Account Chapter 11 Notes

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Apr 3, 2024

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ACC111 – Accounting Principles I Chapter 11 – Current Liabilities and Payroll Learning Guide Learning Objectives we will cover from our Textbook LO1 Account for current liabilities of known amount. LO 2 Calculate and journalize basic payroll transactions. LO 3 Account for current liabilities that must be estimated. LO 4 Account for contingent liabilities. Chapter Terminology (Define each of the terms) Contingent Liability Current Liability Current Portion of Notes Payable Federal Insurance Contributions Act (FICA) Gross Pay Income Tax Withholding Liabilities Long-term Liability Net Pay Payroll Register Pension Plan Short-term Note Payable Social Security (FICA) Tax Unemployment Compensation Taxes Warranty Chapter Formulas (write the formula and explain its use) Interest Maturity Value Principles and Assumptions Expense Recognition / Matching Principle states that expenses should be recognized in the same period as the revenues which they helped to generate. Conservatism is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome and recognize revenues and assets only when they are assured of being received. This is an example of being conservative.

New Accounts (identify each of the following for each new account introduced in this chapter) Account Title Classification: A - Asset, L - Liability, OE - Owner’s Equity, D - Drawing, R - Revenue, C - Cost or E - Expense Normal Balance (Debit or Credit) Permane nt or Temporar y Financial Statement: IS - Income Stmnt, OES - Owner’s Equity Stmnt or BS - Balance Sheet Interest Payable Sales Taxes Payable Warranty Liability Salaries and Wages Payable Payroll Taxes Payable Payroll Tax Expense Learning Objective 1 Account for current liabilities of known amount. What is a current liability? What are three main characteristics of liabilities? 1. 2. 3. What is a note payable? Why is sales tax payable a current liability? Why are unearned revenues a liability? What must happen in order for a company to recognize revenue? What is the current portion of long term debt? How are current liabilities presented on the balance sheet?

S-F:11-1 Determining current versus long-term liabilities Rios Raft Company had the following liabilities. Determine whether each liability would be considered a current liability (CL) or a long-term liability (LTL). a. Accounts Payable b. Note Payable due in three years c. Salaries Payable d. Note Payable due in six months e. Sales Tax Payable f. Unearned Revenue due in eight months S-F:11-2 Recording sales tax On July 5, Williams Company recorded sales of merchandise inventory on account, $55,000. The sales were subject to sales tax of 4%. On August 15, Williams Company paid the sales tax owed to the state from the July 5 transaction. 1. Journalize the transaction to record the sale on July 5. Ignore cost of goods sold. Date Account Title Debit Credit July 5 Accounts Receivable $57,20 0 Sales Revenue $55,0 00 Sales Tax Payable $2,20 0 To Record Sale on Account 2. Journalize the transaction to record the payment of sales tax to the state on August 15. Date Account Title Debit Credit Aug 15 Sales Tax Payable $2,200 Cash $2,20 0 To Record Payment of Sales Tax S-F:11-3 Recording unearned revenue On June 1, Movies Online collected cash of $63,000 on future annual subscriptions starting on July 1. 1. Journalize the transaction to record the collection of cash on June 1. Date Account Title Debit Credit Jun 1 Cash $63,00 0 Unearned Revenue $63,0 00 To Record Cash Received for Subscriptions 2. Journalize the transaction required at December 31, the company’s year-end, assuming no revenue earned has been recorded. (Round adjustment to the nearest whole dollar.) Date Account Title Debit Credit Unearned Revenue $31,50 0 Subscription Revenue $31,5 00 To Record Revenue Earned

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S-F:11-4 Accounting for a note payable On December 31, 2023, Franklin purchased $13,000 of merchandise inventory on a one-year, 9% note payable. Franklin uses a perpetual inventory system. 1. Journalize the company’s purchase of merchandise inventory on December 31, 2023. Date Account Title De bit Credit Dec 31 Merchandise Inventory $13 ,00 0 Notes Payable $13,0 00 To Record the Purchase of Inventory with Promissory Note 2. Journalize the company’s accrual of interest expense on June 30, 2024, its fiscal year-end. Date Account Title Debit Credit June 30 Interest Expense $585 Interest Payable $585 To Accrue Interest Expense 3. Journalize the company’s payment of the note plus interest on December 31, 2024. Date Account Title Debit Credit Dec 31 Notes Payable (Principal) $13,00 0 Interest Payable (Prior Year Interest) $585 Interest Expense (Current Interest) $585 Cash (Maturity Value) $14,1 70 To Record Payment of Note + Interest S-F:11-5 Determining current portion of long-term note payable On January 1, Irving Company purchased equipment of $280,000 with a long-term note payable. The debt is payable in annual installments of $56,000 due on December 31 of each year. At the date of purchase, how will Irving Company report the note payable? Balance Sheet (on Jan 1 date of purchase) Current Liabilities: $56,000 Long-Term Liabilities: $224,000 Learning Objective 4 Account for contingent liabilities. How must a company address a reporting uncertainty? What is a contingent liability? A potential liability that depends on a future event.

What is a Remote Contingent Liability and is it recorded? A liability that has a remote likelihood. Report that: Do Not Disclose What is a Reasonably Possible Contingent Liability and is it recorded? A liability that is reasonably possible, describe the situation in the notes to the financial statements. Footnote Disclosure. What is a Probable Contingent Liability? A liability that will be recorded in the financial statements 1) Probable and we cannot estimate: Described in a note to financial statements 2) Probable and can be estimated: Record expense or loss and liability for estimated amount S-F:11-12 Accounting treatment for contingencies Freeman Motors, a motorcycle manufacturer, had the following contingencies. Determine the appropriate accounting treatment for each of the situations Freeman is facing. a. Freeman estimates that it is reasonably possible but not likely that it will lose a current lawsuit. Freeman’s attorneys estimate the potential loss will be $4,500,000. Describe the situation in a note to the financial statements. b. Freeman received notice that it was being sued. Freeman considers this lawsuit to be frivolous. Do Not Disclose c. Freeman is currently the defendant in a lawsuit. Freeman believes it is likely that it will lose the lawsuit and estimates the damages to be paid will be $75,000. Record an expense or loss and a liability based upon the amount ($75,000) Learning Objective 2 Calculate and journalize basic payroll transactions. What are the three components of determining the payroll? Explain each one. 1. 2. 3. How is the overtime rate and hours calculated?

List some of the common withholdings deducted from employees’ paychecks: What are employer payroll taxes? S-F:11-6 Computing and journalizing an employee’s total pay Lucy Rose works at College of Fort Worth and is paid $12 per hour for a 40-hourworkweek and time-and-a-half for hours above 40. 1. Compute Rose’s gross pay for working 60 hours during the first week of February. Regular Hours 40 X $12 = $480 Overtime Hours 20 X $18 = $360 Gross Pay: $840 A.) Rose is single, and her income tax withholding is 15% of total pay. Rose’s only payroll deductions are payroll taxes. Compute Rose’s net (take-home) pay for the week. Assume Rose’s earnings to date are less than the OASDI limit. Gross Pay $840 Withholding/Deductions Employee Income Tax (15% X $840) = $126.00 Employee OASDI/SS Tax (6.2% X $840) = $52.08 Employee Medicare Tax (1.45% X $840) = $12.18 2. Journalize the accrual of wages expense and the payment related to the employment of Lucy Rose. Date Account Title Debit Credit Wages Expense $840 Employee Income Tax Payable $126 Employee OASDI/SS Tax Payable $52.0 8 Employee Medicare Tax Payable $12.1 8 Wages Payable $649. 74 To Record Wage Expense and Withholdings Wages Payable $649. 74 Cash $649. 74

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S-F:11-7 Computing payroll amounts considering FICA tax limits Lily Carter works for JDK all year and earns a monthly salary of $12,300. There is no overtime pay. Lily’s income tax withholding rate is 15% of gross pay. In addition to payroll taxes, Lily elects to contribute 4% monthly to United Way. JDK also deducts $200 monthly for co-payment of the health insurance premium. As of September 30, Lily had $125,100 of cumulative earnings. 1. Compute Lily’s net pay for October. Employee Earnings Subject to Tax. $132,900 Employee Earnings Prior to Current Pay. -- $125,100 Current Earnings Subject to OASDI Tax. $7,800 X Tax Rate 6.2%. X .062 OASDI / SS Tax to be Withheld $483.62 Net Pay Gross Pay. $12,300.00 Withholding Deductions: Employee Income Tax $1,845

2. Journalize the accrual of salaries expense and the payment related to the employment of Lily Carter. Date Account Title Debit Credit Oct 31 Salaries Expense $12,3 00 Employee Income Tax Payable $1,84 5 FICA OASDI Tax Payable $483. 60 FICA Medicare Tax Payable $178. 35 Employee Health Insurance Payable $200 United Way Payable $492 Salaries Payable $9,10 1.05 Salaries Payable $9,10 1.05 Cash $9,10 1.05 S-F:11-8 Computing and journalizing the payroll expense and payments Macintosh Company has monthly salaries of $26,000. Assume Macintosh pays all the standard payroll taxes, no employees have reached the payroll tax limits, total income tax withheld is $2,000, and the only payroll deductions are payroll taxes. Journalize the accrual of salaries expense, accrual of employer payroll taxes, and payment of employee and employer payroll taxes for Macintosh Company. Date Account Title Debit Credit (1) Salaries Expense (Gross Pay) 26,00 0 Employee Income Tax Payable 2,000 FICA – OASDI Tax Payable 1,612 FICA – Medicare Tax Payable 377 Salaries Payable (Net Pay) 22,01 1 (2) Payroll Tax Expense 3,549 FICA – OASDI Tax Payable 1,612 FICA – Medicare Tax Payable 377 Federal Unemployed Tax Payable (FUTA) 156 State Unemployment Tax Payable (SUTA) 1,404 (3) Employee Income Tax Payable 2,000 FICA – OASDI Tax Payble 3,224 FICA – Medicare Tax Payable 754 Federal Unemployed Tax Payable (FUTA) 156 State Unemployment Tax Payable (SUTA) 1,404 Cash 7,538 Learning Objective 3 Account for current liabilities that must be estimated.

List two current liabilities that must be estimated: 1. 2. S-F:11-9 Computing bonus payable On December 31, Weston Company estimates that it will pay its employees a 5% bonus on net income after deducting the bonus. The company reports net income of $64,000 before the calculation of the bonus. The bonus will be paid on January 15 of the next year. Formula: (Bonus % X Net Income before Bonus) / (1 + Bonus %) (5% X 64,000) / 1.05 = $3,047.62 1. Journalize the December 31 transaction for Weston. Date Account Title Debit Credit Dec 31 Employee Bonus Expense 3,047. 62 Employee Bonus Payable 3,047. 62 To Accrue Employee Bonus 2. Journalize the payment of the bonus on January 15. Date Account Title Debit Credit Jan 15 Employee Bonus Payable 3,047. 62 Cash 3,047. 62 To Record Payment of Bonus S-F:11-10 Journalizing vacation benefits Samuel Industries has three employees. Each employee earns two vacation days a month. Samuel pays each employee a weekly salary of $1,250 for a five-day workweek. 1. Determine the amount of vacation expense for one month. 3 Employees X 2 Vacation Days = 6 days to accrue @ $250 = $1,500 per month 2. Journalize the entry to accrue the vacation expense for the month. Date Account Title Debit Credit Vacation Benefits Expense $1,500 Vacation Benefits Payable $1,50 0 To Record Payment of Vacation Benefits

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S-F:11-11 Accounting for warranty expense and warranty payable Trail Runner guarantees its snowmobiles for three years. Company experience indicates that warranty costs will be approximately 5% of sales. Assume that the Trail Runner dealer in Colorado Springs made sales totaling $600,000 during 2024. The company received cash for 20% of the sales and notes receivable for the remainder. Warranty payments totaled $10,000 during 2024. 1. Record the sales, warranty expense, and warranty payments for the company. Ignore cost of goods sold. Date Account Title Debit Credit 12/3 1 Cash 120,0 00 Accounts Receivable 480,0 00 Sales Revenue 600,0 00 To Record Sales Warranty Expense 30,00 0 Estimated Warranty Payable 30,00 0 To Accrue Warranty Expense Estimated Warranty Payable 10,00 0 Cash 10,00 0 To Accrue Warranty Payments 2. Assume the Estimated Warranty Payable is $0 on January 1, 2024. Post the 2024 transactions to the Estimated Warranty Payable T-account. At the end of 2024, how much in Estimated Warranty Payable does the company owe?