Chapter 11: Current Liabilities and Payroll Accounting

Question 1

Employer Payroll Taxes

Answer 1

• FICA - employer matches employee’s contributions
• Federal (FUTA) and State (SUTA) unemployment tax

All computed based on wages

2021 Rates:
FICA: 6.2% social security (up to first $142,800 gross wages), 1.45% medicare
FUTA- 6% on first $7K of wages
SUTA (NY)- 4.025% base wage $11,800
(can get credits for paying FUTA on time)

Question 2

Current Liability

Answer 2

Debt that:

• company expects to pay from existing current assets or the creation of other current liabilities
• company will pay debt in one yeat or one operating cycle (whichever is longer)

Includes: notes payable, accounts payable, unearned revenue, taxes payable, salaries payable, interest payable

Question 3

“Fringe Benefits”

Answer 3

Employer Paid Taxes
Paid vacations
Pensions
etc…

Question 4

Types of Pension Plans

Answer 4

Defined-contribution plan:

• Employer contribution is fixed
• benefits based on plan value
• Risk borne by employees

Defined-benefit plan:

• benefit fixed by plan
• Employer contribution varies
• Risk borne by employer

Actuaries estimate employer contribution- recorded by company as expense.

Question 5

Post Retirement Benefits

Answer 5

Benefits provided to retired employees (health insurance, insurance, pensions)
- These costs are estimated and expensed during employee’s working years
However, funds are rarely set up to meet these benefits as the company does not receive a tax deduction until the medical bill is paid

Usually managed through a pension plan administratior

Question 6

Internal control for payroll

Answer 6

• Documenting authorized employees
• Multiple people verify amounts and supervisors approves
• Treasurer signs and distributes pre-numbered checks
• Supervisors monitor hours and time cards

Question 7

Filing and Remitting Payroll Tax

Answer 7

FICA and Federal income tax withheld: reported no later than one month following close of each quarter.

Fed unemployment = annually on or before January 31st of the following year

State Unemployment= by EOM following each quarter

W2 (Wage and tax statement) to employees by January 31st of the following year

Question 8

Payroll Deductions

Answer 8

Mandatory: 
- FICA tax (SS & Medicare)
- Federal Income Tax
- State Income Tax (+ city and local)
Income tax deductions determined by rate and allowances

Potential:

• Insurance
• Pensions
• Retirement / 401K
• Dues
• Charity

Question 9

Payroll Register

Answer 9

A combined record of all payroll amounts

Question 10

Employee Earnings Record

Answer 10

A cumulative record of each employee’s gross earnings, deductions and net pay in a year

Question 11

Net Pay

Answer 11

Gross earnings less payroll deductions

Question 12

Gross Earnings

Answer 12

Total compensation earned by employee

Wage or Salary + overtime + bonuses + commissions

Question 13

Payroll

Answer 13

Wages and Salaries

contractor fees are not payroll, not subject to government regulations re: employees

Question 14

Contingent Liabilities

Answer 14

A potential liability that may become an actual liability in the future

Likelihood of a future event determines recording treatment

Warranty liability is a contingent liability

Question 15

Liquidity

Answer 15

Ability to pay maturing obligations and meet any unexpected needs for cash

Question 16

Current Maturities of Long Term Debt

Answer 16

Any portion of long-term debt that comes due in the current year

No adjusting entry, just spot on the balance sheet is updated.
Shown as “long-term debt due within one year” in current liabilities section

Question 17

Financing Cost

Answer 17

AKA: interest expense

Question 18

Notes Payable

Answer 18

• Written promissory note
• Requires borrower to pay interest
• Face value of the note = assets received
• Interest is the cost for delaying payment

Question 19

Sales Tax Payable

Answer 19

• Collected from the customer when the sale occurs and periodically remitted to the state.
• Stated as a percentage of sales price
• If calculated as part of total receipts must be separate out
  Sales = cash receipts / (1+ sales tax %)
  Sales tax = cash receipts - sales

Question 20

Recording payroll

Answer 20

To Accrue:
Debit Salaries / Wages expense
Credit Deduction Payables
Credit Salaries/ Wages payables

• Use payroll register as source document

When paid:
Debit Salaries / Wages Payable
Credit Cash

Question 21

Warranty Liability (Contingency)

Answer 21

Matching principal: must include estimated cost of honoring product warranty contracts as an expense in the same period where the sale occurs.

Debit Warranty Expense
Credit Warranty Liability

If/When warranty honored:
Debit Warranty Liability
Credit Repair Parts Inventory
(no expense because the expense has already been recognized)

Question 22

Recording Contingency liabilities

Answer 22

3 probability levels under GAAP
Probable: likely to occur
- Record IF amount can be reasonably estimated (if they cannot, then disclose in the notes)

Reasonably Probable: could occur
- Disclose in notes

Remote: unlikely to occur
- Not required to diclose

Question 23

Journaling Unearned Revenue

Answer 23

When cash is received:
Debit Cash
Credit Unearned Revenue

When revenue earned
Debit Unearned Revenue
Credit Revenue

Question 24

Journaling Sales Tax Payable

Answer 24

Debit Cash (or Accounts Receivable)
Credit Sales Revenue
Credit Sales Tax Payable

Question 25

Journaling Notes Payable

Answer 25

to accrue interest expense:
Debit Interest Expense
Credit Interest Payable

At Maturity:
Debit Notes Payable (zero out)
Debit Interest Payable (zero out)
Credit Cash (payment amount)

Question 26

Paid Absences Liability

Answer 26

Accrued because payment is probable AND reasonably estimated

Accrual adjusting entry:
Debit Vacation Benefits Expense
Credit Vacation Benefits Liability

Benefits paid:
Debit Vacation Benefits Liability
Credit Cash

Question 27

Recording payroll tax expense

Answer 27

Debit Payroll Tax Expense
Credit FICA Taxes payable
Credit FED unemployment Taxes payable
Credit state unemployment taxes payable

Question 28

Current Liabilities on Balance Sheet

Answer 28

Notes Payable
Accounts Payable
Then in order of magnitude (largest to smallest)

Question 29

Financial statements when long term debt matures

Answer 29

On the balance sheet show under current liabilities as “long-term debit due within one year”

Some notes may have portions reported as current as well as portions reported as long-term

Question 30

Sales (equation to separate sales revenue from taxes)

Answer 30

= total proceeds / (1+tax rate)

Question 31

Current Ratio

Answer 31

Allows the comparison of the liquidity of differently sized companies, or of a single company at different points in time

= current assets / current liabilities

Question 32

Working Capital

Answer 32

= current assets less current liabilities

Question 33

Times Interest Earned Ratio

Answer 33

Evaluated a businesses ability to pay interest expense

= (Net income + income tax expense + interest expense)/ Interest expense

Aka Interest coverage ratio

High = ease of payments, low = difficulty

Question 34

Analyzing Current Liabilities

Answer 34

Current Ratio and Working Capital

Question 35

IASB & FASB Work together to:

Answer 35

Change definitions of: liabilities, equity and assets

Question 36

IFRS Contingent Liabilities

Answer 36

Under IFRS
“Contingent liabilities”: Only possible obligations, not recognized in financial statement (though may be disclosed under certain criteria)

Recordable contingent liabilities = “provisions”
Measurement of an uncertain obligation based on best estimate of expenditure required to settle.

Question 37

IFRS liabilties on balance sheet

Answer 37

Order: Sometimes liabilities before assets, sometimes long-term before current

Sometimes Net Current liabilities against current assets to show working capital on the statement of financial position (balance sheets)