C10 - 1
Learning Objectives
Power Notes
1,The Nature of Current Liabilities
2,Short-Term Notes Payable
3,Contingent Liabilities
4,Payroll and Payroll Taxes
5,Accounting Systems for Payroll
6,Employees’ Fringe Benefits
7,Financial Analysis and Interpretation
Chapter F10
Current Liabilities
C10
C10 - 2
Short-Term Notes Payable
Product Warranty Liability
Payroll and Payroll Taxes
Employees’ Earnings
Employer’s Payroll Taxes
Payroll System and Data Flow
Quick Ratio
Slide # Power Note Topics
3
6
7
12
15
19
26
Note,To select a topic,type the slide # and press Enter.
Power NotesChapter F10
Current Liabilities
C10 - 3
Short-Term Notes Payable
Description Debit Credit
Mdse,Inventory 10,000
Accts,Payable 10,000
Accts,Receivable 10,000
Sales 10,000
Cost of Mdse,Sold 7,500
Mdse,Inventory 7,500
Bowden Co,(Buyer/Borrower) Coker Co,(Seller/Creditor)
Description Debit Credit
May 1,Bowden Co,purchased merchandise on
account from Coker Co.,$10,000,terms 2/10,n/30
C10 - 4
Short-Term Notes Payable
Description Debit Credit
Mdse,Inventory 10,000
Accts,Payable 10,000
Accts,Payable 10,000
Notes Payable 10,000
Accts,Receivable 10,000
Sales 10,000
Cost of Mdse,Sold 7,500
Mdse,Inventory 7,500
Notes Receivable 10,000
Accts,Receivable 10,000
Bowden Co,(Buyer/Borrower) Coker Co,(Seller/Creditor)
Description Debit Credit
May 31,Bowden Co,issued a 60-day,12% note
for $10,000 to Coker Co,on account.
C10 - 5
Short-Term Notes Payable
Description Debit Credit
Mdse,Inventory 10,000
Accts,Payable 10,000
Accts,Payable 10,000
Notes Payable 10,000
Notes Payable 10,000
Interest Expense 200
Cash 10,200
Accts,Receivable 10,000
Sales 10,000
Cost of Mdse,Sold 7,500
Mdse,Inventory 7,500
Notes Receivable 10,000
Accts,Receivable 10,000
Cash 10,200
Interest Revenue 200
Notes Receivable 10,000
Bowden Co,(Buyer/Borrower) Coker Co,(Seller/Creditor)
Description Debit Credit
July 30,Bowden Co,paid the amount due,
Interest,$10,000 x 12% x 60 / 360 = $200
C10 - 6
Date Description Debit Credit
Product Warranty Liability
Product Warranty Expense 3,000
Product Warranty Payable 3,000
Estimated warranty,$60,000 x 5% = $3,000
Dec,31
Sales of $60,000 with a 36-month warranty.
Estimated average cost to repair defects is 5%.
To match revenues and expenses properly,warranty
costs should be recognized as expense in the same
period in which related revenues are recorded.
C10 - 7
1,Good employee relations demand that payrolls be
calculated accurately and paid as scheduled.
2,Payroll expenditures are subject to a variety of
federal,state,and local taxes.
3,Total payroll expense (gross payroll plus payroll
taxes) has a major impact on net income.
Payroll and Payroll Taxes
Payroll is the amount paid to employees for services
provided,Payrolls are important because:
C10 - 8
Base earnings (40 x $25) $1,000
Overtime earnings (4 x $37.50) 150
Total earnings $1,150
Base earnings (44 x$25) $1,100
Overtime premium (4 x $12.50) 50
Total earnings $1,150
Gross Pay Calculation
John T,McGrath is employed by McDermott Supply Co,at
the rate of $25 per hour,plus 1.5 times the normal hourly
rate for hours over 40 per week,For the week ended
December 27,McGrath worked 44 hours.
Employee viewpoint:
Employer viewpoint:
C10 - 9
Base earnings (40 x$25) $1,000
Overtime earnings (4 x $37.50) 150
Total earnings $1,150
Base earnings (44 x$25) $1,100
Overtime premium (4 x $12.50) 50
Total earnings $1,150
Gross Pay Calculation
John T,McGrath is employed by McDermott Supply Co,at
the rate of $25 per hour,plus 1.5 times the normal hourly
rate for hours over 40 per week,For the week ended
December 27,McGrath worked 44 hours.
Same total
earnings
but a
different
view of the
overtime
hours
Employee viewpoint:
Employer viewpoint:
C10 - 10
($70,000 - $69,150) $850
Social security tax rate x 6%
Social security tax $51.00
Current earnings $1,150
Medicare tax rate x 1.5%
Medicare tax 17.25
Total FICA tax $68.25
FICA Tax Calculation
Assume that John T,McGrath’s annual earnings prior
to the current period total $69,150,The current period
earnings are $1,150.
FICA tax calculation:
Earnings subject to 6.0% social security tax
Earnings subject to 1.5% Medicare tax
C10 - 11
Withholding Taxes,Other Deductions
Employers are required to withhold federal income
tax from each employee based on the withholding
table and information provided by the employee’s
W-4 form,
Federal income tax and FICA tax must be withheld
from the pay of each employee.
Deductions for other purposes may be withheld by
mutual agreement.
C10 - 12
Earnings:
Regular earnings $1,000.00
Overtime earnings 150.00
Total $1,150.00
Deductions:
Social security tax tax $ 51.00
Medicare tax 17.25
Federal income tax 237.00
Retirement savings 20.00
United Way 5.00
Total deductions 330.25
Net pay $ 819.75
John T,McGrath is single,has declared one
withholding allowance,and had gross pay of
$1,150 for the week ended December 27.
Employee Net Pay Calculation
C10 - 13
Earnings:
Regular $13,328.00
Overtime 574.00
Total $13,902.00
Deductions:
Social security tax $ 643.07
Medicare tax 208.53
Federal income tax 3,332.00
Retirement savings 680.00
United Way 470.00
Accounts receivable 50.00
Total 5,383.60
Net amount paid $ 8,518.40
Accounts debited:
Sales Salaries Expense $11,122.00
Office Salaries Expense 2,780.00
Total (as above) $13,902.00
Payroll Register Summary
C10 - 14
Recording Employees’ Earnings
Date Description Debit Credit
12/27 Sales Salaries Expense 11,122.00
Office Salaries Expense 2,780.00
Social Security Tax Payable 643.07
Medicare Tax Payable 208.53
Employees Fed,Inc,Tax Payable 3,332.00
Retirement Savings Deductions Payable 680.00
United Way Deductions Payable 470.00
Accounts Receivable–Fred G,Elrod 50.00
Salaries Payable 8,518.40
C10 - 15
1,FICA tax must be paid by the employer on the
earnings of each employee.
2,Employers must pay federal unemployment
compensation tax at the rate of,8% (.008) on the
first $7,000 of annual earnings of each employee.
3,Employers in most states also pay state
unemployment compensation tax based on claims
experience at a rate not to exceed 5.4% (.054) of
the first $7,000 of annual earnings.
Employer’s Payroll Taxes
In addition to the amounts due employees,the
employer must calculate and pay the following:
C10 - 16
Recording Employer’s Payroll Taxes
General Journal
Date Description Debit Credit
12/27 Payroll Tax Expense 1,019.62
Social Security Tax Payable 643.07
Medicare Tax Payable 208.53
State Unemployment Tax Payable 146.34
Federal Unemployment Tax Payable 21.68
C10 - 17
Employer’s Total Payroll Costs
Date Description Debit Credit
12/27 Sales Salaries Expense 11,122.00
Office Salaries Expense 2,780.00
Social Security Tax Payable 643.07
Medicare Tax Payable 208.53
Employees Fed,Inc,Tax Payable 3,332.00
Retirement Savings Deductions Payable 680.00
United Way Deductions Payable 470.00
Accounts Receivable–Fred G,Elrod 50.00
Salaries Payable 8,518.40
12/27 Payroll Tax Expense 1,019.62
Social Security Tax Payable 643.07
Medicare Tax Payable 208.53
State Unemployment Tax Payable 146.34
Federal Unemployment Tax Payable 21.68
C10 - 18
Employer’s Total Payroll Costs
Date Description Debit Credit
12/27 Sales Salaries Expense 11,122.00
Office Salaries Expense 2,780.00
Social Security Tax Payable 643.07
Medicare Tax Payable 208.53
Employees Fed,Inc,Tax Payable 3,332.00
Retirement Savings Deductions P 680.00
United Way Deductions Payable 470.00
Accounts Receivable–Fred G,Elr 50.00
Salaries Payable 8,518.40
Total
Payroll
Expens
e
12/27 Payroll Tax Expense 1,019.62
Social Security Tax Payable 643.07
Medicare Tax Payable 208.53
State Unemployment Tax Payable 146.34
Federal Unemployment Tax Payable 21.68
C10 - 19
Flow of Data in a Payroll System
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
Current Period’s
Variables
(hours worked)
C10 - 20
Flow of Data in a Payroll System
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
PAYROLL
REGISTER
Current Period’s
Variables
(hours worked)
C10 - 21
Flow of Data in a Payroll System
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
PAYROLL
REGISTER
EMPLOYEES’
EARNINGS
RECORDSCurrent Period’sVariables
(hours worked)
C10 - 22
Flow of Data in a Payroll System
Wage and Tax
Statements
Payroll Tax
Returns
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
PAYROLL
REGISTER
EMPLOYEES’
EARNINGS
RECORDSCurrent Period’sVariables
(hours worked)
C10 - 23
Flow of Data in a Payroll System
Payroll Checks
and Statements
Wage and Tax
Statements
Payroll Tax
Returns
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
PAYROLL
REGISTER
EMPLOYEES’
EARNINGS
RECORDSCurrent Period’sVariables
(hours worked)
C10 - 24
Flow of Data in a Payroll System
Payroll Checks
and Statements
Wage and Tax
Statements
Payroll Tax
Returns
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
PAYROLL
REGISTER
GENERAL
LEDGER
EMPLOYEES’
EARNINGS
RECORDSCurrent Period’sVariables
(hours worked)
C10 - 25
Flow of Data in a Payroll System
Payroll Checks
and Statements
Financial
Statements
Wage and Tax
Statements
Payroll Tax
Returns
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
PAYROLL
REGISTER
GENERAL
LEDGER
EMPLOYEES’
EARNINGS
RECORDSCurrent Period’sVariables
(hours worked)
C10 - 26
Solvency Measures — Quick Ratio
Noble Co,Hart Co.
Quick assets:
Cash $ 100,000 $ 55,000
Cash equivalents 47,000 65,000
Accounts receivable (net) 84,000 472,000
Total $231,000 $592,000
Current liabilities $220,000 $740,000
C10 - 27
Solvency Measures — Quick Ratio
Use,To indicate instant debt-paying ability
Noble Co,Hart Co.
Quick assets:
Cash $ 100,000 $ 55,000
Cash equivalents 47,000 65,000
Accounts receivable (net) 84,000 472,000
Total $231,000 $592,000
Current liabilities $220,000 $740,000
Quick ratio 1.05,8
C10 - 28
Note,To see the topic slide,type 2 and press Enter.
This is the last slide in Chapter F10,
Power NotesChapter F10
Current Liabilities
Learning Objectives
Power Notes
1,The Nature of Current Liabilities
2,Short-Term Notes Payable
3,Contingent Liabilities
4,Payroll and Payroll Taxes
5,Accounting Systems for Payroll
6,Employees’ Fringe Benefits
7,Financial Analysis and Interpretation
Chapter F10
Current Liabilities
C10
C10 - 2
Short-Term Notes Payable
Product Warranty Liability
Payroll and Payroll Taxes
Employees’ Earnings
Employer’s Payroll Taxes
Payroll System and Data Flow
Quick Ratio
Slide # Power Note Topics
3
6
7
12
15
19
26
Note,To select a topic,type the slide # and press Enter.
Power NotesChapter F10
Current Liabilities
C10 - 3
Short-Term Notes Payable
Description Debit Credit
Mdse,Inventory 10,000
Accts,Payable 10,000
Accts,Receivable 10,000
Sales 10,000
Cost of Mdse,Sold 7,500
Mdse,Inventory 7,500
Bowden Co,(Buyer/Borrower) Coker Co,(Seller/Creditor)
Description Debit Credit
May 1,Bowden Co,purchased merchandise on
account from Coker Co.,$10,000,terms 2/10,n/30
C10 - 4
Short-Term Notes Payable
Description Debit Credit
Mdse,Inventory 10,000
Accts,Payable 10,000
Accts,Payable 10,000
Notes Payable 10,000
Accts,Receivable 10,000
Sales 10,000
Cost of Mdse,Sold 7,500
Mdse,Inventory 7,500
Notes Receivable 10,000
Accts,Receivable 10,000
Bowden Co,(Buyer/Borrower) Coker Co,(Seller/Creditor)
Description Debit Credit
May 31,Bowden Co,issued a 60-day,12% note
for $10,000 to Coker Co,on account.
C10 - 5
Short-Term Notes Payable
Description Debit Credit
Mdse,Inventory 10,000
Accts,Payable 10,000
Accts,Payable 10,000
Notes Payable 10,000
Notes Payable 10,000
Interest Expense 200
Cash 10,200
Accts,Receivable 10,000
Sales 10,000
Cost of Mdse,Sold 7,500
Mdse,Inventory 7,500
Notes Receivable 10,000
Accts,Receivable 10,000
Cash 10,200
Interest Revenue 200
Notes Receivable 10,000
Bowden Co,(Buyer/Borrower) Coker Co,(Seller/Creditor)
Description Debit Credit
July 30,Bowden Co,paid the amount due,
Interest,$10,000 x 12% x 60 / 360 = $200
C10 - 6
Date Description Debit Credit
Product Warranty Liability
Product Warranty Expense 3,000
Product Warranty Payable 3,000
Estimated warranty,$60,000 x 5% = $3,000
Dec,31
Sales of $60,000 with a 36-month warranty.
Estimated average cost to repair defects is 5%.
To match revenues and expenses properly,warranty
costs should be recognized as expense in the same
period in which related revenues are recorded.
C10 - 7
1,Good employee relations demand that payrolls be
calculated accurately and paid as scheduled.
2,Payroll expenditures are subject to a variety of
federal,state,and local taxes.
3,Total payroll expense (gross payroll plus payroll
taxes) has a major impact on net income.
Payroll and Payroll Taxes
Payroll is the amount paid to employees for services
provided,Payrolls are important because:
C10 - 8
Base earnings (40 x $25) $1,000
Overtime earnings (4 x $37.50) 150
Total earnings $1,150
Base earnings (44 x$25) $1,100
Overtime premium (4 x $12.50) 50
Total earnings $1,150
Gross Pay Calculation
John T,McGrath is employed by McDermott Supply Co,at
the rate of $25 per hour,plus 1.5 times the normal hourly
rate for hours over 40 per week,For the week ended
December 27,McGrath worked 44 hours.
Employee viewpoint:
Employer viewpoint:
C10 - 9
Base earnings (40 x$25) $1,000
Overtime earnings (4 x $37.50) 150
Total earnings $1,150
Base earnings (44 x$25) $1,100
Overtime premium (4 x $12.50) 50
Total earnings $1,150
Gross Pay Calculation
John T,McGrath is employed by McDermott Supply Co,at
the rate of $25 per hour,plus 1.5 times the normal hourly
rate for hours over 40 per week,For the week ended
December 27,McGrath worked 44 hours.
Same total
earnings
but a
different
view of the
overtime
hours
Employee viewpoint:
Employer viewpoint:
C10 - 10
($70,000 - $69,150) $850
Social security tax rate x 6%
Social security tax $51.00
Current earnings $1,150
Medicare tax rate x 1.5%
Medicare tax 17.25
Total FICA tax $68.25
FICA Tax Calculation
Assume that John T,McGrath’s annual earnings prior
to the current period total $69,150,The current period
earnings are $1,150.
FICA tax calculation:
Earnings subject to 6.0% social security tax
Earnings subject to 1.5% Medicare tax
C10 - 11
Withholding Taxes,Other Deductions
Employers are required to withhold federal income
tax from each employee based on the withholding
table and information provided by the employee’s
W-4 form,
Federal income tax and FICA tax must be withheld
from the pay of each employee.
Deductions for other purposes may be withheld by
mutual agreement.
C10 - 12
Earnings:
Regular earnings $1,000.00
Overtime earnings 150.00
Total $1,150.00
Deductions:
Social security tax tax $ 51.00
Medicare tax 17.25
Federal income tax 237.00
Retirement savings 20.00
United Way 5.00
Total deductions 330.25
Net pay $ 819.75
John T,McGrath is single,has declared one
withholding allowance,and had gross pay of
$1,150 for the week ended December 27.
Employee Net Pay Calculation
C10 - 13
Earnings:
Regular $13,328.00
Overtime 574.00
Total $13,902.00
Deductions:
Social security tax $ 643.07
Medicare tax 208.53
Federal income tax 3,332.00
Retirement savings 680.00
United Way 470.00
Accounts receivable 50.00
Total 5,383.60
Net amount paid $ 8,518.40
Accounts debited:
Sales Salaries Expense $11,122.00
Office Salaries Expense 2,780.00
Total (as above) $13,902.00
Payroll Register Summary
C10 - 14
Recording Employees’ Earnings
Date Description Debit Credit
12/27 Sales Salaries Expense 11,122.00
Office Salaries Expense 2,780.00
Social Security Tax Payable 643.07
Medicare Tax Payable 208.53
Employees Fed,Inc,Tax Payable 3,332.00
Retirement Savings Deductions Payable 680.00
United Way Deductions Payable 470.00
Accounts Receivable–Fred G,Elrod 50.00
Salaries Payable 8,518.40
C10 - 15
1,FICA tax must be paid by the employer on the
earnings of each employee.
2,Employers must pay federal unemployment
compensation tax at the rate of,8% (.008) on the
first $7,000 of annual earnings of each employee.
3,Employers in most states also pay state
unemployment compensation tax based on claims
experience at a rate not to exceed 5.4% (.054) of
the first $7,000 of annual earnings.
Employer’s Payroll Taxes
In addition to the amounts due employees,the
employer must calculate and pay the following:
C10 - 16
Recording Employer’s Payroll Taxes
General Journal
Date Description Debit Credit
12/27 Payroll Tax Expense 1,019.62
Social Security Tax Payable 643.07
Medicare Tax Payable 208.53
State Unemployment Tax Payable 146.34
Federal Unemployment Tax Payable 21.68
C10 - 17
Employer’s Total Payroll Costs
Date Description Debit Credit
12/27 Sales Salaries Expense 11,122.00
Office Salaries Expense 2,780.00
Social Security Tax Payable 643.07
Medicare Tax Payable 208.53
Employees Fed,Inc,Tax Payable 3,332.00
Retirement Savings Deductions Payable 680.00
United Way Deductions Payable 470.00
Accounts Receivable–Fred G,Elrod 50.00
Salaries Payable 8,518.40
12/27 Payroll Tax Expense 1,019.62
Social Security Tax Payable 643.07
Medicare Tax Payable 208.53
State Unemployment Tax Payable 146.34
Federal Unemployment Tax Payable 21.68
C10 - 18
Employer’s Total Payroll Costs
Date Description Debit Credit
12/27 Sales Salaries Expense 11,122.00
Office Salaries Expense 2,780.00
Social Security Tax Payable 643.07
Medicare Tax Payable 208.53
Employees Fed,Inc,Tax Payable 3,332.00
Retirement Savings Deductions P 680.00
United Way Deductions Payable 470.00
Accounts Receivable–Fred G,Elr 50.00
Salaries Payable 8,518.40
Total
Payroll
Expens
e
12/27 Payroll Tax Expense 1,019.62
Social Security Tax Payable 643.07
Medicare Tax Payable 208.53
State Unemployment Tax Payable 146.34
Federal Unemployment Tax Payable 21.68
C10 - 19
Flow of Data in a Payroll System
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
Current Period’s
Variables
(hours worked)
C10 - 20
Flow of Data in a Payroll System
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
PAYROLL
REGISTER
Current Period’s
Variables
(hours worked)
C10 - 21
Flow of Data in a Payroll System
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
PAYROLL
REGISTER
EMPLOYEES’
EARNINGS
RECORDSCurrent Period’sVariables
(hours worked)
C10 - 22
Flow of Data in a Payroll System
Wage and Tax
Statements
Payroll Tax
Returns
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
PAYROLL
REGISTER
EMPLOYEES’
EARNINGS
RECORDSCurrent Period’sVariables
(hours worked)
C10 - 23
Flow of Data in a Payroll System
Payroll Checks
and Statements
Wage and Tax
Statements
Payroll Tax
Returns
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
PAYROLL
REGISTER
EMPLOYEES’
EARNINGS
RECORDSCurrent Period’sVariables
(hours worked)
C10 - 24
Flow of Data in a Payroll System
Payroll Checks
and Statements
Wage and Tax
Statements
Payroll Tax
Returns
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
PAYROLL
REGISTER
GENERAL
LEDGER
EMPLOYEES’
EARNINGS
RECORDSCurrent Period’sVariables
(hours worked)
C10 - 25
Flow of Data in a Payroll System
Payroll Checks
and Statements
Financial
Statements
Wage and Tax
Statements
Payroll Tax
Returns
Updated Variables
(cumulative
earnings,taxes)
Constant Data
(rates of pay,
tax,etc.)
PAYROLL
REGISTER
GENERAL
LEDGER
EMPLOYEES’
EARNINGS
RECORDSCurrent Period’sVariables
(hours worked)
C10 - 26
Solvency Measures — Quick Ratio
Noble Co,Hart Co.
Quick assets:
Cash $ 100,000 $ 55,000
Cash equivalents 47,000 65,000
Accounts receivable (net) 84,000 472,000
Total $231,000 $592,000
Current liabilities $220,000 $740,000
C10 - 27
Solvency Measures — Quick Ratio
Use,To indicate instant debt-paying ability
Noble Co,Hart Co.
Quick assets:
Cash $ 100,000 $ 55,000
Cash equivalents 47,000 65,000
Accounts receivable (net) 84,000 472,000
Total $231,000 $592,000
Current liabilities $220,000 $740,000
Quick ratio 1.05,8
C10 - 28
Note,To see the topic slide,type 2 and press Enter.
This is the last slide in Chapter F10,
Power NotesChapter F10
Current Liabilities
