Chapter 11

Current Liabilities and PayrollCurrent Liabilities and Payroll

© 2009 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin Slide 2

Measuring Liabilities

A liability must be recorded whenever a transaction or event obligates a company to give up assets or

provide services in the future.

The dollar amount that is reported for a liability depends on three considerations:

1.The initial dollar amount of the liability.2.Additional amounts owed to the creditor.3.Payments or services provided to the creditor.

McGraw-Hill/Irwin Slide 3

Current LiabilitiesCurrent

Liabilities

Short-term obligations that

will be paid within one year.

Short-term obligations that

will be paid within one year.

Long-Term Liabilities

Long-Term Liabilities

Long-term obligations that will be paid after

one year.

Long-term obligations that will be paid after

one year.

Classifying Liabilities

McGraw-Hill/Irwin Slide 4

2007 LiabilitiesCurrent Liabilities

Accounts Payable 778$ Notes Payable 1,254 Current Portion of Long-Term Debt 1,734 Other Current Liabilities 2,079 Total Current Liabilities 5,845 Long-Term Debt 3,218 Other Liabilities 2,663 Total Liabilities 11,726$

General Mills' Liabilities(In Millions)

Classifying Liabilities

McGraw-Hill/Irwin Slide 5

Measures whether the company has enough current assets to pay what it currently owes.Measures whether the company has enough current assets to pay what it currently owes.

Calculating and Interpreting the Current Ratio

CurrentCurrentRatioRatio ==

Current AssetsCurrent AssetsCurrent LiabilitiesCurrent Liabilities

$3.1 billion$5.8 billion

= 0.53

General Mills' Current Ratio

McGraw-Hill/Irwin Slide 6

Accountants record liabilities when the company is obligated to

give up assets or services.

Accountants record liabilities when the company is obligated to

give up assets or services.

Accounts Payable

The advantage of using Accounts Payable to buy goods and services is that suppliers do not charge interest on the unpaid balances,

unless they are overdue.

McGraw-Hill/Irwin Slide 7

Notes Payable

Notes Payable represents the amount the company owes others as a result of

issuing promissory notes.

2010 Interest

10 Months

2009Interest

2 months

11/01/09 12/31/09 10/31/10

Create note. Borrow $100,000.

Adjust records. Accrue 2 months

of interest.

Pay 12 months of interest.

Pay $100,000 principal.

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On November 1, 2009, General Mills would make the following entry.

What entry would General Mills make on December 31, 2009 to accrue the interest on

this note?

Debit CreditCash (+A) 100,000

Notes Payable (+L) 100,000

Accounts

Notes Payable

McGraw-Hill/Irwin Slide 9

Interest = Principal × Rate × TimeInterest = Principal × Rate × Time

Interest = $100,000 × 6% × 2/12Interest = $100,000 × 6% × 2/12

Notes Payable

2010 Interest

10 Months

2009Interest

2 months

11/01/09 12/31/09 10/31/10

Create note. Borrow $100,000.

Adjust records. Accrue 2 months

of interest.

Pay 12 months of interest.

Pay $100,000 principal.

Debit CreditInterest Expense (+E, -OE) 1,000

Interest Payable (+L) 1,000

Accounts

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On October 31, 2010, General Mills must pay the interest and principal on the note.

$6,000 = $100,000 × 6% × 12/12$6,000 = $100,000 × 6% × 12/12

Debit CreditInterest Expense (+E, -OE) 5,000 Interest Payable (-L) 1,000

Cash (-A) 6,000

Notes Payable (-L) 100,000 Cash (-A) 100,000

Accounts

Notes Payable

McGraw-Hill/Irwin Slide 11

Current Portion of Long-Term Debt

2007 LiabilitiesCurrent Liabilities

Accounts Payable 778$ Notes Payable 1,254 Current Portion of Long-Term Debt 1,734 Other Current Liabilities 2,079 Total Current Liabilities 5,845 Long-Term Debt 3,218 Other Liabilities 2,663 Total Liabilities 11,726$

General Mills' Liabilities(In Millions)

When long-term debt has a portion of the principal due within one year, that portion of the loan must be reported

in the current liabilities section of the balance sheet, called Current Portion of Long-Term Debt.

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Retailers collect sales tax from consumers at the time of sale and forward it to the state government.

They report the taxes they collect as a current liability until they forward them to the government.

Sales Tax Payable

Debit CreditCash (+A) 1,050

Sales Tax Payable (+L) 50 Sales Revenue (+R, +OE) 1,000

Accounts

Best Buy sold a television for $1,000 cash plus 5 percent sales tax

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On October 1, IAC, the owner of Ticketmaster and Match.com, received $30 for a three-month subscription for October, November, and

December.Debit Credit

Cash (+A) 30 Unearned Revenue (+L) 30

Accounts

Unearned Revenue

McGraw-Hill/Irwin Slide 14

On October 31, IAC has provided one month of services for the prepaid

subscription. Debit Credit

Unearned Revenue (-L) 10 Subscription Revenue (+R, +OE) 10

Accounts

Unearned Revenue

McGraw-Hill/Irwin Slide 15

Warranties PayableAccording to the matching principle, warranty

costs should be reported as an expense when the sale is recorded. Because these costs are not paid by the company at the time of the sale, a liability is

also recorded.

In the second quarter, Gateway sold 1 million computers. Managers estimated that 10 percent of the computers were expected to require warranty repairs and these repairs would cost, on average, $160 per

computer, for a total warranty estimate of $16 million.

Debit CreditWarranty Expense (+E, -OE) 16,000,000

Warranty Liability (+L) 16,000,000

Accounts

McGraw-Hill/Irwin Slide 16

Gateway used $300 of parts to repair a computer under warranty.

Debit CreditWarranty Liability (-L) 300

Computer Parts (-A) 300

Accounts

Warranties Payable

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Possible Possible Possible Possible

Don’t mention it Don’t mention it Don’t mention it Don’t mention it Remote Remote Remote Remote

Record a liability Record a liability and estimated loss and estimated loss

Record a liability Record a liability and estimated loss and estimated loss

ContingentContingentliabilityliability

ContingentContingentliabilityliability

YesYesYesYes

ProbableProbableProbableProbable

Describe in Describe in financial statement financial statement

notesnotes

Describe in Describe in financial statement financial statement

notesnotes

No No No No

Other Contingent Liabilities

How likely is the liability?

Can the amount be estimated?

How is it accounted for?

McGraw-Hill/Irwin Slide 18

FICA TaxesMedicare

TaxesFederal

Income TaxState and Local Income Taxes

Voluntary Deductions

Gross EarningsGross Earnings

Net PayNet Pay

Payroll Accounting

McGraw-Hill/Irwin Slide 19

FICA Taxes Medicare Taxes

2007: 6.2% of the first $97,500 earned in the

year.

2007: 1.45% of all wages earned in the

year.

Employers owe the FICA and income tax amounts withheld from employees’ gross pay to the IRS.

Employers owe the FICA and income tax amounts withheld from employees’ gross pay to the IRS.

Payroll DeductionsThe simplest method to determine federal income tax

withholding is to look up the amount in tables provided by the Internal Revenue Service.

The simplest method to determine federal income tax withholding is to look up the amount in tables provided

by the Internal Revenue Service.

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Recording the Payroll

Payroll Register - For the Week Ending January 7, 2009

Gross Earnings Payroll Deductions Payment Accounts Debited

Total United Net Check Office Wages

Employee Hours Regular Overtime Gross FIT FICA Way Total Pay No. Salary Exp. Expense

Arent, Jason 40 400.00 - 400.00 59.00 32.00 4.00 95.00 305.00 280 400.00

Caldwell, Nancy 45 400.00 75.00 475.00 37.00 38.00 5.00 80.00 395.00 281 475.00

Lithgow, Nigel 54 400.00 210.00 610.00 58.00 48.80 10.00 116.80 493.20 282 610.00

Zvinakis, Kris 42 560.00 42.00 602.00 47.00 48.16 15.00 110.16 491.84 308 602.00

Total 14,780.00 950.00 15,730.00 1,489.00 1,258.40 260.00 3,007.40 12,722.60 2,359.50 13,370.50

Most companies use a Payroll Register similar to the one shown below the keep detail information about

employee earnings, payroll deductions, payments, and accounting information. We will use the information in the total row to prepare our journal entry for payroll.

McGraw-Hill/Irwin Slide 21

Here is information about the payroll for General Mills:

Debit CreditOffice Salaries Expense (+E, -OE) 2,359.50 Wages Expense (+E, -OE) 13,370.50

Federal Income Tax Payable (+L) 1,489.00 FICA Taxes Payable (+L) 1,258.40 United Way Payable (+L) 260.00 Cash (-A) 12,722.60

Accounts

Office salaries expense 2,359.50$ Wages expense 13,370.50 Less: Income taxes withheld from employees (1,489.00) Less: FICA taxes withheld from employees (1,258.40) Less: United Way deductions (260.00) Net pay to employees 12,722.60$

General Mills' Payroll

Recording the Payroll

McGraw-Hill/Irwin Slide 22

FICA TaxesMedicare

TaxesFederal and

State Unemployment

Taxes

Employers pay amounts equal to the amount withheld from the employees’ gross pay.

Employer Payroll Taxes

McGraw-Hill/Irwin Slide 23

Tax rate of 6.2% on the first $7,000 of wages paid to each

employee. (A credit up to 5.4% is given

for SUTA paid.)

Federal Unemployment Tax

(FUTA)

Basic rate of 5.4% on the first $7,000 of wages paid to each

employee. (Merit ratings may lower

SUTA rates.)

State Unemployment Tax (SUTA)

Unemployment Taxes

McGraw-Hill/Irwin Slide 24

Here is the entry to record the employer payroll taxes for General Mills’ employees’ salaries

recorded earlier.

SUTA: $15,730.054 = $849.42

FUTA: $15,730 (0.062-0.054) = $125.84

FICA amounts are the same as that withheld from the employees’ gross pay.

Debit CreditPayroll Tax Expense (+E, -OE) 2,233.66

FICA Taxes Payable (+L) 1,258.40 State Unemployment Taxes Payable (+L) 849.42 Federal Unemployment Taxes Payable (+L) 125.84

Accounts

Employer Payroll Taxes

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Internal Controls

Establish Responsibilities

Establish Responsibilities

Segregate Duties

Segregate Duties

Restrict Access

Restrict Access

Document ProceduresDocument

Procedures

Independent Verification

Independent Verification

McGraw-Hill/Irwin Slide 26

Supplement 11A : Employee Benefits

Employer expenses for pensions or

medical, dental, life and disability

insurance

Employer expenses for pensions or

medical, dental, life and disability

insurance

Employer expenses for paid vacation by

employees

Employer expenses for paid vacation by

employees

Post-Employment Benefits

Post-Employment Benefits

Paid LeavesPaid Leaves

McGraw-Hill/Irwin Slide 27

Supplement 11A : Employee BenefitsDefined BenefitThe employer

promises to pay specified amounts

(benefits) to employees after they

retire.

Defined BenefitThe employer

promises to pay specified amounts

(benefits) to employees after they

retire.

Defined ContributionThe employer is

responsible only for making specified

contributions to the plan, not for the amounts that are

ultimately paid out as pensions.

Defined ContributionThe employer is

responsible only for making specified

contributions to the plan, not for the amounts that are

ultimately paid out as pensions.

End of Chapter 11

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