Professional Documents
Culture Documents
Coby Harmon
University of California, Santa Barbara
Westmont College
11-1
11 Current Liabilities and
Payroll Accounting
Learning Objectives
After studying this chapter, you should be able to:
[1] Explain a current liability, and identify the major types of current liabilities.
[2] Describe the accounting for notes payable.
[3] Explain the accounting for other current liabilities.
[4] Explain the financial statement presentation and analysis of current
liabilities.
[5] Describe the accounting and disclosure requirements for contingent
liabilities.
[6] Compute and record the payroll for a pay period.
[7] Describe and record employer payroll taxes.
[8] Discuss the objectives of internal control for payroll.
11-2
Preview of Chapter 11
Accounting Principles
Eleventh Edition
Weygandt Kimmel Kieso
11-3
Current Liabilities
11-4
LO 1 Explain a current liability, and identify the
major types of current liabilities.
Accounting for Current Liabilities
Question
To be classified as a current liability, a debt must be
expected to be paid:
c. within 2 years.
11-5
LO 1 Explain a current liability, and identify the
major types of current liabilities.
Accounting for Current Liabilities
Notes Payable
Written promissory note.
Requires the borrower to pay interest.
Issued for varying periods.
Instructions
Cash 100,000
Notes Payable 100,000
Cash 10,600
Sales Revenue 10,000
Sales Taxes Payable 600
Unearned Revenue
Revenues received before the company
delivers goods or
provides services.
Illustration 11-2
Statement
Presentation
Illustration 11-3
11-15
Accounting for Current Liabilities
Question
Working capital is calculated as:
11-16
LO 4 Explain the financial statement presentation
and analysis of current liabilities.
Accounting for Current Liabilities
Analysis
Illustration 11-4
Liquidity refers to the
ability to pay maturing
obligations and meet
unexpected needs for
cash.
Illustration 11-5
Current ratio permits us to
compare the liquidity of
different-sized companies
and of a single company at
different times.
11-17
LO 4 Explain the financial statement presentation
and analysis of current liabilities.
Contingent Liabilities
11-18
LO 5 Describe the accounting and disclosure
requirements for contingent liabilities.
Contingent Liabilities
Probability Accounting
Probable Accrue
Reasonably
Footnote
Possible
Remote Ignore
11-19
LO 5 Describe the accounting and disclosure
requirements for contingent liabilities.
Contingent Liabilities
Question
A contingent liability should be recorded in the accounts when:
a. it is probable the contingency will happen, but the
amount cannot be reasonably estimated.
b. it is reasonably possible the contingency will happen,
and the amount can be reasonably estimated.
c. it is probable the contingency will happen, and the
amount can be reasonably estimated.
d. it is reasonably possible the contingency will happen,
but the amount cannot be reasonably estimated.
11-20
LO 5 Describe the accounting and disclosure
requirements for contingent liabilities.
11-21
Contingent Liabilities
11-22
LO 5 Describe the accounting and disclosure
requirements for contingent liabilities.
Contingent Liabilities
Illustration 11-6
Computation of estimated
product warranty liability
11-23 LO 5
Contingent Liabilities
11-24
LO 5 Describe the accounting and disclosure
requirements for contingent liabilities.
Contingent Liabilities
11-25
LO 5 Describe the accounting and disclosure
requirements for contingent liabilities.
Contingent Liabilities
11-26
LO 5 Describe the accounting and disclosure
requirements for contingent liabilities.
Payroll Accounting
Gross Earnings
Total compensation earned by an employee (wages or
salaries, plus any bonuses and commissions).
Illustration 11-8
Payroll Deductions
Mandatory: Voluntary:
FICA taxes Charity
Federal income taxes Insurance
State income taxes Union dues
Pension plans
Payroll Deductions
Payroll Deductions
Mandatory:
FICA taxes
Federal income taxes Most states (and some cities)
State income taxes require employers to withhold
income taxes from
employees earnings.
Net Pay
Gross earnings minus payroll deductions.
Illustration 11-13
Illustration 11-14
11-34 LO 6
Recording the Payroll
Illustration11-13
11-15
Illustration
11-35 LO 6
Recording the Payroll
Illustration 11-16
Paycheck and
statement of
earnings
Question
Employer payroll taxes do not include:
d. FICA taxes..
Art was a custodial supervisor for a large school district. The district was supposed
to employ between 35 and 40 regular custodians, as well as 3 or 4 substitute
custodians to fill in when regular custodians were missing. Instead, in addition to the
regular custodians, Art hired 77 substitutes. In fact, almost none of these people
worked for the district. Instead, Art submitted time cards for these people, collected
their checks at the district office, and personally distributed the checks to the
employees. If a substitutes check was for $1,200, that person would cash the
check, keep $200, and pay Art $1,000.
Total take: $150,000
11-48
LO 9 Identify additional fringe benefits associated
with employee compensation.
APPENDIX 11A Additional Fringe Benefits
Paid Absences
Employees often are given rights to receive compensation for
absence when they meet certain conditions of employment.
The compensation may be for paid vacations, sick pay
benefits, and paid holidays.
When the payment for such absences is probable and the
amount can be reasonably estimated, the company should
accrue a liability for paid future absences.
When the amount cannot be reasonably estimated, the
company should instead disclose the potential liability.
11-49
LO 9 Identify additional fringe benefits associated
with employee compensation.
APPENDIX 11A Additional Fringe APPENDIX
Benefits
Postretirement Benefits
Post-retirement benefits are benefits that employers provide
to retired employees for
1. pensions and
2. health care and life insurance.
11-50
LO 9 Identify additional fringe benefits associated
with employee compensation.
APPENDIX 11A Additional Fringe Benefits
Pensions
A pension plan is an agreement whereby employers provide
benefits to employees after they retire.
11-51
LO 9 Identify additional fringe benefits associated
with employee compensation.
A Look at IFRS
Key Points
The basic definition of a liability under GAAP and IFRS is very similar. In
a more technical way, liabilities are defined by the IASB as a present
obligation of the entity arising from past events, the settlement of which
is expected to result in an out flow from the entity of resources
embodying economic benefits. Liabilities may be legally enforceable via
a contract or law but need not be; that is, they can arise due to normal
business practice or customs.
Key Points
IFRS requires that companies classify liabilities as current or noncurrent
on the face of the statement of financial position (balance sheet), except
in industries where a presentation based on liquidity would be
considered to provide more useful information (such as financial
institutions). When current liabilities (also called short-term liabilities) are
presented, they are generally presented in order of liquidity.
Under IFRS, liabilities are classified as current if they are expected to be
paid within 12 months.
Similar to GAAP, items are normally reported in order of liquidity.
Companies sometimes show liabilities before assets. Also, they will
sometimes show long-term liabilities before current liabilities.
Key Points
Under IFRS, companies sometimes will net current liabilities against
current liabilities to show working capital on the face of the statement of
financial position. (This is evident in the Zetar financial statements in
Appendix F.)
Under GAAP, some contingent liabilities are recorded in the financial
statements, others are disclosed, and in some cases no disclosure is
required. Unlike GAAP, IFRS reserves the use of the term contingent
liability to refer only to possible obligations that are not recognized in the
financial statements but may be disclosed if certain criteria are met.
Key Points
For those items that GAAP would treat as recordable contingent
liabilities, IFRS instead uses the term provisions. Provisions are defined
as liabilities of uncertain timing or amount. Examples of provisions would
be provisions for warranties, employee vacation pay, or anticipated
losses. Under IFRS, the measurement of a provision related to a
uncertain obligation is based on the best estimate of the expenditure
required to settle the obligation.
IFRS and GAAP separate plans into defined benefit and defined
contribution. The IASB and FASB are working on a joint project on
pensions that will dramatically change the approach used by both.
a) contingent liabilities.
b) provisions.
c) possible obligations.
d) None of these.
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11-60