June 18, 2024

Analysis section should demonstrate

1. Read article

a. Overview/Summary

b. Opinion/Analysis – The Opinion/Analysis section should demonstrate your critical thinking and analysis of the subject matter.

c. Relevance to business climate. – The Relevance section should offer an insight-building summary, recommendations, findings and conclusions.

3. 300 words or more

4. Resources only – Chapter 11 (attached PPTX) and News Article

Ch.11accounting2.pptx

Horngren’s Accounting: The Financial Chapters

Twelfth Edition

Chapter 11

Current Liabilities and Payroll

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Learning Objectives (1 of 2)

11.1 Account for current liabilities of known amount

11.2 Calculate and journalize basic payroll transactions

11.3 Account for current liabilities that must be estimated

Learning Objectives (2 of 2)

11.4 Account for contingent liabilities

11.5 Use the times-interest-earned ratio to evaluate business performance

Learning Objective 11.1

Account for current liabilities of known amount

How Are Current Liabilities of Known Amounts Accounted For? (1 of 3)

Liabilities are debts that are owed to creditors.

Liabilities have three main characteristics:

They occur as a result of a past transaction or event.

They create a present obligation for future payment of cash or services.

They are an unavoidable obligation.

Up to this point, we’ve been focusing on all the assets a business owns. But what about the bills a business owes? A business needs to know what it owes (liabilities) and by what date the liabilities have to be paid. Liabilities are debts that are owed to creditors. Liabilities have three main characteristics:

They occur because of a past transaction or event.

They create a present obligation for future payment of cash or services.

They are an unavoidable obligation.

How Are Current Liabilities of Known Amounts Accounted For? (2 of 3)

Current liabilities must be paid either with cash or with goods and services within one year or within the entity’s operating cycle.

Long-term liabilities do not need to be paid within one year or within the entity’s operating cycle.

Liabilities can be split into two main categories: current and long term. A current liability is a liability that must be paid with cash or with goods and services within one year or within the entity’s operating cycle if the cycle is longer than a year. A long-term liability is a liability that does not need to be paid within one year or within the entity’s operating cycle, whichever is longer.

How Are Current Liabilities of Known Amounts Accounted For? (3 of 3)

Current liabilities

Accounts Payable

Sales Tax Payable

Unearned Revenue

Long-term liabilities

Notes Payable

Mortgage Payable

Bonds Payable

Examples of current liabilities include:

Accounts Payable―Amounts owed for products or services on account are accounts payable. Because these are typically due in 30 days, they are current liabilities.

Sales Tax Payable―Most states assess sales tax on retail sales. Retailers collect the sales tax in addition to the price of the item sold. Sales Tax Payable is a current liability because the retailer must pay the state in less than a year.

Unearned Revenues―Unearned revenue is also called deferred revenue. Unearned revenue arises when a business has received cash before providing goods or performing work and, therefore, has an obligation to provide goods or services to customers in the future.

Examples of long-term liabilities include Notes Payable, Mortgage Payable, and Bonds Payable.

Sales Tax Payable (1 of 2)

December’s taxable sales for Smart Touch Learning total $10,000. The company collects an additional 6% sales tax, which equals $600 ($10,000 × 0.06).

Sales tax is usually calculated as a percentage of the amount of a sale. For example, suppose that December’s taxable sales for Smart Touch Learning total $10,000. The company collects an additional 6% sales tax, which equals $600 ($10,000 × 0.06). The entry requires a debit to Cash for $10,600, the amount of the sale plus the amount of the related sales tax. In addition, there is credit to Sales Revenue for $10,000 and a credit to Sales Taxes Payable for $600.

Sales Tax Payable (2 of 2)

Sales tax is not an expense of the business. It is a current liability. Companies collect sales tax and then forward it to the state at regular intervals.

When Smart Touch Learning pays the tax, it records the following:

Sales tax is not an expense of the business. It is a current liability. Companies collect sales tax and then forward it to the state at regular intervals. They normally submit it monthly, but they could file it at other intervals, depending on the state and the amount of the tax. To pay the tax, the company debits Sales Tax Payable for $600 and credits Cash for $600.

Unearned Revenues (1 of 2)

Unearned revenue arises when a business has received cash before providing goods or performing work.

Smart Touch Learning receives $900 in advance on May 21 for a month’s work beginning on that date.

Unearned revenue is also called deferred revenue. Unearned revenue arises when a business has received cash in advance of providing goods or performing work and, therefore, has an obligation to provide goods or services to the customer in the future. Unearned revenues are current liabilities until they are earned.

Suppose Smart Touch Learning receives $900 in advance on May 21 for a month’s work beginning on that date. On May 21, because it received cash before earning the revenue, the company has a liability to perform work for the client. The liability is called Unearned Revenue.

Unearned Revenues (2 of 2)

During May, Smart Touch Learning delivers one-third of the work and earns

of the revenue. On May 31, the accounting clerk records the following entry:

During May, Smart Touch Learning delivers one-third of the work and earns $300 ($900 × 1/3) of the revenue. On May 31, the accounting clerk records a debit to Unearned Revenue of $300 and a credit to Service Revenue of $300 to show that some of the work has been completed and some revenues have now been earned.

Short-Term Notes Payable (1 of 6)

A short-term note payable represents a written promise by a business to pay a debt, usually involving interest, within one year or less.

On May 1, Smart Touch Learning purchases merchandise inventory with a 10%, 90-day note payable, for $8,000. Assume a perpetual inventory system.

Short-term notes payable are a common form of financing. A short-term note payable represents a written promise by the business to pay a debt, usually involving interest, within one year or less.

Assume that on May 1, Smart Touch Learning purchases merchandise inventory with a note payable, for $8,000. The company uses the perpetual inventory system. The 10%, 90-day entry includes a debit to Merchandise Inventory for $8,000 and a credit to Notes Payable for $8,000.

Short-Term Notes Payable (2 of 6)

On July 30, when the note is due, Smart Touch Learning pays the note plus interest.

On July 30, when the note is due, Smart Touch Learning pays the note plus interest. It then debits Notes Payable for $8,000 and Interest Expense for $197 ($8,000 × 0.10 × 90/365). It credits Cash for $8,197 for the principal and interest associated with the note.

Short-Term Notes Payable (3 of 6)

Businesses occasionally borrow cash from banks.

A bank requires a business to sign a promissory note stating that the business will pay the principal plus interest at a specified maturity date.

Businesses occasionally borrow cash from banks. A bank requires a business to sign a promissory note stating that the business will pay the principal plus interest at a specified maturity date.

Short-Term Notes Payable (4 of 6)

On November 1, 2018, Smart Touch Learning borrows $10,000 from First Street Bank at 6% for five months. On November 1, the accounting clerk records the following entry:

On November 1, 2018, Smart Touch Learning borrows $10,000 from First Street Bank at 6% for five months. On November 1, the accounting clerk records the transaction with a debit to Cash and a credit to Notes Payable for $10,000.

Short-Term Notes Payable (5 of 6)

At year-end, the matching principle requires the business to accrue interest expense for November and December as follows:

The interest accrual at December 31, 2018, allocates $100 of the interest on this note to 2018.

Short-Term Notes Payable (6 of 6)

During 2019, the interest on this note for the three remaining months is $150.

During 2019, the interest on this note for the three remaining months is $150. When Smart Touch Learning records payment for the note, it records the remaining interest expense and also removes the interest payable and note payable from the books.

Current Portion of Long-Term Notes Payable

Long-term notes payable are typically reported in the long-term liability section of the balance sheet.

When a long-term debt is paid in installments, the business reports the current portion of notes payable as a current liability.

The remainder is classified as long term.

Long-term notes payable are typically reported in the long-term liability section of the balance sheet. If, however, a long-term debt is paid in installments, the business reports the current portion of notes payable (also called current maturity) as a current liability. The current portion of notes payable is the amount of the principal that is payable within one year. The remaining portion of the note is classified as long term.

Consider a $20,000 note payable that is paid in $5,000 installments over four years. The portion that must be paid within one year, $5,000, is current. The remaining $15,000 is classified as long term. No journal entry is needed to reclassify the current portion. It is, instead, only classified as current or long term for reporting purposes on the balance sheet. Notice that the reclassification does not change the total amount of debt. It only reclassifies $5,000 of the total debt from long term to current.

Learning Objective 11.2

Calculate and journalize basic payroll transactions

How Do Companies Account for and Record Payroll? (1 of 2)

Payroll, also called employee compensation, creates liabilities for a business.

For service organizations, payroll is the major expense.

There are numerous ways to label an employee’s pay:

Salary

Wages

Commission

Bonus

Benefits

Payroll, also called employee compensation, creates liabilities for a business. For service organizations—such as CPA firms and travel agencies—payroll is the major expense. Labor cost is so important that most businesses develop a special payroll system.

There are numerous ways to label an employee’s pay:

Salary is pay stated at an annual, monthly, or weekly rate, such as $62,400 per year, $5,200 per month, or $1,200 per week.

Wages are pay amounts stated at an hourly rate, such as $15 per hour.

Commission is pay stated as a percentage of a sales amount, such as a 5% commission on a sale. A realtor who earns 5% commission, for example, earns $5,000 on a $100,000 sale of real estate ($100,000 × 5%).

Bonus is pay over and above base salary (or wage commission). A bonus is usually paid for exceptional performance—in a single amount after year-end.

Benefits are extra compensation—items that are not paid directly to the employee. Benefits include health, life, and disability insurance.

How Do Companies Account for and Record Payroll? (2 of 2)

Ryan Park was hired to work for Smart Touch Learning.

Ryan earns wages of $15 per hour for straight time (40 hours).

The company pays time-and-a-half for overtime. Thus, Ryan earns $22.50 per hour of overtime ($15.00 × 1.5).

For a 42-hour work week, Ryan’s gross pay is:

Businesses pay employees at a base rate for a set period—called straight time. For additional hours—overtime—the employee may get a higher pay rate, depending on the job classification and wage and hour laws.

Gross Pay and Net (Take-Home) Pay

Two pay amounts are important for accounting purposes:

Gross pay is the total amount of salary, wages, commissions, and bonuses earned by an employee during a pay period.

Net pay is the amount an employee gets to keep. Net pay is also called take-home pay.

Two pay amounts are important for accounting purposes. Gross pay is the total amount of salary, wages, commissions, and any other employee compensation before taxes and other deductions. Net pay is gross pay minus all deductions. It is the amount of compensation that an employee actually takes home.

Employee Payroll Withholding Deductions

Required Deductions

Federal and state income tax

Social Security tax

Other deductions required by federal, state, or local laws

Optional Deductions

Insurance premiums

Retirement plan contributions

Charitable contributions

The federal government, most states, and many municipalities require employers to deduct taxes from employee paychecks. Insurance companies may also get some of the employee’s gross pay. Amounts withheld from paychecks are called withholding deductions. Payroll withholding deductions are the difference between gross pay and take-home pay. These deductions are withheld from paychecks and sent directly to the government, to insurance companies, or to other entities. Payroll deductions fall into two categories: required deductions and optional deductions.

Required deductions include items such as employee federal and state income tax, Social Security tax, and other deductions required by federal, state, or local laws. For example, employees pay their income tax and Social Security tax through payroll deductions.

Optional deductions include insurance premiums, retirement plan contributions, charitable contributions, and other amounts that are withheld at the employee’s request.

Withholding for Employee Income Tax (1 of 2)

The income tax deducted from gross pay is called income tax withholding.

The amount withheld depends on the employee’s gross pay and the number of withholding allowances claimed.

An unmarried taxpayer usually claims one allowance.

A childless married couple usually claims two allowances.

A married couple with one child usually claims three allowances.

U.S. law and some states, cities, and counties require companies to withhold income tax from employee paychecks. The income tax deducted from gross pay is called income tax withholding. The amount withheld depends on the employee’s gross pay and on the number of withholding allowances he or she claims.

For federal withholding, an employee files form W-4 with his or her employer to indicate the number of allowances claimed for income tax withholding. Each allowance lowers the amount of tax withheld.

Withholding for Employee Income Tax (2 of 2)

Ryan Park claims married with three allowances.

Exhibit 11-1 W-4

Exhibit 11-1 shows a W-4 for Ryan Park, who claims married with three allowances (see lines 3 and 5).

Withholding for Employee Social Security Tax (FICA) (1 of 2)

The Federal Insurance Contributions Act (FICA), also known as the Social Security Act, created the Social Security tax.

The law requires employers to withhold Social Security (FICA) tax from employees’ paychecks.

FICA has two components:

OASDI (old age, survivors, and disability insurance)

Medicare (medical benefits)

The Federal Insurance Contributions Act (FICA), also known as the Social Security Act, created the Social Security tax. The Social Security program provides retirement, disability, and medical benefits. The law requires employers to withhold Social Security (FICA) tax from employees’ paychecks. The FICA tax has two components:

OASDI (old age, survivors, and disability insurance)

Medicare (medical benefits)

OASDI provides retirement benefits to individuals based on age, benefits to survivors of qualified individuals, and disability insurance to individuals who cannot work because of a medical condition. The amount of tax withheld varies from year to year because the wage base is subject to OASDI tax changes each year. For 2016, the OASDI tax applies to the first $118,500 of employee earnings in a year. The taxable amount of earnings is usually adjusted annually. The OASDI tax rate for employees at the time of this writing is 6.2%. Therefore, the maximum OASDI tax that an employee paid in 2016 was $7,347 ($118,500 × 0.062).

The Medicare portion of the FICA tax provides health insurance to individuals based on age or disability. Medicare applies to all employees’ earnings, which means there is no maximum tax. At the time of this writing, this tax rate is 1.45% for earnings up to $200,000. Earnings over $200,000 are taxed an additional 0.9%, for a total of 2.35%. Therefore, an employee pays a combined FICA tax rate of 7.65% (6.2% + 1.45%) of the first $118,500 of annual earnings, plus 1.45% of earnings above $118,500 up to $200,000, and 2.35% on earnings above $200,000.

Withholding for Employee Social Security Tax (FICA) (2 of 2)

James Kolen, an employee of Smart Touch Learning, earned $114,200 prior to December. Kolen’s salary for December is $10,000. Kolen’s FICA tax withheld from his paycheck is calculated as follows:

*Numbers in examples are rounded to nearest dollar for simplicity. Payroll amounts are usually rounded to the nearest cent.

Notice that only $4,300 of Kolen’s $10,000 salary is subject to OASDI tax. This is because in December, Kolen reaches the maximum amount of earnings subject to OASDI. Once an employee has earned $118,500, no further earnings are taxed for OASDI in that year.

Medicare tax, on the other hand, has no maximum. All earnings are subject to the tax. Kolen pays Medicare tax on the entire $10,000 earned in December.

Optional Withholding Deductions (1 of 2)

Some companies withhold payroll deductions and then pay designated organizations according to employee instructions.

Examples include:

Insurance premiums

Retirement savings

Union dues

Gifts to charities

Some companies withhold payroll deductions and then pay designated organizations according to employee instructions. Examples include insurance premiums, retirement savings, union dues, and gifts to charities.

Optional Withholding Deductions (2 of 2)

James Kolen’s final pay period on December 31 assumes that he authorized a $180 payment for health insurance and a $20 contribution to United Way. Employee income tax is assumed to be 20% of gross pay.

This slide illustrates the net (take-home) pay that occurs onc

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