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Chapter 10:
Liabilities
Presented by PERSON for COMPANY
Current Liabilities
Current Liabilities
A/P & Accruals
Purchases on Account
Examples
Accruals
End of period, adjustment process
A/P & Accruals
Short-Term notes Payable
Short-Term Notes payable
- Similar to Notes Receivable
- Notes issued:
- purchase merchandise
- satisfy A/P created earlier (A/P in exchange for Notes payable)
- Borrow from bank
- Interest-bearing note
- Discount note
Each note transaction affects a debtor (borrower) and creditor (lender)
Borrower & Creditor
Assume that Nature’s Sunshine Company issued a 90-day, 12% note for $1,000, dated August 1, to Murray Co. for a $1,000 overdue account
1. Purchase Merchandise
2. A/P exchange N/P
Notes Payable to Bank
Assume that on September 19, Iceburg Company borrowed cash from First National Bank by issuing a $4,000, 90-day, 15% note to the bank
N/P Bank
Breakout Session
Breakout Session
- current portions of long-term debt reported on the balance sheet as a current liability
- installment notes
Current portion of LT-Debt
Payroll
- Amount paid to employees
- Important to companies
- Why?
- Salary vs. Wages
- Services
- Time
- Increases
- Fair Labor Standards Act
- OT & DT
- California
- Exemptions
Payroll Liabilities
Employee Earnings Deductions
Gross pay
Deductions
- federal, state, local taxes, medical insurance, pensions, life insurance, charitable contributions
Net pay (take home pay)
Income Taxes
- Employer withhold portion employees earnings for pymt of employees Federal Income Tax
- W-4
Income Tax
FICA Tax
FICA Taxes
- Employer required by FICA to withhold:
- Social security
- Medicare
- Rates & Max earnings subject revised by Congress
- Social security: 6%
- Medicare: 1.5%
FICA Tax Example
Assume that John T. McGrath’s earnings for the week ending December 27 are $1,462. Total FICA tax to be withheld?
Example
Employer's Payroll Taxes
Employer's Payroll Taxes
Employers subject to payroll taxes:
- FICA
- must match employee's contribution
- FUTA
- SUTA
The following data for McDermott Supply for its payroll period ending March 21 is used
Recording Payroll
Payroll
Payroll taxes
Journal Entry
Installment Notes
- Equal periodic payments to lender
- Examples
- Payment
- Rights of lender for failure to pay
Installment Notes
Installment note issued
For example, assume that on January 1 of Year 1 Lewis Company issues the following installment note to City National Bank:
Example part 1
Principal amount of note.... $24,000
Interest rate........................... 6%
Term of note.......................... 5 years
Annual payments ..................$5,698
Year 1 @ issuance
dr Cash $24,000
cr Notes Payble $24,000
Example part 2
Fringe Benefits
Employees' Fringe Benefits
- What are fringe benefits & do they matter?
- https://www.youtube.com/watch?v=wtl8uKof4E0
- How are they recorded?
- expense by employer
Vacation
- Accrue liability end of every period or complete an adjusting entry end of year
Vacation
For example, assume that employees earn one day of vacation for each month worked. The estimated vacation pay for the year ending December 31 is $325,000
- current liability vs. LT- liability
- Entry to record with vacation is utilized
- dr vacation pay payable
- cr salary/wages payable
Pensions
- What is a pension?
- How do they work?
- 2 types
- defined contribution
- 40lK plan
- dr pension expense
- cr cash
- defined benefits plans
- archaic
- costly
- Other benefits (Post retirement benefits)
Contingent Liabilities
Contingecies
- May arise from past transactions only if certain events occur in the future
- potential obligations
- Accounting for contingent liabilities:
- 2 factors
- likelihood of occurring
- probable, reasonably possible, or remote
- measurement
- estimable or not estimable
- Probable, estimable=record &disclose
- dr expense
- cr liability
For example, assume that during June a company sold a product for $60,000 that includes a 36-month warranty for repairs. The average cost of repairs over the warranty period is 5% of the sales price
June 30 Entry:
dr Product Warranty Expense
cr Product Warranty payable