Bài giảng Fundamental Financial Accounting Concepts - Chapter 9: Accounting for Current Liabilities and Payroll

Chapter NineAccounting for Current Liabilities and PayrollMcGraw-Hill/IrwinMcGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.Notes Payable and the Going Concern AssumptionDo companies estimate the amount of payables that they are going to pay?Under the going concern assumption , companies expect to pay their obligations in full.9-*On September 1, 2013, Herrera Supply Company (HSC) borrowed $90,000 from the National Bank.Increase assets (cash).Increase liabilities (notes payable).9-*On December 31, 2013, HSC must accrue (recognize) four months of interest expense.Increase liabilities (interest payable).Decrease equity (interest expense).9-*On August 31, 2014, the maturity date of the note, three events are recognized. First, $5,400 of interest expense has accrued since January 1, 2014.Increase liabilities (interest payable).Decrease stockholders’ equity (retained earnings). 9-*Second, cash is paid for $8,100, the total amount of interest due on the note. Decrease assets (cash).Decrease liabilities (interest payable). 9-*Third, HSC must recognize the repayment of the $90,000 principal of the note.Decrease assets (cash).Decrease liabilities (notes payable). 9-*Sales TaxMost states require retailers to collect sales tax on goods sold to their customers.Retailers collect the tax from customers and remit the tax to the state at regular intervals.9-*9-*Warranty ObligationsGenerally within the warranty period, the seller promises to replace or repair defective products without charge to the customer.Event 1 Sale of MerchandiseHSC sells $7,000 of merchandise for cash. The merchandise had cost the company $4,000.9-*Warranty ObligationsEvent 2 Recognition of Warranty ExpenseThe company estimates that warranty expense associated with the current sale will be $100.9-*Warranty ObligationsEvent 3 Settlement of Warranty ObligationThe company pays $40 cash to repair defective merchandise returned by a customer.9-*Identifying EmployeesPeople who perform work for your business are employees. Correct?Not necessarily. When a business supervises, directs, and controls an individual’s work, the individual is an employee of the business. When a business pays an individual for specific services, but the individualsupervises and controls the work, then that individual is an independent contractor.9-*Social Security and Medicare (FICA) TaxesThe Federal Insurance Contributions Act (FICA) provided funding for Social Security and Medicare programs. Approximately 7 ½% of each employee’s gross pay is withheld for FICA tax, and the employer pays an additional 7 ½ %.9-*Payroll TaxesPayroll taxes only apply to employees. Companies are not required to withhold taxes from or pay taxes on work done by independent contractors.Employers withhold federal, state, and sometimes local income taxes, as well as FICA (Social Security and Medicare) taxes from employees, and then remit those taxes to the taxing authorities. They also pay unemployment taxes and the employer portion of FICA taxes.9-*Recording PayrollAccount TitleDebitCredit Salary Expense 6,000   Employee Income Tax Payable 450 FICA Tax - Social Security Payable 360 FICA Tax - Medicare Payable 90 Medical Insurance Premiums Payable 320 American Cancer Society Payable 25 Cash  4,755 9-*Payroll Tax ExpenseFICA tax expense—Social Security ($6,000 X 6%) $360FICA tax expense—Medicare ($6,000 X 1.5%) 90Federal unemployment tax expense ($1,000 X .8%) 8State unemployment tax expense ($1,000 X 5.4%) 54Total payroll tax expense $5129-*Fringe BenefitsAccount TitleDebitCreditVacation Pay Expense 200  Employee Medical Insurance Expense 250  Employee Pension Expense 150  Vacation Pay Payable 200 Employee Medical Insurance Payable 250 Employee Pension Liability  150 9-*Current Versus NoncurrentCurrent assets are expected to be converted to cash or consumed within one year or an operating cycle, whichever is longer. Current assets include:CashMarketable SecuritiesAccounts ReceivableShort-Term Notes ReceivableInterest ReceivableInventorySuppliesPrepaids9-*Current Versus NoncurrentCurrent liabilities are due within one year or an operating cycle, whichever is longer. Current liabilities include:Accounts PayableShort-Term Notes PayableWages PayableTaxes PayableInterest Payable9-*Current RatioCurrentRatio=Current AssetCurrent LiabilitiesFor Limbaugh Company the current ratio is:CurrentRatio=$288,600$193,800= 1.49:19-*Liquidity vs. SolvencyLiquidity describes the ability to generate sufficient short-term cash flows to pay obligationsas they come due. Solvency is the ability to repay liabilities in the long run.Liquidity is often measured by the current ratio.Solvency is often measured by the debt to assets ratio.9-*Discount NotesDiscount notes are ones in which the interest is withheld from the proceeds when the note is issued. The face value of the note is the amount that will be repaid at maturity.9-*End of Chapter Nine9-*