroll Records: Employee Earnings Report
0:27
Payroll Records: Form W-4
1:31
Synopsis of Chapter Revisions
NEW opener—Pandora and entrepreneurial assignment.
Updated data in Exhibit 9.2.
Streamlined “Short–Term Notes Payable.”
Financial and Managerial Accounting, 8e
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. Uncertainties 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
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
3. When note extends over two periods—
Financial and Managerial Accounting, 8e
9-5
(Dr Interest Expense and Cr Interest Payable) if accrued interest is being recorded at end-of-
period adjustment.
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).
for pay in excess of $200,000 – this additional tax is not imposed on the employer.
marital status and number of withholding allowances the employee claims.
• Gross pay—total compensation an employee earns, including wages, salaries, commissions,
and bonuses. Gross pay amount is recorded as Salaries Expense (Dr).
3. Employee 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.
B. Employer Payroll Taxes—payroll taxes in addition to those required of employees. These taxes
result in expenses (Dr) and current liabilities (Cr).
4. Payroll payment
1. Employer FICA tax—employers must pay an amount equal to employee contribution. The
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.
III. Estimated Liabilities—Known obligations of uncertain amounts that can be reasonably estimated.
Recorded as expenses (Dr) and payables (Cr). Examples include:
A. Health and Pension Benefits—benefits provided by a business, including benefits such as medical,
Financial and Managerial Accounting, 8e
in the period when employees earn them. Appropriate proportion accrued at time of each payroll.
E. Multi-Period Estimated Liabilities—can be current or long-term and must be classified based
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:
2. Debt guarantees (of a debt owed by another company)—require disclosure in financial
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 probable
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
is growing, but can create risk because the company might be unable to pay fixed expenses if sales
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)
Financial and Managerial Accounting, 8e
9-7
B. Payroll Records—employers are required to keep payroll records in addition to reporting and
paying taxes.
1. Payroll Register
2. Payroll Check
3. Employee Earnings Report
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
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, 8e
9-8
Chapter 9 Alternate Demonstration Problem
On November l, 2019, 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, 8e
Chapter 9 Solution: Alternate Demonstration Problem
Issuance:
11/1/19
Cash …………………………………………
200,000
Notes Payable ……………………..
200,000
12/31/19
($200,000 × 9% × 60/360 = $ 3,000 accrued interest)
Maturity date:
204,500