Chapter 11
Current Liabilities and Payroll
Review Questions
1. What are the three main characteristics of liabilities?
The three main characteristics of liabilities are:
2. What is a current liability? Provide some examples of current liabilities.
Current liabilities must be paid with cash or with goods and services within one year or within the
3. How is sales tax recorded? Is it considered an expense of a business? Why or why not?
Sales tax is recorded as a liability when it is charged to the customer; it is usually calculated as a
4. How do unearned revenues arise?
Unearned revenue arises when a business has received cash in advance of providing goods or
5. What do short-term notes payable represent?
6. Coltrane Company has a $5,000 note payable that is paid in $1,000 installments over five years.
How would the portion that must be paid within the next year be reported on the balance sheet?
The principal amount that will be paid within one year will be reported in the current liabilities as
current portion of notes payable.
7. What is the difference between gross pay and net pay?
Gross pay is the total amount of salary, wages, commissions, and bonuses earned by the employee
8. List the required employee payroll withholding deductions, and provide the tax rate for each.
Required payroll withholding deductions are:
Withholding Deductions
Tax Rate
Federal, State and Local Income Tax
The amount withheld depends on the
employee’s gross pay and the
number of withholding allowances
9. How might a business use a payroll register?
Many companies use a payroll register to help summarize the earnings, withholdings, and net pay for
each employee.
10. What payroll taxes is the employer responsible for paying?
11. What are the two main controls for payroll? Provide an example of each.
There are two main controls for payroll: controls for efficiency and controls to safeguard payroll
disbursements.
12. When do businesses record warranty expense, and why?
13. What is a contingent liability? Provide some examples of contingencies.
14. Curtis Company is facing a potential lawsuit. Curtis’s lawyers think that it is reason- ably possible
that it will lose the lawsuit. How should Curtis report this lawsuit?
Contingencies that are reasonably possible have more chance of occurring but are not likely. A
reasonably possible contingency should be described in the notes to the financial statements.
15. How is the times-interest-earned ratio calculated, and what does it evaluate?
The times-interest-earned ratio is calculated as earnings before interest and taxes or EBIT (Net
Short Exercises
For all payroll calculations, use the following tax rates and round amounts to the nearest cent.
Employee: OASDI: 6.2% on first $117,000 earned; Medicare: 1.45% up to $200,000, 2.35% on
earnings above $200,000.
Employer: OASDI: 6.2% on first $117,000 earned; Medicare: 1.45%; FUTA: 0.6% on first
$7,000 earned; SUTA: 5.4% on first $7,000 earned.
S11-1 Determining current versus long-term liabilities
Learning Objective 1
Rios Raft Company had the following liabilities.
a. Accounts Payable
b. Note Payable due in 3 years
c. Salaries Payable
d. Note Payable due in 6 months
e. Sales Tax Payable
f. Unearned Revenue due in 8 months
g. Income Tax Payable
Determine whether each liability would be considered a current liability (CL) or a long-term liability
(LTL).
SOLUTION
a.
current liability (CL)
long-term liability (LTL)
c.
current liability (CL)
current liability (CL)
e.
current liability (CL)
current liability (CL)
current liability (CL)
S11-2 Recording sales tax
Learning Objective 1
On July 5, Feather Company recorded sales of merchandise inventory on account, $20,000. The sales
were subject to sales tax of 9%. On August 15, Feather Company paid $1,200 of sales tax to the state.
Requirements
1. Journalize the transaction to record the sale on July 5. Ignore cost of goods sold.
2. Journalize the transaction to record the payment of sales tax to the state.
SOLUTION
Requirement 1
Date
Debit
Credit
July 5
21,800
Debit
Credit
S11-3 Recording unearned revenue
Learning Objective 1
On June 1, Guitar Magazine collected cash of $51,000 on future annual subscriptions starting on July 1.
Requirements
1. Journalize the transaction to record the collection of cash on June 1.
2. Journalize the transaction required at December 31, the magazine’s year-end, assuming no revenue
earned has been recorded. (Round adjustment to the nearest whole dollar.)
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
June 1
Cash
51,000
Date
Debit
Credit
Dec. 31
Unearned Revenue
25,500
S11-4 Accounting for a note payable
Learning Objective 1
On December 31, 2015, Franklin purchased $7,000 of merchandise inventory on a one-year, 11% note
payable. Franklin uses a perpetual inventory system.
Requirements
1. Journalize the company’s purchase of merchandise inventory on December 31, 2015.
2. Journalize the company’s accrual of interest expense on June 30, 2016, its fiscal year-end.
3. Journalize the company’s payment of the note plus interest on December 31, 2016.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2015
Dec. 31
Merchandise Inventory
7,000
Date
Debit
Credit
Jun. 30
Interest Expense ($7,000 × 0.11 × 6/12)
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2016
Dec. 31
Notes Payable
7,000
Interest Expense ($7,000 × 0.11 × 6/12)
Interest Payable
S11-5 Determining current portion of long-term note payable
Learning Objective 1
On January 1, Garland Company purchased equipment of $120,000 with a long-term note payable. The
debt is payable in annual installments of $24,000 due on December 31 of each year. At the date of
purchase, how will Garland Company report the note payable?
SOLUTION
S11-6 Computing and journalizing an employee’s total pay
Learning Objective 2
Jenna Lindsay works at College of Boston and is paid $40 per hour for a 40-hour workweek and time-
and-a-half for hours above 40.
Requirements
1. Compute Lindsay’s gross pay for working 54 hours during the first week of February.
2. Lindsay is single, and her income tax withholding is 10% of total pay. Lindsay’s only payroll
deductions are payroll taxes. Compute Lindsay’s net (take-home) pay for the week. Assume
Lindsay’s earnings to date are less than the OASDI limit.
3. Journalize the accrual of salaries and wages expense and the payments related to the employment of
Jenna Lindsay.
SOLUTION
Requirement 1
Straight-time pay for 40 hours ($40 × 40 hours)
$ 1,600
Overtime pay for 14 hours: 14 × $40 × 1.5
Gross Pay
$ 2,440
Gross pay
Withholding deductions:
Employee income tax (10%)
Employee OASDI tax (6.2%)
Employee Medicare tax (1.45%)
Total withholdings
Net (take-home) pay
S11-6, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
Wages Expense
2,440.00
Employee Income Taxes Payable
244.00
151.28
Wages Payable
2,009.34
S11-7 Computing payroll amounts considering FICA tax ceilings
Learning Objective 2
Lori Waverly works for MRK all year and earns a monthly salary of $11,700. There is no overtime pay.
Lori’s income tax withholding rate is 20% of gross pay. In addition to payroll taxes, Lori elects to
contribute 4% monthly to United Way. MRK also deducts $125 monthly for co-payment of the health
insurance premium. As of September 30, Lori had $114,900 of cumulative earnings.
Requirements
1. Compute Lori’s net pay for October.
2. Journalize the accrual of salaries expense and the payments related to the employment of Lori
Waverly.
SOLUTION
Requirement 1
Gross pay
$ 12,000.00
Withholding deductions:
Employee income tax (20%)
Employee OASDI tax (6.2%)*
Employee Medicare tax (1.45%)
Employee health insurance
Employee contribution to United Way (4%)
Total withholdings
Net (take-home) pay
*Calculation of tax for OASDI
Employee earnings subject to tax
Employee earnings prior to the current month
Current pay subject to tax
Tax rate
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Oct. 31
Salaries Expense
12,000.00
Employee Income Taxes Payable
2,400.00
8,263.00
8,263.00
S11-8 Computing and journalizing the payroll expense of an employer
Learning Objective 2
Orchard Company has monthly salaries of $10,000. Assume Orchard pays all the standard payroll taxes
and no employees have reached the payroll tax limits. Journalize the accrual and payment of employer
payroll taxes for Orchard Company.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Payroll Tax Expense
1,365
FICA—OASDI Taxes Payable
(6.2% × $10,000)
620
(0.6% × $10,000)
540
Federal Unemployment Taxes Payable
State Unemployment Taxes Payable
Payment of payroll taxes
S11-9 Computing bonus payable
Learning Objective 3
On December 31, Peterson Company estimates that it will pay its employees a 3% bonus on $62,000 of
net income after deducting the bonus. The bonus will be paid on January 15 of the next year.
Requirements
1. Journalize the December 31 transaction for Peterson.
2. Journalize the payment of the bonus on January 15.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Employee Bonus Expense
1,805.83
Employee Bonus Payable
S11-9, cont.
Requirement 2
S11-10 Journalizing vacation benefits
Learning Objective 3
Roy Industries has eight employees. Each employee earns two vacation days a month. Roy pays each
employee a weekly salary of $1,000 for a five-day workweek.
Requirements
1. Determine the amount of vacation expense for one month.
2. Journalize the entry to accrue the vacation expense for the month.
SOLUTION
Requirement 1
Employees
8
Weekly salary
$1,000
Total amount to accrue 16 days times $200 per day = $3,200 for one month
Requirement 2
S11-11 Accounting for warranty expense and warranty payable
Learning Objective 3
Hipster Corrector guarantees its snowmobiles for three years. Company experience indicates that
warranty costs will be approximately 3% of sales.
Assume that the Hipster dealer in Colorado Springs made sales totaling $350,000 during 2016. The
company received cash for 20% of the sales and notes receivable for the remainder. Warranty payments
totaled $8,000 during 2016.
Requirements
1. Record the sales, warranty expense, and warranty payments for the company. Ignore cost of goods
sold.
2. Post to the Estimated Warranty Payable T-account. At the end of 2016, how much in Estimated
Warranty Payable does the company owe? Assume the Estimated Warranty Payable is $0 on January
1, 2016.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2016
Cash (20% × $350,000)
70,000
Notes Receivable (80% × $350,000)
280,000
Warranty Expense (3% × $350,000)
10,500
Estimated Warranty Payable
10,500 Accrual
2,500 Bal.
S11-12 Accounting treatment for contingencies
Learning Objective 4
Fernandez Motors, a motorcycle manufacturer, had the following contingencies.
a. Fernandez estimates that it is reasonably possible but not likely that it will lose a current lawsuit.
Fernandez’s attorneys estimate the potential loss will be $3,200,000.
b. Fernandez received notice that it was being sued. Fernandez considers this lawsuit to be frivolous.
c. Fernandez is currently the defendant in a lawsuit. Fernandez believes it is likely that it will lose the
lawsuit and estimates the damages to be paid will be $60,000.
Determine the appropriate accounting treatment for each of the situations Fernandez is facing.
SOLUTION
Situation
Appropriate accounting treatment
S11-13 Computing times-interest-earned ratio
Learning Objective 5
Arnold Electronics reported the following amounts on its 2016 income statement:
What is Arnold’s times-interest-earned ratio for 2016? (Round the answer to two decimals.)
SOLUTION
Times-interest-earned ratio
Exercises
E11-14 Recording sales tax
Learning Objective 1
Sales Tax Payable $8,500
Consider the following transactions of Moore Software:
Journalize the transactions for the company. Ignore cost of goods sold.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Mar. 31
Cash
178,500
Sales Revenue
170,000
Sales Tax Payable ($170,000 × 0.05)
Sales Tax Payable
Cash
E11-15 Recording note payable transactions
Learning Objective 1
May 1, 2016 Interest Expense $120
Consider the following note payable transactions of Concert Video Productions.
Journalize the transactions for the company.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2015
May 1
Equipment
12,000
Notes Payable
12,000
Interest Expense ($12,000 × 0.03 × 8/12)
Interest Payable
2016
May 1
Notes Payable
12,000
Interest Payable
Cash
12,360
E11-16 Recording and reporting current liabilities
Learning Objective 1
Dec. 31 Subscription Revenue $150
Worldly Publishing completed the following transactions during 2016:
Journalize the transactions (explanations are not required).
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2016
Oct. 1
Cash
477
Unearned Revenue
450
Sales Tax Payable ($450 × 6%)
27
sales tax.
Sales Tax Payable
27
Cash
27
payable.
Unearned Revenue
150
Subscription Revenue
150
E11-17 Journalizing current liabilities
Learning Objectives 1, 2
Salaries Expense $3,100
Erik O’Hern Associates reported short-term notes payable and salaries payable as follows:
During 2016, O’Hern paid off both current liabilities that were left over from 2015, borrowed money on
short-term notes payable, and accrued salaries expense. Journalize all four of these transactions for
O’Hern during 2016. Assume no interest on short-term notes payable of $15,200.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2016
Short-Term Notes Payable
15,200
Cash
15,200
Salaries Payable
Cash
Cash
16,800
Short-Term Notes Payable
16,800
Salaries Expense
Salaries Payable
E11-18 Computing and recording gross and net pay
Learning Objective 2
1. Net Pay $362.44
Hubert Sollenberger manages a Dairy House drive-in. His straight-time pay is $8 per hour, with time-
and-a-half for hours in excess of 40 per week. Sollenberger’s payroll deductions include withheld
income tax of 20%, FICA tax, and a weekly deduction of $8 for a charitable contribution to United Way.
Sollenberger worked 56 hours during the week.
Requirements
1. Compute Sollenberger’s gross pay and net pay for the week. Assume earnings to date are $11,000.
2. Journalize Dairy House wages expense accrual for Sollenberger’s work. An explanation is not
required.
3. Journalize the subsequent payment of wages to Sollenberger.
SOLUTION
Requirement 1
Straight-time pay for 40 hours ($8 × 40 hours)
$ 320.00
Overtime pay for 16 hours: (16 × $8 × 1.5)
Gross Pay
$ 512.00
Gross pay
Withholding deductions:
Employee income tax (20%)
Employee OASDI tax (6.2%)
Employee Medicare tax (1.45%)
Employee contribution to United Way
Total withholdings
Net (take-home) pay
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Wages Expense
512.00
Requirement 3
Date
Accounts and Explanation
Debit
Credit
Wages Payable
362.44
E11-19 Recording employer payroll taxes and employee benefits
Learning Objective 2
Payroll Tax Expense $6,135.00
Diego’s Mexican Restaurant incurred salaries expense of $70,000 for 2016. The pay– roll expense
includes employer FICA tax, in addition to state unemployment tax and federal unemployment tax. Of
the total salaries, $13,000 is subject to unemployment tax. Also, the company provides the following
benefits for employees: health insurance (cost to the company, $2,700), life insurance (cost to the
company, $380), and retirement benefits (cost to the company, 10% of salaries expense). Journalize
Diego’s expenses for employee benefits and for payroll taxes. Explanations are not required.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Payroll Tax Expense
6,135
FICA—OASDI Taxes Payable (6.2% × $70,000)
4,340
FICA—Medicare Taxes Payable (1.45% × $70,000)
1,015
Employee Benefits Expense
7,000