Financing His Dreams
What would you do if you had a great idea for a new product but couldn't come up with the cash to get the business off the ground? Small businesses often cannot attract investors. Nor can they obtain traditional debt financing through bank loans or bond issuances. Instead, they often resort to unusual, and costly, forms of nontraditional financing.
Such was the case for Wilbert Murdock. Murdock grew up in a New York housing project and always had great ambitions. This ambitious spirit led him into some business ventures that failed: a medical diagnostic tool, a device to eliminate carpal tunnel syndrome, custom-designed sneakers, and a device to keep people from falling asleep while driving.
Another idea was computerized golf clubs that analyze a golfer's swing and provide immediate feedback. Murdock saw great potential in the idea. Many golfers are willing to shell out considerable sums of money for devices that might improve their game. But Murdock had no cash to develop his product, and banks and other lenders had shied away. Rather than give up, Murdock resorted to credit cards—in a big way. He quickly owed $25,000 to credit card companies.
While funding a business with credit cards might sound unusual, it isn't. A recent study found that one-third of businesses with fewer than 20 employees financed at least part of their operations with credit cards. As Murdock explained, credit cards are an appealing way to finance a start-up because “credit-card companies don't care how the money is spent.” However, they do care how they are paid. And so Murdock faced high interest charges and a barrage of credit card collection letters.
Murdock's debt forced him to sacrifice nearly everything in order to keep his business afloat. His car stopped running, he barely had enough money to buy food, and he lived and worked out of a dimly lit apartment in his mother's basement. Through it all he tried to maintain a positive spirit, joking that, if he becomes successful, he might some day get to appear in an American Express commercial.
Source: Rodney Ho, “Banking on Plastic: To Finance a Dream, Many Entrepreneurs Binge on Credit Cards,” Wall Street Journal (March 9, 1998), p. A1.
Scan Learning Objectives
Read Feature Story
Read Preview
Read text and answer DO IT! p. 527 p. 531 p. 538 p. 541
Work Comprehensive DO IT! p. 543
Review Summary of Learning Objectives
Answer Self-Test Questions
Complete Assignments
Go to WileyPLUS for practice and tutorials
Read A Look at IFRS p. 564
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.
Preview of Chapter 11
Inventor-entrepreneur Wilbert Murdock, as you can tell from the Feature Story, had to use multiple credit cards to finance his business ventures. Murdock's credit card debts would be classified as current liabilities because they are due every month. Yet, by making minimal payments and paying high interest each month, Murdock used this credit source long-term. Some credit card balances remain outstanding for years as they accumulate interest.
Earlier, we defined liabilities as creditors’ claims on total assets and as existing debts and obligations. These claims, debts, and obligations must be settled or paid at some time in the future by the transfer of assets or services. The future date on which they are due or payable (maturity date) is a significant feature of liabilities. This “future date” feature gives rise to two basic classifications of liabilities: (1) current liabilities and (2) long-term liabilities. We will explain current liabilities, along with payroll accounting, in this chapter. We will explain long-term liabilities in Chapter 15.
The content and organization of Chapter 11 are as follows.
Current Liabilities
Explain a current liability, and identify the major types of current liabilities.
As explained in Chapter 4, a current liability is a debt that a company expects to pay within one year or the operating cycle, whichever is longer. Debts that do not meet this criterion are classified as long-term liabilities.
Companies must carefully monitor the relationship of current liabilities to current assets. This relationship is critical in evaluating a company's short-term debt-paying ability. A company that has more current liabilities than current assets may not be able to meet its current obligations when they become due.
Current liabilities include notes payable, accounts payable, and unearned revenues. They also include accrued liabilities such as taxes, salaries and wages, and interest payable. In the sections that follow, we discuss a few of the common types of current liabilities.
Notes Payable
Companies record obligations in the form of written notes as notes payable. Notes payable are often used instead of accounts payable because they give the lender formal proof of the obligation in case legal remedies are needed to collect the debt. Companies frequently issue notes payable to meet short-term financing needs. Notes payable usually require the borrower to pay interest.
Notes are issued for varying periods of time. Those due for payment within one year of the balance sheet date are usually classified as current liabilities.
To illustrate the accounting for notes payable, assume that First National Bank agrees to lend $100,000 on September 1, 2014, if Cole Williams Co. signs a $100,000, 12%, four-month note maturing on January 1. When a company issues an interest-bearing note, the amount of assets it receives upon issuance of the note generally equals the note's face value. Cole Williams Co. therefore will receive $100,000 cash and will make the following journal entry.
Interest accrues over the life of the note, and the company must periodically record that accrual. If Cole Williams Co. prepares financial statements annually, it makes an adjusting entry at December 31 to recognize interest expense and interest payable of $4,000 ($100,000 × 12% × 4/12). Illustration 11-1 shows the formula for computing interest and its application to Cole Williams Co.'s note.
Illustration 11-1
Formula for computing interest
Cole Williams makes an adjusting entry as follows.
In the December 31 financial statements, the current liabilities section of the balance sheet will show notes payable $100,000 and interest payable $4,000. In addition, the company will report interest expense of $4,000 under “Other expenses and losses” in the income statement. If Cole Williams Co. prepared financial statements monthly, the adjusting entry at the end of each month would be $1,000 ($100,000 × 12% × 1/12).
At maturity (January 1, 2015), Cole Williams Co. must pay the face value of the note ($100,000) plus $4,000 interest ($100,000 × 12% × 4/12). It records payment of the note and accrued interest as follows.
Sales Taxes Payable
As a consumer, you know that many of the products you purchase at retail stores are subject to sales taxes. Many states also are now collecting sales taxes on purchases made on the Internet as well. Sales taxes are expressed as a percentage of the sales price. The selling company collects the tax from the customer when the sale occurs. Periodically (usually monthly), the retailer remits the collections to the state's department of revenue. Collecting sales taxes is important. For example, the state of New York recently sued Sprint Corporation for $300 million for its alleged failure to collect sales taxes on phone calls.
Under most state sales tax laws, the selling company must enter separately in the cash register the amount of the sale and the amount of the sales tax collected. (Gasoline sales are a major exception.) The company then uses the cash register readings to credit Sales Revenue and Sales Taxes Payable. For example, if the March 25 cash register reading for Cooley Grocery shows sales of $10,000 and sales taxes of $600 (sales tax rate of 6%), the journal entry is:
When the company remits the taxes to the taxing agency, it debits Sales Taxes Payable and credits Cash. The company does not report sales taxes as an expense. It simply forwards to the government the amount paid by the customers. Thus, Cooley Grocery serves only as a collection agent for the taxing authority.
Sometimes companies do not enter sales taxes separately in the cash register. To determine the amount of sales in such cases, divide total receipts by 100% plus the sales tax percentage. To illustrate, assume that in the above example Cooley Grocery enters total receipts of $10,600. The receipts from the sales are equal to the sales price (100%) plus the tax percentage (6% of sales), or 1.06 times the sales total. We can compute the sales amount as follows.
$10,600 ÷ 1.06 = $10,000
Helpful Hint Alternatively, Cooley could find the tax by multiplying sales by the sales tax rate ($10,000 × .06).
Thus, Cooley Grocery could find the sales tax amount it must remit to the state ($600) by subtracting sales from total receipts ($10,600 − $10,000).
Unearned Revenues
A magazine publisher, such as Sports Illustrated, receives customers’ checks when they order magazines. An airline company, such as American Airlines, often receives cash when it sells tickets for future flights. Season tickets for concerts, sporting events, and theater programs are also paid for in advance. How do companies account for unearned revenues that are received before goods are delivered or services are performed?
1. When a company receives the advance payment, it debits Cash, and credits a current liability account identifying the source of the unearned revenue.
2. When the company recognizes revenue, it debits an unearned revenue account, and credits a revenue account.
To illustrate, assume that Superior University sells 10,000 season football tickets at $50 each for its five-game home schedule. The university makes the following entry for the sale of season tickets.
As each game is completed, Superior records the recognition of revenue with the following entry.
The account Unearned Ticket Revenue represents unearned revenue, and Superior reports it as a current liability. As the school recognizes revenue, it reclassifies the amount from unearned revenue to Ticket Revenue. Unearned revenue is material for some companies. In the airline industry, for example, tickets sold for future flights represent almost 50% of total current liabilities. At United Air Lines, unearned ticket revenue is its largest current liability, recently amounting to over $1 billion.
Illustration 11-2 shows specific unearned revenue and revenue accounts used in selected types of businesses.
Illustration 11-2
Unearned revenue and revenue accounts
Current Maturities of Long-Term Debt
Companies often have a portion of long-term debt that comes due in the current year. That amount is considered a current liability. As an example, assume that Wendy Construction issues a five-year, interest-bearing $25,000 note on January 1, 2013. This note specifies that each January 1, starting January 1, 2014, Wendy should pay $5,000 of the note. When the company prepares financial statements on December 31, 2013, it should report $5,000 as a current liability and $20,000 as a long-term liability. (The $5,000 amount is the portion of the note that is due to be paid within the next 12 months.) Companies often identify current maturities of long-term debt on the balance sheet as long-term debt due within one year.
It is not necessary to prepare an adjusting entry to recognize the current maturity of long-term debt. At the balance sheet date, all obligations due within one year are classified as current, and all other obligations as long-term.
Current Liabilities
You and several classmates are studying for the next accounting examination. They ask you to answer the following questions.
1. If cash is borrowed on a $50,000, 6-month, 12% note on September 1, how much interest expense would be incurred by December 31?
2. How is the sales tax amount determined when the cash register total includes sales taxes?
3. If $15,000 is collected in advance on November 1 for 3 months’ rent, what amount of rent revenue should be recognized by December 31?
Action Plan
Use the interest formula: Face value of note × Annual interest rate × Time in terms of one year.
Divide total receipts by 100% plus the tax rate to determine sales revenue; then subtract sales revenue from the total receipts.
Determine what fraction of the total unearned rent should be recognized this year.
Solution
1. $50,000 × 12% × 4/12 = $2,000
2. First, divide the total cash register receipts by 100% plus the sales tax percentage to find the sales revenue amount. Second, subtract the sales revenue amount from the total cash register receipts to determine the sales taxes.
3. $15,000 × 2/3 = $10,000
Related exercise material: BE11-2, BE11-3, BE11-4, E11-1, E11-2, E11-3, E11-4, and DO IT! 11-1.
Statement Presentation and Analysis
PRESENTATION
Explain the financial statement presentation and analysis of current liabilities.
As indicated in Chapter 4, current liabilities are the first category under liabilities on the balance sheet. Each of the principal types of current liabilities is listed separately. In addition, companies disclose the terms of notes payable and other key information about the individual items in the notes to the financial statements.
Companies seldom list current liabilities in the order of liquidity. The reason is that varying maturity dates may exist for specific obligations such as notes payable. A more common method of presenting current liabilities is to list them by order of magnitude, with the largest ones first. Or, as a matter of custom, many companies show notes payable first, and then accounts payable, regardless of amount. Then the remaining current liabilities are listed by magnitude. (Use this approach in your homework.) Illustration 11-3 (page 528) provides an adapted excerpt from Caterpillar Inc.'s balance sheet, which illustrates its order of presentation.
ANALYSIS
Use of current and noncurrent classifications makes it possible to analyze a company's liquidity. Liquidity refers to the ability to pay maturing obligations and meet unexpected needs for cash. The relationship of current assets to current liabilities is critical in analyzing liquidity. We can express this relationship as a dollar amount (working capital) and as a ratio (the current ratio).
Illustration 11-3
Balance sheet presentation of current liabilities
Helpful Hint For other examples of current liabilities sections, refer to the PepsiCo and Coca-Cola balance sheets in Appendices B and C.
The excess of current assets over current liabilities is working capital. Illustration 11-4 shows the formula for the computation of Caterpillar's working capital (dollar amounts in millions).
Illustration 11-4
Working capital formula and computation
As an absolute dollar amount, working capital offers limited informational value. For example, $1 million of working capital may be more than needed for a small company but inadequate for a large corporation. Also, $1 million of working capital may be adequate for a company at one time but inadequate at another time.
The current ratio permits us to compare the liquidity of different-sized companies and of a single company at different times. The current ratio is calculated as current assets divided by current liabilities. Illustration 11-5 shows the formula for this ratio, along with its computation using Caterpillar's current asset and current liability data (dollar amounts in millions).
Illustration 11-5
Current ratio formula and computation
Historically, companies and analysts considered a current ratio of 2:1 to be the standard for a good credit rating. In recent years, however, many healthy companies have maintained ratios well below 2:1 by improving management of their current assets and liabilities. Caterpillar's ratio of 1.33:1 is adequate but certainly below the standard of 2:1.
Contingent Liabilities
Describe the accounting and disclosure requirements for contingent liabilities.
With notes payable, interest payable, accounts payable, and sales taxes payable, we know that an obligation to make a payment exists. But, suppose that your company is involved in a dispute with the Internal Revenue Service (IRS) over the amount of its income tax liability. Should you report the disputed amount as a liability on the balance sheet? Or, suppose your company is involved in a law-suit which, if you lose, might result in bankruptcy. How should you report this major contingency? The answers to these questions are difficult because these liabilities are dependent—contingent—upon some future event. In other words, a contingent liability is a potential liability that may become an actual liability in the future.
How should companies report contingent liabilities? They use the following guidelines:
1. If the contingency is probable (if it is likely to occur) and the amount can be reasonably estimated, the liability should be recorded in the accounts.
2. If the contingency is only reasonably possible (if it could happen), then it needs to be disclosed only in the notes that accompany the financial statements.
3. If the contingency is remote (if it is unlikely to occur), it need not be recorded or disclosed.
ACCOUNTING ACROSS THE ORGANIZATION 
Contingencies: How Big Are They?
Contingent liabilities abound in the real world. Consider the following. Manville Corp. filed for bankruptcy when it was hit by billions of dollars in asbestos product-liability claims. Companies having multiple toxic waste sites are faced with cleanup costs that average $10 to $30 million and can reach as high as $500 million depending on the type of waste. For life and health insurance companies and their stockholders, the cost of diseases such as diabetes, Alzheimer's, and AIDS is like an iceberg: Everyone wonders how big such costs really are and what damage they might do in the future. And frequent-flyer programs are so popular that airlines at one time owed participants more than 3 million round-trip domestic tickets. That's enough to fly at least 5.4 billion miles—free for the passengers, but at what future cost to the airlines?
Why do you think most companies disclose, but do not record, contingent liabilities? (See page 563.)
Recording a Contingent Liability
Product warranties are an example of a contingent liability that companies should record in the accounts. Warranty contracts result in future costs that companies may incur in replacing defective units or repairing malfunctioning units. Generally, a manufacturer, such as Stanley Black & Decker, knows that it will incur some warranty costs. From prior experience with the product, the company usually can reasonably estimate the anticipated cost of servicing (honoring) the warranty.
The accounting for warranty costs is based on the expense recognition principle. The estimated cost of honoring product warranty contracts should be recognized as an expense in the period in which the sale occurs. To illustrate, assume that in 2014 Denson Manufacturing Company sells 10,000 washers and dryers at an average price of $600 each. The selling price includes a one-year warranty on parts. Denson expects that 500 units (5%) will be defective and that warranty repair costs will average $80 per unit. In 2014, the company honors warranty contracts on 300 units, at a total cost of $24,000.
At December 31, it is necessary to accrue the estimated warranty costs on the 2014 sales. Denson computes the estimated warranty liability as follows.
Illustration 11-6
Computation of estimated warranty liability
The company makes the following adjusting entry.
Denson records those repair costs incurred in 2014 to honor warranty contracts on 2014 sales as shown below.
The company reports warranty expense of $40,000 under selling expenses in the income statement. It classifies warranty liability of $16,000 ($40,000 − $24,000) as a current liability on the balance sheet.
In the following year, Denson should debit to Warranty Liability all expenses incurred in honoring warranty contracts on 2014 sales. To illustrate, assume that the company replaces 20 defective units in January 2015, at an average cost of $80 in parts and labor. The summary entry for the month of January 2015 is:
Disclosure of Contingent Liabilities
When it is probable that a company will incur a contingent liability but it cannot reasonably estimate the amount, or when the contingent liability is only reasonably possible, only disclosure of the contingency is required. Examples of contingencies that may require disclosure are pending or threatened lawsuits and assessment of additional income taxes pending an IRS audit of the tax return.
The disclosure should identify the nature of the item and, if known, the amount of the contingency and the expected outcome of the future event. Disclosure is usually accomplished through a note to the financial statements, as shown in Illustration 11-7.
Illustration 11-7
Disclosure of contingent liability
The required disclosure for contingencies is a good example of the use of the full-disclosure principle. The full-disclosure principle requires that companies disclose all circumstances and events that would make a difference to financial statement users. Some important financial information, such as contingencies, is not easily reported in the financial statements. Reporting information on contingencies in the notes to the financial statements will help investors be aware of events that can affect the financial health of a company.
DO IT!
Current Liabilities
Lepid Company has the following account balances at December 31, 2014.
| Notes payable ($80,000 due after 12/31/15) | $200,000 |
| Unearned service revenue | 75,000 |
| Other long-term debt ($30,000 due in 2015) | 150,000 |
| Salaries and wages payable | 22,000 |
| Other accrued expenses | 15,000 |
| Accounts payable | 100,000 |
In addition, Lepid is involved in a lawsuit. Legal counsel feels it is probable Lepid will pay damages of $38,000 in 2015.
(a) Prepare the current liability section of Lepid's December 31, 2014, balance sheet.
(b) Lepid's current assets are $504,000. Compute Lepid's working capital and current ratio.
Action Plan
Determine which liabilities will be paid within one year or the operating cycle and include those as current liabilities.
If the contingent liability is probable and reasonably estimable, include it as a current liability.
Use the formula for working capital: Current assets − Current liabilities.
Use the formula for the current ratio: Current assets ÷ Current liabilities.
Solution
(b) Working capital = Current assets − Current liabilities = $504,000 − $400,000 = $104,000
Current ratio = Current assets ÷ Current liabilities = $504,000 ÷ $400,000 = 1.26:1
Related exercise material: BE11-5, E11-7, E11-8, E11-9, and DO IT! 11-2.
Payroll Accounting
Payroll and related fringe benefits often make up a large percentage of current liabilities. Employee compensation is often the most significant expense that a company incurs. For example, Costco recently reported total employees of 103,000 and labor and fringe benefits costs which approximated 70% of the company's total cost of operations.
Payroll accounting involves more than paying employees’ wages. Companies are required by law to maintain payroll records for each employee, to file and pay payroll taxes, and to comply with state and federal tax laws related to employee compensation.
The term “payroll” pertains to both salaries and wages of employees. Managerial, administrative, and sales personnel are generally paid salaries. Salaries are often expressed in terms of a specified amount per month or per year rather than an hourly rate. Store clerks, factory employees, and manual laborers are normally paid wages. Wages are based on a rate per hour or on a piecework basis (such as per unit of product). Frequently, people use the terms “salaries” and “wages” interchangeably.
The term “payroll” does not apply to payments made for services of professionals such as certified public accountants, attorneys, and architects. Such professionals are independent contractors rather than salaried employees. Payments to them are called fees. This distinction is important because government regulations relating to the payment and reporting of payroll taxes apply only to employees.
Determining the Payroll
Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay.
GROSS EARNINGS
Gross earnings is the total compensation earned by an employee. It consists of wages or salaries, plus any bonuses and commissions.
Companies determine total wages for an employee by multiplying the hours worked by the hourly rate of pay. In addition to the hourly pay rate, most companies are required by law to pay hourly workers a minimum of 1½ times the regular hourly rate for overtime work in excess of eight hours per day or 40 hours per week. In addition, many employers pay overtime rates for work done at night, on weekends, and on holidays.
For example, assume that Michael Jordan, an employee of Academy Company, worked 44 hours for the weekly pay period ending January 14. His regular wage is $12 per hour. For any hours in excess of 40, the company pays at one-and-a-half times the regular rate. Academy computes Jordan's gross earnings (total wages) as follows.
Illustration 11-8
Computation of total wages
This computation assumes that Jordan receives 1½ times his regular hourly rate ($12 × 1.5) for his overtime hours. Union contracts often require that overtime rates be as much as twice the regular rates.
An employee's salary is generally based on a monthly or yearly rate. The company then prorates these rates to its payroll periods (e.g., biweekly or monthly). Most executive and administrative positions are salaried. Federal law does not require overtime pay for employees in such positions.
Many companies have bonus agreements for employees. One survey found that over 94% of the largest U.S. manufacturing companies offer annual bonuses to key executives. Bonus arrangements may be based on such factors as increased sales or net income. Companies may pay bonuses in cash and/or by granting employees the opportunity to acquire shares of company stock at favorable prices (called stock option plans).
Ethics Note 
Bonuses often reward outstanding individual performance, but successful corporations also need considerable teamwork. A challenge is to motivate individuals while preventing an unethical employee from taking another's idea for his or her own advantage.
PAYROLL DEDUCTIONS
As anyone who has received a paycheck knows, gross earnings are usually very different from the amount actually received. The difference is due to payroll deductions.
Payroll deductions may be mandatory or voluntary. Mandatory deductions are required by law and consist of FICA taxes and income taxes. Voluntary deductions are at the option of the employee. Illustration 11-9 summarizes common types of payroll deductions. Such deductions do not result in payroll tax expense to the employer. The employer is merely a collection agent, and subsequently transfers the deducted amounts to the government and designated recipients.
Illustration 11-9
Payroll deductions
FICA TAXES In 1937, Congress enacted the Federal Insurance Contribution Act (FICA). FICA taxes are designed to provide workers with supplemental retirement, employment disability, and medical benefits. In 1965, Congress extended benefits to include Medicare for individuals over 65 years of age. The benefits are financed by a tax levied on employees’ earnings.
FICA taxes consist of a Social Security tax and a Medicare tax. They are paid by both employee and employer.1 The FICA tax rate is 7.65% (6.2% Social Security tax plus 1.45%) on the first $110,100 of salary and wages for each employee. In addition, the Medicare tax of 1.45% continues for an employee's salary and wages in excess of $110,100. These tax rate and tax base requirements are shown in Illustration 11-10.
Illustration 11-10
FICA tax rate and tax base
To illustrate the computation of FICA taxes, assume that Mario Ruez has total wages for the year of $100,000. In this case, Mario pays FICA taxes of $7,650 ($100,000 × 7.65%). If Mario has total wages of $114,000, Mario pays FICA taxes of $8,479.20, as shown in Illustration 11-11.
Illustration 11-11
FICA tax computation
Mario's employer is also required to pay $8,479.20.
INCOME TAXES Under the U.S. pay-as-you-go system of federal income taxes, employers are required to withhold income taxes from employees each pay period. Three variables determine the amount to be withheld: (1) the employee's gross earnings, (2) the number of allowances claimed by the employee, and (3) the length of the pay period. The number of allowances claimed typically includes the employee, his or her spouse, and other dependents.
Withholding tables furnished by the Internal Revenue Service indicate the amount of income tax to be withheld. Withholding amounts are based on gross wages and the number of allowances claimed. Separate tables are provided for weekly, biweekly, semimonthly, and monthly pay periods. Illustration 11-12 shows the withholding tax table for Michael Jordan (assuming he earns $552 per week and claims two allowances). For a weekly salary of $552 with two allowances, the income tax to be withheld is $49 (highlighted in red).
In addition, most states (and some cities) require employers to withhold income taxes from employees’ earnings. As a rule, the amounts withheld are a percentage (specified in the state revenue code) of the amount withheld for the federal income tax. Or they may be a specified percentage of the employee's earnings. For the sake of simplicity, we have assumed that Jordan's wages are subject to state income taxes of 2%, or $11.04 (2% × $552) per week.
There is no limit on the amount of gross earnings subject to income tax withholdings. In fact, under our progressive system of taxation, the higher the earnings, the higher the percentage of income withheld for taxes.
OTHER DEDUCTIONS Employees may voluntarily authorize withholdings for charitable organizations, retirement, and other purposes. All voluntary deductions from gross earnings should be authorized in writing by the employee. The authorization(s) may be made individually or as part of a group plan. Deductions for charitable organizations, such as the United Fund, or for financial arrangements, such as U.S. savings bonds and repayment of loans from company credit unions, are made individually. Deductions for union dues, health and life insurance, and pension plans are often made on a group basis. We will assume that Jordan has weekly voluntary deductions of $10 for the United Fund and $5 for union dues.
Illustration 11-12
Withholding tax table
NET PAY
Academy Company determines net pay by subtracting payroll deductions from gross earnings. Illustration 11-13 shows the computation of Jordan's net pay for the pay period.
Alternative Terminology
Net pay is also called take-home pay.
Illustration 11-13
Computation of net pay
Assuming that Michael Jordan's wages for each week during the year are $552, total wages for the year are $28,704 (52 × $552). Thus, all of Jordan's wages are subject to FICA tax during the year. In comparison, let's assume that Jordan's department head earns $2,200 per week, or $114,400 for the year. Since only the first $110,100 is subject to FICA taxes, the maximum FICA withholdings on the department head's earnings would be $8,485 [($110,100 × 6.20%) + ($114,400 × 1.45%)].
Recording the Payroll
Recording the payroll involves maintaining payroll department records, recognizing payroll expenses and liabilities, and recording payment of the payroll.
MAINTAINING PAYROLL DEPARTMENT RECORDS
To comply with state and federal laws, an employer must keep a cumulative record of each employee's gross earnings, deductions, and net pay during the year. The record that provides this information is the employee earnings record. Illustration 11-14 shows Michael Jordan's employee earnings record.
Illustration 11-14
Employee earnings record
Companies keep a separate earnings record for each employee and update these records after each pay period. The employer uses the cumulative payroll data on the earnings record to: (1) determine when an employee has earned the maximum earnings subject to FICA taxes, (2) file state and federal payroll tax returns (as explained later), and (3) provide each employee with a statement of gross earnings and tax withholdings for the year. Illustration 11-18 on page 542 shows this statement.
In addition to employee earnings records, many companies find it useful to prepare a payroll register. This record accumulates the gross earnings, deductions, and net pay by employee for each pay period. Illustration 11-15 presents Academy Company's payroll register. It provides the documentation for preparing a paycheck for each employee. For example, it shows the data for Michael Jordan in the wages section. In this example, Academy Company's total weekly payroll is $17,210, as shown in the gross earnings column (column E, row 24).
Note that this record is a listing of each employee's payroll data for the pay period. In some companies, a payroll register is a journal or book of original entry. Postings are made from it directly to ledger accounts. In other companies, the payroll register is a memorandum record that provides the data for a general journal entry and subsequent posting to the ledger accounts. At Academy Company, the latter procedure is followed.
Illustration 11-15
Payroll register
RECOGNIZING PAYROLL EXPENSES AND LIABILITIES
From the payroll register in Illustration 11-15, Academy Company makes a journal entry to record the payroll. For the week ending January 14, the entry is:
The company credits specific liability accounts for the mandatory and voluntary deductions made during the pay period. In the example, Academy debits Salaries and Wages Expense for the gross earnings of its employees. The amount credited to Salaries and Wages Payable is the sum of the individual checks the employees will receive.
RECORDING PAYMENT OF THE PAYROLL
A company makes payments by check (or electronic funds transfer) either from its regular bank account or a payroll bank account. Each paycheck is usually accompanied by a detachable statement of earnings document. This shows the employee's gross earnings, payroll deductions, and net pay, both for the period and for the year-to-date. Academy Company uses its regular bank account for payroll checks. Illustration 11-16 (page 538) shows the paycheck and statement of earnings for Michael Jordan.
Illustration 11-16
Paycheck and statement of earnings
Helpful Hint Do any of the income tax liabilities result in payroll tax expense for the employer?
Answer: No. The employer is acting only as a collection agent for the government.
Following payment of the payroll, the company enters the check numbers in the payroll register. Academy Company records payment of the payroll as follows.
Many medium- and large-size companies use a payroll processing center that performs payroll recordkeeping services. Companies send the center payroll information about employee pay rates and hours worked. The center maintains the payroll records and prepares the payroll checks. In most cases, it costs less to process the payroll through the center (outsource) than if the company did so internally.
DO IT!
Payroll
In January, gross earnings in Ramirez Company were $40,000. All earnings are subject to 7.65% FICA taxes. Federal income tax withheld was $9,000, and state income tax withheld was $1,000. (a) Calculate net pay for January, and (b) record the payroll.
Action Plan
Determine net pay by subtracting payroll deductions from gross earnings.
Record gross earnings as Salaries and Wages Expense, record payroll deductions as liabilities, and record net pay as Salaries and Wages Payable.
Solution
(a) Net pay: $40,000 − (7.65% × $40,000) − $9,000 − $1,000 = $26,940
(b) Salaries and Wages Expense 40,000
| FICA Taxes Payable | 3,060 |
| Federal Income Taxes Payable | 9,000 |
| State Income Taxes Payable | 1,000 |
| Salaries and Wages Payable | 26,940 |
| (To record payroll) |
Related exercise material: BE11-7, BE11-8, E11-10, E11-11, E11-12, E11-13, and DO IT! 11-3.
Employer Payroll Taxes
Payroll tax expense for businesses results from three taxes that governmental agencies levy on employers. These taxes are (1) FICA, (2) federal unemployment tax, and (3) state unemployment tax. These taxes plus such items as paid vacations and pensions (discussed in the appendix to this chapter) are collectively referred to as fringe benefits. As indicated earlier, the cost of fringe benefits in many companies is substantial.
FICA TAXES
Each employee must pay FICA taxes. In addition, employers must match each employee's FICA contribution. This means the employer must remit to the federal government 12.4% of each employee's first $110,100 of taxable earnings, plus 2.9% of each employee's earnings, regardless of amount. The matching contribution results in payroll tax expense to the employer. The employer's tax is subject to the same rate and maximum earnings as the employee's. The company uses the same account, FICA Taxes Payable, to record both the employee's and the employer's FICA contributions. For the January 14 payroll, Academy Company's FICA tax contribution is $1,316.57 ($17,210.00 × 7.65%).
FEDERAL UNEMPLOYMENT TAXES
The Federal Unemployment Tax Act (FUTA) is another feature of the federal Social Security program. Federal unemployment taxes provide benefits for a limited period of time to employees who lose their jobs through no fault of their own. The FUTA tax rate is 6.2% of taxable wages. The taxable wage base is the first $7,000 of wages paid to each employee in a calendar year. Employers who pay the state unemployment tax on a timely basis will receive an offset credit of up to 5.4%. Therefore, the net federal tax rate is generally 0.8% (6.2% − 5.4%). This rate would equate to a maximum of $56 of federal tax per employee per year (0.8% × $7,000). State tax rates are based on state law.
Helpful Hint Both the employer and employee pay FICA taxes. Federal unemployment taxes and (in most states) the state unemployment taxes are borne entirely by the employer.
The employer bears the entire federal unemployment tax. There is no deduction or withholding from employees. Companies use the account Federal Unemployment Taxes Payable to recognize this liability. The federal unemployment tax for Academy Company for the January 14 payroll is $137.68 ($17,210.00 × 0.8%).
STATE UNEMPLOYMENT TAXES
All states have unemployment compensation programs under state unemployment tax acts (SUTA). Like federal unemployment taxes, state unemployment taxes provide benefits to employees who lose their jobs. These taxes are levied on employers.2 The basic rate is usually 5.4% on the first $7,000 of wages paid to an employee during the year. The state adjusts the basic rate according to the employer's experience rating: Companies with a history of stable employment may pay less than 5.4%. Companies with a history of unstable employment may pay more than the basic rate. Regardless of the rate paid, the company's credit on the federal unemployment tax is still 5.4%.
Companies use the account State Unemployment Taxes Payable for this liability. The state unemployment tax for Academy Company for the January 14 payroll is $929.34 ($17,210.00 × 5.4%). Illustration 11-17 (page 540) summarizes the types of employer payroll taxes.
RECORDING EMPLOYER PAYROLL TAXES
Companies usually record employer payroll taxes at the same time they record the payroll. The entire amount of gross pay ($17,210.00) shown in the payroll register in Illustration 11-15 is subject to each of the three taxes mentioned above.
Illustration 11-17
Employer payroll taxes
Accordingly, Academy records the payroll tax expense associated with the January 14 payroll with the following entry.
Note that Academy uses separate liability accounts instead of a single credit to Payroll Taxes Payable. Why? Because these liabilities are payable to different taxing authorities at different dates. Companies classify the liability accounts in the balance sheet as current liabilities since they will be paid within the next year. They classify Payroll Tax Expense on the income statement as an operating expense.
ACCOUNTING ACROSS THE ORGANIZATION
It Costs $74,000 to Put $44,000 in Sally's Pocket
Sally works for Bogan Communications, a small company in New Jersey that provides audio systems. She makes $59,000 a year but only nets $44,000. What happened to the other $15,000? Well, $2,376 goes for Sally's share of the medical and dental insurance that Bogan provides, $126 for state unemployment insurance, $149 for disability insurance, and $856 for Medicare. New Jersey takes $1,893 in income taxes, and the federal government gets $3,658 for Social Security and another $6,250 for income tax withholding. All of this adds up to some 22% of Sally's gross pay going to Washington or Trenton.
Employing Sally costs Bogan plenty too. Bogan has to write checks for $74,000 so Sally can receive her $59,000 in base pay. Health insurance is the biggest cost: While Sally pays nearly $2,400 for coverage, Bogan pays the rest—$9,561. Then, the federal and state governments take $56 for federal unemployment coverage, $149 for disability insurance, $300 for workers’ comp, and $505 for state unemployment insurance. Finally, the government requires Bogan to pay $856 for Sally's Medicare and $3,658 for her Social Security.
When you add it all up, it costs $74,000 to put $44,000 in Sally's pocket and to give her $12,000 in benefits.
Source: Michael P. Fleischer, “Why I'm Not Hiring,” Wall Street Journal (August 9, 2010), p. A17.
How are the Social Security and Medicare taxes computed for Sally's salary? (See page 563.)
Employer's Payroll Taxes
In January, the payroll supervisor determines that gross earnings for Halo Company are $70,000. All earnings are subject to 7.65% FICA taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes. Halo asks you to record the employer's payroll taxes.
Action Plan
Compute the employer's payroll taxes on the period's gross earnings.
Identify the expense account(s) to be debited.
Identify the liability account(s) to be credited.
Solution
The entry to record the employer's payroll taxes is:
Related exercise material: BE11-9, E11-12, E11-14, and DO IT! 11-4.
Filing and Remitting Payroll Taxes
Preparation of payroll tax returns is the responsibility of the payroll department. The treasurer's department makes the tax payment. Much of the information for the returns is obtained from employee earnings records.
For purposes of reporting and remitting to the IRS, the company combines the FICA taxes and federal income taxes that it withheld. Companies must report the taxes quarterly, no later than one month following the close of each quarter. The remitting requirements depend on the amount of taxes withheld and the length of the pay period. Companies remit funds through deposits in either a Federal Reserve bank or an authorized commercial bank.
Companies generally file and remit federal unemployment taxes annually on or before January 31 of the subsequent year. Earlier payments are required when the tax exceeds a specified amount. Companies usually must file and pay state unemployment taxes by the end of the month following each quarter. When payroll taxes are paid, companies debit payroll liability accounts, and credit Cash.
ANATOMY OF A FRAUD
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 substitute's check was for $1,200, that person would cash the check, keep $200, and pay Art $1,000.
Total take: $150,000
The Missing Controls
Human Resource Controls. Thorough background checks should be performed. No employees should begin work until they have been approved by the Board of Education and entered into the payroll system. No employees should be entered into the payroll system until they have been approved by a supervisor. All paychecks should be distributed directly to employees at the official school locations by designated employees.
Independent internal verification. Budgets should be reviewed monthly to identify situations where actual costs significantly exceed budgeted amounts.
Source: Adapted from Wells, Fraud Casebook (2007), pp. 164–171.
Employers also must provide each employee with a Wage and Tax Statement (Form W-2) by January 31 following the end of a calendar year. This statement shows gross earnings, FICA taxes withheld, and income taxes withheld for the year. The required W-2 form for Michael Jordan, using assumed annual data, is shown in Illustration 11-18. The employer must send a copy of each employee's Wage and Tax Statement (Form W-2) to the Social Security Administration. This agency subsequently furnishes the Internal Revenue Service with the income data required.
Internal Control for Payroll
Chapter 8 introduced internal control. As applied to payrolls, the objectives of internal control are (1) to safeguard company assets against unauthorized payments of payrolls, and (2) to ensure the accuracy and reliability of the accounting records pertaining to payrolls.
Irregularities often result if internal control is lax. Frauds involving payroll include overstating hours, using unauthorized pay rates, adding fictitious employees to the payroll, continuing terminated employees on the payroll, and distributing duplicate payroll checks. Moreover, inaccurate records will result in incorrect paychecks, financial statements, and payroll tax returns.
Payroll activities involve four functions: hiring employees, timekeeping, preparing the payroll, and paying the payroll. For effective internal control, companies should assign these four functions to different departments or individuals. Illustration 11-19 highlights these functions and illustrates their internal control features.
Illustration 11-19
Internal control for payroll
Indiana Jones Company had the following selected transactions.
| Feb. | 1 | Signs a $50,000, 6-month, 9%-interest-bearing note payable to CitiBank and receives $50,000 in cash. |
| 10 | Cash register sales total $43,200, which includes an 8% sales tax. | |
| 28 | The payroll for the month consists of salaries and wages of $50,000. All wages are subject to 7.65% FICA taxes. A total of $8,900 federal income taxes are withheld. The salaries are paid on March 1. | |
| 28 | The company develops the following adjustment data. 1. Interest expense of $375 has been incurred on the note. 2. Employer payroll taxes include 7.65% FICA taxes, a 5.4% state unemployment tax, and a 0.8% federal unemployment tax. 3. Some sales were made under warranty. Of the units sold under warranty, 350 are expected to become defective. Repair costs are estimated to be $40 per unit. |
Instructions
(a) Journalize the February transactions.
(b) Journalize the adjusting entries at February 28.
Action Plan
To determine sales revenue, divide the cash register total by 100% plus the sales tax percentage.
Base payroll taxes on gross earnings.
Expense warranty costs in the period in which the sale occurs.
Solution to Comprehensive DO IT!
SUMMARY OF LEARNING OBJECTIVES
1 Explain a current liability, and identify the major types of current liabilities. A current liability is a debt that a company expects to pay within one year or the operating cycle, whichever is longer. The major types of current liabilities are notes payable, accounts payable, sales taxes payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable.
2 Describe the accounting for notes payable. When a promissory note is interest-bearing, the amount of assets received upon the issuance of the note is generally equal to the face value of the note. Interest expense accrues over the life of the note. At maturity, the amount paid equals the face value of the note plus accrued interest.
3 Explain the accounting for other current liabilities. Companies record sales taxes payable at the time the related sales occur. The company serves as a collection agent for the taxing authority. Sales taxes are not an expense to the company. Companies initially record unearned revenues in an Unearned Revenue account. As a company recognizes revenue, a transfer from unearned revenue to revenue occurs. Companies report the current maturities of long-term debt as a current liability in the balance sheet.
4 Explain the financial statement presentation and analysis of current liabilities. Companies should report the nature and amount of each current liability in the balance sheet or in schedules in the notes accompanying the statements. The liquidity of a company may be analyzed by computing working capital and the current ratio.
5 Describe the accounting and disclosure requirements for contingent liabilities. If the contingency is probable (likely to occur) and the amount is reasonably estimable, the company should record the liability in the accounts. If the contingency is only reasonably possible (it could happen), then it should be disclosed only in the notes to the financial statements. If the possibility that the contingency will happen is remote (unlikely to occur), it need not be recorded or disclosed.
6 Compute and record the payroll for a pay period. The computation of the payroll involves gross earnings, payroll deductions, and net pay. In recording the payroll, companies debit Salaries and Wages Expense for gross earnings, credit individual tax and other liability accounts for payroll deductions, and credit Salaries and Wages Payable for net pay. When the payroll is paid, companies debit Salaries and Wages Payable and credit Cash.
7 Describe and record employer payroll taxes. Employer payroll taxes consist of FICA, federal unemployment taxes, and state unemployment taxes. The taxes are usually accrued at the time the company records the payroll, by debiting Payroll Tax Expense and crediting separate liability accounts for each type of tax.
8 Discuss the objectives of internal control for payroll. The objectives of internal control for payroll are (1) to safeguard company assets against unauthorized payments of payrolls, and (2) to ensure the accuracy of the accounting records pertaining to payrolls.
GLOSSARY
Bonus Compensation to management and other personnel, based on factors such as increased sales or the amount of net income. (p. 533).
Contingent liability A potential liability that may become an actual liability in the future. (p. 529).
Current ratio A measure of a company's liquidity; computed as current assets divided by current liabilities. (p. 528).
Employee earnings record A cumulative record of each employee's gross earnings, deductions, and net pay during the year. (p. 536).
Federal unemployment taxes Taxes imposed on the employer by the federal government that provide benefits for a limited time period to employees who lose their jobs through no fault of their own. (p. 539).
Fees Payments made for the services of professionals. (p. 532).
FICA taxes Taxes designed to provide workers with supplemental retirement, employment disability, and medical benefits. (p. 533).
Full-disclosure principle Requires that companies disclose all circumstances and events that would make a difference to financial statement users. (p. 531).
Gross earnings Total compensation earned by an employee. (p. 532).
Net pay Gross earnings less payroll deductions. (p. 535).
Notes payable Obligations in the form of written notes. (p. 524).
Payroll deductions Deductions from gross earnings to determine the amount of a paycheck. (p. 533).
Payroll register A payroll record that accumulates the gross earnings, deductions, and net pay by employee for each pay period. (p. 536).
Salaries Employee pay based on a specified amount rather than an hourly rate. (p. 532).
Statement of earnings A document attached to a paycheck that indicates the employee's gross earnings, payroll deductions, and net pay. (p. 537).
State unemployment taxes Taxes imposed on the employer by states that provide benefits to employees who lose their jobs. (p. 539).
Wage and Tax Statement (Form W-2) A form showing gross earnings, FICA taxes withheld, and income taxes withheld, prepared annually by an employer for each employee. (p. 542).
Wages Amounts paid to employees based on a rate per hour or on a piecework basis. (p. 532).
Working capital A measure of a company's liquidity; computed as current assets minus current liabilities.(p. 528).
APPENDIX 11A Additional Fringe Benefits
In addition to the traditional payroll-tax fringe benefits (Social Security taxes, Medicare taxes, and state and federal unemployment taxes), employers incur other substantial fringe benefit costs. Two of the most important are paid absences and postretirement benefits.
Paid Absences
Employees often are given rights to receive compensation for absences 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. Ordinarily, vacation pay is the only paid absence that is accrued. The other types of paid absences are only disclosed.
To illustrate, assume that Academy Company employees are entitled to one day's vacation for each month worked. If 30 employees earn an average of $110 per day in a given month, the accrual for vacation benefits in one month is $3,300. Academy records the liability at the end of the month by the following adjusting entry.
This accrual is required by the expense recognition principle. Academy would report Vacation Benefits Expense as an operating expense in the income statement, and Vacation Benefits Payable as a current liability in the balance sheet.
Later, when Academy pays vacation benefits, it debits Vacation Benefits Payable and credits Cash. For example, if employees take 10 days of vacation in July, the entry is:
The magnitude of unpaid absences has gained employers’ attention. Consider the case of an assistant superintendent of schools who worked for 20 years and rarely took a vacation or sick day. A month or so before she retired, the school district discovered that she was due nearly $30,000 in accrued benefits. Yet the school district had never accrued the liability.
Postretirement Benefits
Postretirement benefits are benefits that employers provide to retired employees for (1) pensions and (2) health care and life insurance. Companies account for both types of postretirement benefits on the accrual basis. The cost of postretirement benefits is getting steep. For example, states and localities must deal with a $1 trillion deficit in public employees’ retirement benefit funds. This shortfall amounts to more than $8,800 for every household in the nation.
The average American has debt of approximately $10,000 (not counting the mortgage on their home) and has little in the way of savings. What will happen at retirement for these people? The picture is not pretty—people are living longer, the future of Social Security is unclear, and companies are cutting back on postretirement benefits. This situation may lead to one of the great social and moral dilemmas this country faces in the next 40 years. The more you know about postretirement benefits, the better you will understand the issues involved in this dilemma.
POSTRETIREMENT HEALTH-CARE AND LIFE INSURANCE BENEFITS
Providing medical and related health-care benefits for retirees was at one time an inexpensive and highly effective way of generating employee goodwill. This practice has now turned into one of corporate America's most worrisome financial problems. Runaway medical costs, early retirement, and increased longevity are sending the liability for retiree health plans through the roof.
Companies estimate and expense postretirement costs during the working years of the employee because the company benefits from the employee's services during this period. However, the company rarely sets up funds to meet the cost of the future benefits. It follows a pay-as-you-go basis for these costs. The major reason is that the company does not receive a tax deduction until it actually pays the medical bill.
PENSION PLANS
A pension plan is an agreement whereby an employer provides benefits (payments) to employees after they retire. The need for good accounting for pension plans becomes apparent when we consider the size of existing pension funds. Over 50 million workers currently participate in pension plans in the United States. Most pension plans are subject to the provisions of ERISA (Employee Retirement Income Security Act), a law enacted to curb abuses in the administration and funding of such plans.
Three parties are generally involved in a pension plan. The employer (company) sponsors the pension plan. The plan administrator receives the contributionsfrom the employer, invests the pension assets, and makes the benefit payments to the pension recipients (retired employees). Illustration 11A-1 indicates the flow of cash among the three parties involved in a pension plan.
Illustration 11A-1 Parties in a pension plan
An employer-financed pension is part of the employees’ compensation. ERISA establishes the minimum contribution that a company must make each year toward employee pensions. The most popular type of pension plan used is the 401(k) plan. A 401(k) plan works as follows. As an employee, you can contribute up to a certain percentage of your pay into a 401(k) plan, and your employer will match a percentage of your contribution. These contributions are then generally invested in stocks and bonds through mutual funds. These funds will grow without being taxed and can be withdrawn beginning at age 59-1/2. If you must access the funds earlier, you may be able to do so, but a penalty usually occurs along with a payment of tax on the proceeds. Any time you have the opportunity to be involved in a 401(k) plan, you should avail yourself of this benefit!
Companies record pension costs as an expense while the employees are working because that is when the company receives benefits from the employees’ services. Generally, the pension expense is reported as an operating expense in the company's income statement. Frequently, the amount contributed by the company to the pension plan is different from the amount of the pension expense. A liability is recognized when the pension expense to date is more than the company's contributions to date. An asset is recognized when the pension expense to date is less than the company's contributions to date. Further consideration of the accounting for pension plans is left for more advanced courses.
The two most common types of pension arrangements for providing benefits to employees after they retire are defined-contribution plans and defined-benefit plans.
DEFINED-CONTRIBUTION PLAN In a defined-contribution plan, the plan defines the employer's contribution but not the benefit that the employee will receive at retirement. That is, the employer agrees to contribute a certain sum each period based on a formula. A 401(k) plan is typically a defined-contribution plan.
The accounting for a defined-contribution plan is straightforward. The employer simply makes a contribution each year based on the formula established in the plan. As a result, the employer's obligation is easily determined. It follows that the company reports the amount of the contribution required each period as pension expense. The employer reports a liability only if it has not made the contribution in full.
To illustrate, assume that Alba Office Interiors has a defined-contribution plan in which it contributes $200,000 each year to the pension fund for its employees. The entry to record this transaction is:
To the extent that Alba did not contribute the $200,000 defined contribution, it would record a liability. Pension payments to retired employees are made from the pension fund by the plan administrator.
DEFINED-BENEFIT PLAN In a defined-benefit plan, the benefits that the employee will receive at the time of retirement are defined by the terms of the plan. Benefits are typically calculated using a formula that considers an employee's compensation level when he or she nears retirement and the employee's years of service. Because the benefits in this plan are defined in terms of uncertain future variables, an appropriate funding pattern is established to ensure that enough funds are available at retirement to meet the benefits promised. This funding level depends on a number of factors such as employee turnover, length of service, mortality, compensation levels, and investment earnings. The proper accounting for these plans is complex and is considered in more advanced accounting courses.
POSTRETIREMENT BENEFITS AS LONG-TERM LIABILITIES
While part of the liability associated with (1) postretirement health-care and life insurance benefits and (2) pension plans is generally a current liability, the greater portion of these liabilities extends many years into the future. Therefore, many companies are required to report significant amounts as long-term liabilities for postretirement benefits.
SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 11A
9 Identify additional fringe benefits associated with employee compensation. Additional fringe benefits associated with wages are paid absences (paid vacations, sick pay benefits, and paid holidays), and postretirement benefits (pensions, health care, and life insurance).
GLOSSARY FOR APPENDIX 11A
Defined-benefit plan A pension plan in which the benefits that the employee will receive at retirement are defined by the terms of the plan. (p. 548).
Defined-contribution plan A pension plan in which the employer's contribution to the plan is defined by the terms of the plan. (p. 547).
Pension plan An agreement whereby an employer provides benefits to employees after they retire. (p. 546).
Postretirement benefits Payments by employers to retired employees for health care, life insurance, and pensions. (p. 546).
Self-Test, Brief Exercises, Exercises, Problem Set A, and many more components are available for practice in WileyPLUS.
*Note: All asterisked Questions, Exercises, and Problems relate to material in the appendix to the chapter.
SELF-TEST QUESTIONS
Answers are on page 563.
(LO 1)
1. The time period for classifying a liability as current is one year or the operating cycle, whichever is:
(a) longer.
(b) shorter.
(c) probable.
(d) possible.
2. To be classified as a current liability, a debt must be expected to be paid within:
(LO 1)
(a) one year.
(b) the operating cycle.
(c) 2 years.
(d) (a) or (b), whichever is longer.
(LO 2)
3. Maggie Sharrer Company borrows $88,500 on September 1, 2014, from Sandwich State Bank by signing an $88,500, 12%, one-year note. What is the accrued interest at December 31, 2014?
(a) $2,655.
(b) $3,540.
(c) $4,425.
(d) $10,620.
(LO 2)
4. RS Company borrowed $70,000 on December 1 on a 6-month, 6% note. At December 31:
(a) neither the note payable nor the interest payable is a current liability.
(b) the note payable is a current liability, but the interest payable is not.
(c) the interest payable is a current liability but the note payable is not.
(d) both the note payable and the interest payable are current liabilities.
(LO 3)
5. Becky Sherrick Company has total proceeds from sales of $4,515. If the proceeds include sales taxes of 5%, the amount to be credited to Sales Revenue is:
(a) $4,000.
(b) $4,300.
(c) $4,289.25.
(d) No correct answer given.
(LO 3)
6. Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1. What amount should Sensible report as a current liability for Unearned Service Revenue at December 31?
(a) $0.
(b) $4,500.
(c) $13,500.
(d) $18,000.
(LO 4)
7. Working capital is calculated as:
(a) current assets minus current liabilities.
(b) total assets minus total liabilities.
(c) long-term liabilities minus current liabilities.
(d) Both (b) and (c).
(LO 4)
8. The current ratio is computed as:
(a) total assets divided by total liabilities.
(b) total assets divided by current liabilities.
(c) current assets divided by total liabilities.
(d) current assets divided by current liabilities.
(LO 5)
9. 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.
(LO 5)
10. At December 31, Hanes Company prepares an adjusting entry for a product warranty contract. Which of the following accounts is/are included in the entry?
(a) Miscellaneous Expense.
(b) Warranty Liability.
(c) Repair Parts.
(d) Both (a) and (b).
(LO 6)
11. Andy Manion earns $14 per hour for a 40-hour week and $21 per hour for any overtime work. If Manion works 45 hours in a week, gross earnings are:
(a) $560.
(b) $630.
(c) $650.
(d) $665.
(LO 6)
12. When recording payroll:
(a) gross earnings are recorded as salaries and wages payable.
(b) net pay is recorded as salaries and wages expense.
(c) payroll deductions are recorded as liabilities.
(d) More than one of the above.
(LO 7)
13. Employer payroll taxes do not include:
(a) federal unemployment taxes.
(b) state unemployment taxes.
(c) federal income taxes.
(d) FICA taxes.
(LO 7)
14. FICA Taxes Payable was credited for $7,500 in the entry when Antonio Company recorded payroll. When Antonio Company records employer's payroll taxes, FICA Taxes Payable should be credited for:
(a) $0.
(b) $7,500.
(c) $15,000.
(d) Some other amount.
(LO 8)
15. The department that should pay the payroll is the:
(a) timekeeping department.
(b) human resources department.
(c) payroll department.
(d) treasurer's department.
(LO 9)
*16. Which of the following is not an additional fringe benefit?
(a) Postretirement pensions.
(b) Paid absences.
(c) Paid vacations.
(d) Salaries.
Go to the book's companion website, www.wiley.com/college/weygandt, for additional Self-Test Questions.
QUESTIONS
1. Lori Randle believes a current liability is a debt that can be expected to be paid in one year. Is Lori correct? Explain.
2. Petrocelli Company obtains $40,000 in cash by signing a 7%, 6-month, $40,000 note payable to First Bank on July 1. Petrocelli's fiscal year ends on September 30. What information should be reported for the note payable in the annual financial statements?
3. (a) Your roommate says, “Sales taxes are reported as an expense in the income statement.” Do you agree? Explain.
(b) Jensen Company has cash proceeds from sales of $8,400. This amount includes $400 of sales taxes. Give the entry to record the proceeds.
4. Ottawa University sold 15,000 season football tickets at $80 each for its six-game home schedule. Whatentries should be made (a) when the tickets were sold, and (b) after each game?
5. What is liquidity? What are two measures of liquidity?
6. What is a contingent liability? Give an example of a contingent liability that is usually recorded in the accounts.
7. Under what circumstances is a contingent liability disclosed only in the notes to the financial statements? Under what circumstances is a contingent liability not recorded in the accounts nor disclosed in the notes to the financial statements?
8. What is the difference between gross pay and net pay? Which amount should a company record as wages and salaries expense?
9. Which payroll tax is levied on both employers and employees?
10. Are the federal and state income taxes withheld from employee paychecks a payroll tax expense for the employer? Explain your answer.
11. What do the following acronyms stand for: FICA, FUTA, and SUTA?
12. What information is shown in a W-2 statement?
13. Distinguish between the two types of payroll deductions and give examples of each.
14. What are the primary uses of the employee earnings record?
15. (a) Identify the three types of employer payroll taxes.
(b) How are tax liability accounts and payroll tax expense accounts classified in the financial statements?
16. You are a newly hired accountant with Nolasco Company. On your first day, the controller asks you to identify the main internal control objectives related to payroll accounting. How would you respond?
17. What are the four functions associated with payroll activities?
*18. Identify two additional types of fringe benefits associated with employees’ compensation.
*19. Often during job interviews, the candidate asks the potential employer about the firm's paid absences policy. What are paid absences? How are they accounted for?
*20. What are two types of postretirement benefits?
*21. Explain how a 401(k) plan works.
*22. What is the principal difference between a defined-contribution pension plan and a defined-benefit pension plan?
BRIEF EXERCISES
Identify whether obligations are current liabilities.
(LO 1)
BE11-1 Jamison Company has the following obligations at December 31: (a) a note payable for $100,000 due in 2 years, (b) a 10-year mortgage payable of $300,000 payable in ten $30,000 annual payments, (c) interest payable of $15,000 on the mortgage, and (d) accounts payable of $60,000. For each obligation, indicate whether it should be classified as a current liability. (Assume an operating cycle of less than one year.)
Prepare entries for an interest-bearing note payable.
(LO 2)
BE11-2 Peralta Company borrows $60,000 on July 1 from the bank by signing a $60,000, 10%, one-year note payable.
(a) Prepare the journal entry to record the proceeds of the note.
(b) Prepare the journal entry to record accrued interest at December 31, assuming adjusting entries are made only at the end of the year.
Compute and record sales taxes payable.
(LO 3)
BE11-3 Coghlan Auto Supply does not segregate sales and sales taxes at the time of sale. The register total for March 16 is $16,380. All sales are subject to a 5% sales tax. Compute sales taxes payable, and make the entry to record sales taxes payable and sales revenue.
Prepare entries for unearned revenues.
(LO 3)
BE11-4 Derby University sells 4,000 season basketball tickets at $210 each for its 12-game home schedule. Give the entry to record (a) the sale of the season tickets and (b) the revenue recognized by playing the first home game.
Analyze liquidity.
(LO 4)
BE11-5 Yahoo! Inc.'s recent financial statements contain the following selected data (in thousands).
Compute (a) working capital and (b) current ratio.
BE11-6 On December 1, Bruney Company introduces a new product that includes a one-year warranty on parts. In December, 1,000 units are sold. Management believes that 5% of the units will be defective and that the average warranty costs will be $90 per unit. Prepare the adjusting entry at December 31 to accrue the estimated warranty cost.
Prepare adjusting entry for warranty costs.
(LO 5)
BE11-7 Beth Corbin's regular hourly wage rate is $16, and she receives an hourly rate of $24 for work in excess of 40 hours. During a January pay period, Beth works 45 hours. Beth's federal income tax withholding is $95, and she has no voluntary deductions. Compute Beth Corbin's gross earnings and net pay for the pay period.
Compute gross earnings and net pay.
(LO 6)
Record a payroll and the payment of wages.
(LO 6)
BE11-8 Data for Beth Corbin are presented in BE11-7. Prepare the journal entries to record (a) Beth's pay for the period and (b) the payment of Beth's wages. Use January 15 for the end of the pay period and the payment date.
Record employer payroll taxes.
(LO 7)
BE11-9 In January, gross earnings in Lugo Company totaled $80,000. All earnings are subject to 7.65% FICA taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes. Prepare the entry to record January payroll tax expense.
Identify payroll functions.
(LO 8)
BE11-10 Swenson Company has the following payroll procedures.
(a) Supervisor approves overtime work.
(b) The human resources department prepares hiring authorization forms for new hires.
(c) A second payroll department employee verifies payroll calculations.
(d) The treasurer's department pays employees.
Identify the payroll function to which each procedure pertains.
Record estimated vacation benefits.
(LO 9)
*BE11-11 At Ward Company, employees are entitled to one day's vacation for each month worked. In January, 70 employees worked the full month. Record the vacation pay liability for January, assuming the average daily pay for each employee is $120.
DO IT! Review
Answer questions about current liabilities.
(LO 2, 3)
DO IT! 11-1 You and several classmates are studying for the next accounting examination. They ask you to answer the following questions:
1. If cash is borrowed on a $70,000, 9-month, 6% note on August 1, how much interest expense would be incurred by December 31?
2. The cash register total including sales taxes is $42,000, and the sales tax rate is 5%. What is the sales taxes payable?
3. If $45,000 is collected in advance on November 1 for 6-month magazine subscriptions, what amount of subscription revenue should be recognized by December 31?
Prepare current liabilities section and compute liquidity measures.
(LO 4, 5)
DO IT! 11-2 Medlen Company, has the following account balances at December 31, 2014.
| Notes payable ($60,000 due after 12/31/15) | $100,000 |
| Unearned service revenue | 70,000 |
| Other long-term debt ($90,000 due in 2015) | 250,000 |
| Salaries and wages payable | 32,000 |
| Accounts payable | 63,000 |
In addition, Medlen is involved in a lawsuit. Legal counsel feels it is probable Medlen will pay damages of $25,000 in 2015.
(a) Prepare the current liability section of Medlen's December 31, 2014, balance sheet.
(b) Medlen's current assets are $570,000. Compute Medlen's working capital and current ratio.
Calculate net pay and record payroll.
(LO 6)
DO IT! 11-3 In January, gross earnings in Burrell Company were $80,000. All earnings are subject to 7.65% FICA taxes. Federal income tax withheld was $14,000, and state income tax withheld was $1,600. (a) Calculate net pay for January, and (b) record the payroll.
Record employer's payroll taxes.
(LO 7)
DO IT! 11-4 In January, the payroll supervisor determines that gross earnings for Carlyle Company are $120,000. All earnings are subject to 7.65% FICA taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes. Record the employer's payroll taxes.
EXERCISES
Prepare entries for interest-bearing notes.
(LO 2)
E11-1 C.S. Lewis Company had the following transactions involving notes payable.
| July 1, 2014 | Borrows $50,000 from First National Bank by signing a 9-month, 8% note. |
| Nov. 1, 2014 | Borrows $60,000 from Lyon County State Bank by signing a 3-month, 6% note. |
| Dec. 31, 2014 | Prepares adjusting entries. |
| Feb. 1, 2015 | Pays principal and interest to Lyon County State Bank. |
| Apr. 1, 2015 | Pays principal and interest to First National Bank. |
Prepare journal entries for each of the transactions.
Prepare entries for interest-bearing notes.
(LO 2)
E11-2 On June 1, Merando Company borrows $90,000 from First Bank on a 6-month, $90,000, 8% note.
Instructions
(a) Prepare the entry on June 1.
(b) Prepare the adjusting entry on June 30.
(c) Prepare the entry at maturity (December 1), assuming monthly adjusting entries have been made through November 30.
(d) What was the total financing cost (interest expense)?
Journalize sales and related taxes.
(LO 3)
E11-3 In performing accounting services for small businesses, you encounter the following situations pertaining to cash sales.
1. Poole Company enters sales and sales taxes separately on its cash register. On April 10, the register totals are sales $30,000 and sales taxes $1,500.
2. Waterman Company does not segregate sales and sales taxes. Its register total for April 15 is $25,680, which includes a 7% sales tax.
Instructions
Prepare the entry to record the sales transactions and related taxes for each client.
Journalize unearned subscription revenue.
(LO 3)
E11-4 Moreno Company publishes a monthly sports magazine, Fishing Preview. Subscriptions to the magazine cost $20 per year. During November 2014, Moreno sells 15,000 subscriptions beginning with the December issue. Moreno prepares financial statements quarterly and recognizes subscription revenue at the end of the quarter. The company uses the accounts Unearned Subscription Revenue and Subscription Revenue.
Instructions
(a) Prepare the entry in November for the receipt of the subscriptions.
(b) Prepare the adjusting entry at December 31, 2014, to record sales revenue recognized in December 2014.
(c) Prepare the adjusting entry at March 31, 2015, to record sales revenue recognized in the first quarter of 2015.
Record estimated liability and expense for warranties.
(LO 5)
E11-5 Betancourt Company sells automatic can openers under a 75-day warranty for defective merchandise. Based on past experience, Betancourt estimates that 3% of the units sold will become defective during the warranty period. Management estimates that the average cost of replacing or repairing a defective unit is $15. The units sold and units defective that occurred during the last 2 months of 2014 are as follows.
Instructions
(a) Determine the estimated warranty liability at December 31 for the units sold in November and December.
(b) Prepare the journal entries to record the estimated liability for warranties and the costs incurred in honoring 1,000 warranty claims. (Assume actual costs of $15,000.)
(c) Give the entry to record the honoring of 500 warranty contracts in January at an average cost of $15.
Record and disclose contingent liabilities.
(LO 5)
E11-6 Gallardo Co. is involved in a lawsuit as a result of an accident that took place September 5, 2014. The lawsuit was filed on November 1, 2014, and claims damages of $1,000,000.
Instructions
(a) At December 31, 2014, Gallardo's attorneys feel it is remote that Gallardo will lose the lawsuit. How should the company account for the effects of the lawsuit?
(b) Assume instead that at December 31, 2014, Gallardo's attorneys feel it is probable that Gallardo will lose the lawsuit and be required to pay $1,000,000. How should the company account for this lawsuit?
(c) Assume instead that at December 31, 2014, Gallardo's attorneys feel it is reasonably possible that Gallardo could lose the lawsuit and be required to pay $1,000,000. How should the company account for this lawsuit?
E11-7 Younger Online Company has the following liability accounts after posting adjusting entries: Accounts Payable $73,000, Unearned Ticket Revenue $24,000, Warranty Liability $18,000, Interest Payable $8,000, Mortgage Payable $120,000, Notes Payable $80,000, and Sales Taxes Payable $10,000. Assume the company's operating cycle is less than 1 year, ticket revenue will be recognized within 1 year, warranty costs are expected to be incurred within 1 year, and the notes mature in 3 years.
Prepare the current liability section of the balance sheet.
(LO 1, 2, 3, 4, 5)
Instructions
(a) Prepare the current liabilities section of the balance sheet, assuming $30,000 of the mortgage is payable next year.
(b) Comment on Younger Online Company's liquidity, assuming total current assets are $300,000.
Calculate liquidity ratios.
(LO 4)
E11-8 Suppose Kroger Co.'s 2014 financial statements contained the following data (in millions).
Instructions
Compute these values:
(a) Working capital.
(b) Current ratio.
Calculate current ratio and working capital before and after paying accounts payable.
(LO 4)
E11-9 Suppose the following financial data were reported by 3M Company for 2013 and 2014 (dollars in millions).
Instructions
(a) Calculate the current ratio and working capital for 3M for 2013 and 2014.
(b) Suppose that at the end of 2014, 3M management used $200 million cash to pay off $200 million of accounts payable. How would its current ratio and working capital have changed?
Compute net pay and record pay for one employee.
(LO 6)
E11-10 Maria Garza's regular hourly wage rate is $16, and she receives a wage of 1½ times the regular hourly rate for work in excess of 40 hours. During a March weekly pay period, Maria worked 42 hours. Her gross earnings prior to the current week were $6,000. Maria is married and claims three withholding allowances. Her only voluntary deduction is for group hospitalization insurance at $25 per week.
Instructions
(a) Compute the following amounts for Maria's wages for the current week.
(1) Gross earnings.
(2) FICA taxes. (Assume a 7.65% rate on maximum of $110,100.)
(3) Federal income taxes withheld. (Use the withholding table in the text, page 535.)
(4) State income taxes withheld. (Assume a 2.0% rate.)
(5) Net pay.
(b) Record Maria's pay.
Compute maximum FICA deductions.
(LO 6)
E11-11 Employee earnings records for Slaymaker Company reveal the following gross earnings for four employees through the pay period of December 15.
For the pay period ending December 31, each employee's gross earnings is $4,500. The FICA tax rate is 7.65% on gross earnings of $110,100.
Instructions
Compute the FICA withholdings that should be made for each employee for the December 31 pay period. (Show computations.)
Prepare payroll register and record payroll and payroll tax expense.
(LO 6, 7)
E11-12 Ramirez Company has the following data for the weekly payroll ending January 31.
Employees are paid 1½ times the regular hourly rate for all hours worked in excess of 40 hours per week. FICA taxes are 7.65% on the first $110,100 of gross earnings. Ramirez Company is subject to 5.4% state unemployment taxes and 0.8% federal unemployment taxes on the first $7,000 of gross earnings.
Instructions
(a) Prepare the payroll register for the weekly payroll.
(b) Prepare the journal entries to record the payroll and Ramirez's payroll tax expense.
Compute missing payroll amounts and record payroll.
(LO 6)
E11-13 Selected data from a February payroll register for Sutton Company are presented below. Some amounts are intentionally omitted.
FICA taxes are 7.65%. State income taxes are 4% of gross earnings.
Instructions
(a) Fill in the missing amounts.
(b) Journalize the February payroll and the payment of the payroll.
Determine employer's payroll taxes; record payroll tax expense.
(LO 7)
E11-14 According to a payroll register summary of Frederickson Company, the amount of employees’ gross pay in December was $850,000, of which $80,000 was not subject to FICA tax and $750,000 was not subject to state and federal unemployment taxes.
Instructions
(a) Determine the employer's payroll tax expense for the month, using the following rates: FICA 7.65%, state unemployment 5.4%, and federal unemployment 0.8%.
(b) Prepare the journal entry to record December payroll tax expense.
Prepare adjusting entries for fringe benefits.
(LO 9)
*E11-15 Mayberry Company has two fringe benefit plans for its employees:
1. It grants employees 2 days’ vacation for each month worked. Ten employees worked the entire month of March at an average daily wage of $140 per employee.
2. In its pension plan, the company recognizes 10% of gross earnings as a pension expense. Gross earnings in March were $40,000. No contribution has been made to the pension fund.
Instructions
Prepare the adjusting entries at March 31.
Prepare journal entries for fringe benefits.
(LO 9)
*E11-16 Podsednik Corporation has 20 employees who each earn $140 a day. The following information is available.
1. At December 31, Podsednik recorded vacation benefits. Each employee earned 5 vacation days during the year.
2. At December 31, Podsednik recorded pension expense of $100,000, and made a contribution of $70,000 to the pension plan.
3. In January, 18 employees used one vacation day each.
Instructions
Prepare Podsednik's journal entries to record these transactions.
EXERCISES: SET B AND CHALLENGE EXERCISES
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Exercise Set B and Challenge Exercises.
PROBLEMS: SET A
Prepare current liability entries, adjusting entries, and current liabilities section.
(LO 1, 2, 3, 4, 5)
P11-1A On January 1, 2014, the ledger of Accardo Company contains the following liability accounts.
| Accounts Payable | $52,000 |
| Sales Taxes Payable | 7,700 |
| Unearned Service Revenue | 16,000 |
During January, the following selected transactions occurred.
| Jan. | 5 | Sold merchandise for cash totaling $20,520, which includes 8% sales taxes. |
| 12 | Performed services for customers who had made advance payments of $10,000. (Credit Service Revenue.) | |
| 14 | Paid state revenue department for sales taxes collected in December 2013 ($7,700). | |
| 20 | Sold 900 units of a new product on credit at $50 per unit, plus 8% sales tax. This new product is subject to a 1-year warranty. | |
| 21 | Borrowed $27,000 from Girard Bank on a 3-month, 8%, $27,000 note. | |
| 25 | Sold merchandise for cash totaling $12,420, which includes 8% sales taxes. |
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjusting entries at January 31 for (1) the outstanding notes payable, and (2) estimated warranty liability, assuming warranty costs are expected to equal 7% of sales of the new product. (Hint: Use one-third of a month for the Girard Bank note.)
(c) Current liability total $94,250
(c) Prepare the current liabilities section of the balance sheet at January 31, 2014. Assume no change in accounts payable.
Journalize and post note transactions; show balance sheet presentation.
(LO 2)
P11-2A The following are selected transactions of Blanco Company. Blanco prepares financial statements quarterly.
| Jan. | 2 | Purchased merchandise on account from Nunez Company, $30,000, terms 2/10, n/30. (Blanco uses the perpetual inventory system.) |
| Feb. | 1 | Issued a 9%, 2-month, $30,000 note to Nunez in payment of account. |
| Mar. | 31 | Accrued interest for 2 months on Nunez note. |
| Apr. | 1 | Paid face value and interest on Nunez note. |
| July | 1 | Purchased equipment from Marson Equipment paying $11,000 in cash and signing a 10%, 3-month, $60,000 note. |
| Sept. | 30 | Accrued interest for 3 months on Marson note. |
| Oct. | 1 | Paid face value and interest on Marson note. |
| Dec. | 1 | Borrowed $24,000 from the Paola Bank by issuing a 3-month, 8% note with a face value of $24,000. |
| Dec. | 31 | Recognized interest expense for 1 month on Paola Bank note. |
(a) Prepare journal entries for the listed transactions and events.
(b) Post to the accounts Notes Payable, Interest Payable, and Interest Expense.
(c) Show the balance sheet presentation of notes and interest payable at December 31.
(d) What is total interest expense for the year?
(d) $2,110
Prepare payroll register and payroll entries.
(LO 6, 7)
P11-3A Mann Hardware has four employees who are paid on an hourly basis plus time-and-a-half for all hours worked in excess of 40 a week. Payroll data for the week ended March 15, 2014, are presented below.
Abel and Hager are married. They claim 0 and 4 withholding allowances, respectively. The following tax rates are applicable: FICA 7.65%, state income taxes 3%, state unemployment taxes 5.4%, and federal unemployment 0.8%.
Instructions
(a) Prepare a payroll register for the weekly payroll. (Use the wage-bracket withholding table in the text for federal income tax withholdings.)
(a) Net pay $1,985.30
(b) Payroll tax expense $349.43
(b) Journalize the payroll on March 15, 2014, and the accrual of employer payroll taxes.
(b) Payroll tax expense $349.43
(c) Journalize the payment of the payroll on March 16, 2014.
(d) Cash paid $632.02
(d) Journalize the deposit in a Federal Reserve bank on March 31, 2014, of the FICA and federal income taxes payable to the government.
Journalize payroll transactions and adjusting entries.
(LO 6, 7, 9)
P11-4A The following payroll liability accounts are included in the ledger of Harmon Company on January 1, 2014.
| FICA Taxes Payable | $ 760.00 |
| Federal Income Taxes Payable | 1,204.60 |
| State Income Taxes Payable | 108.95 |
| Federal Unemployment Taxes Payable | 288.95 |
| State Unemployment Taxes Payable | 1,954.40 |
| Union Dues Payable | 870.00 |
| U.S. Savings Bonds Payable | 360.00 |
In January, the following transactions occurred.
| Jan. | 10 | Sent check for $870.00 to union treasurer for union dues. |
| 12 | Remitted check for $1,964.60 to the Federal Reserve bank for FICA taxes and federal income taxes withheld. | |
| 15 | Purchased U.S. Savings Bonds for employees by writing check for $360.00. | |
| 17 | Paid state income taxes withheld from employees. | |
| 20 | Paid federal and state unemployment taxes. | |
| 31 | Completed monthly payroll register, which shows salaries and wages $58,000, FICA taxes withheld $4,437, federal income taxes payable $2,158, state income taxes payable $454, union dues payable $400, United Fund contributions payable $1,888, and net pay $48,663. | |
| 31 | Prepared payroll checks for the net pay and distributed checks to employees. |
At January 31, the company also makes the following accrued adjustments pertaining to employee compensation.
1. Employer payroll taxes: FICA taxes 7.65%, federal unemployment taxes 0.8%, and state unemployment taxes 5.4%.
*2. Vacation pay: 6% of gross earnings.
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjustments pertaining to employee compensation at January 31.
(b) Payroll tax expense $8,033; Vacation benefits expense $3,480
Prepare entries for payroll and payroll taxes; prepare W-2 data.
(LO 6, 7)
P11-5A For the year ended December 31, 2014, Denkinger Electrical Repair Company reports the following summary payroll data.
Denkinger Company's payroll taxes are Social Security tax 6.2%, Medicare tax 1.45%, state unemployment 2.5% (due to a stable employment record), and 0.8% federal unemployment. Gross earnings subject to Social Security taxes of 6.2% total $490,000, and gross earnings subject to unemployment taxes total $135,000.
Instructions
(a) Prepare a summary journal entry at December 31 for the full year's payroll.
(a) Salaries and wages payable $295,155
(b) Payroll tax expense $43,100
(b) Journalize the adjusting entry at December 31 to record the employer's payroll taxes.
(c) The W-2 Wage and Tax Statement requires the following dollar data.
PROBLEMS: SET B
Prepare current liability entries, adjusting entries, and current liabilities section.
(LO 1, 2, 3, 4, 5)
P11-1B On January 1, 2014, the ledger of Werth Company contains the following liability accounts.
| Accounts Payable | $35,000 |
| Sales Taxes Payable | 5,000 |
| Unearned Service Revenue | 12,000 |
During January, the following selected transactions occurred.
| Jan. | 1 | Borrowed $30,000 in cash from Platteville Bank on a 4-month, 6%, $30,000 note. |
| 5 | Sold merchandise for cash totaling $11,130, which includes 6% sales taxes. | |
| 12 | Performed services for customers who had made advance payments of $8,000.(Credit Service Revenue.) | |
| 14 | Paid state treasurer's department for sales taxes collected in December 2013, $5,000. | |
| 20 | Sold 750 units of a new product on credit at $44 per unit, plus 6% sales tax. This new product is subject to a 1-year warranty. | |
| 25 | Sold merchandise for cash totaling $16,536, which includes 6% sales taxes. |
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjusting entries at January 31 for (1) the outstanding notes payable, and (2) estimated warranty liability, assuming warranty costs are expected to equal 5% of sales of the new product.
(c) Current liability total $74,346
(c) Prepare the current liabilities section of the balance sheet at January 31, 2014. Assume no change in accounts payable.
Journalize and post note transactions and show balance sheet presentation.
(LO 2)
P11-2B The following are selected transactions of Lindblom Company. Lindblom prepares financial statements quarterly.
| Jan. | 2 | Purchased merchandise on account from Evers Company, $20,000, terms 2/10, n/30. (Lindblom uses the perpetual inventory system.) |
| Feb. | 1 | Issued a 12%, 2-month, $20,000 note to Evers in payment of account. |
| Mar. | 31 | Accrued interest for 2 months on Evers note. |
| Apr. | 1 | Paid face value and interest on Evers note. |
| July | 1 | Purchased equipment from Francisco Equipment paying $12,000 in cash and signing a 10%, 3-month, $40,000 note. |
| Sept. | 30 | Accrued interest for 3 months on Francisco note. |
| Oct. | 1 | Paid face value and interest on Francisco note. |
| Dec. | 1 | Borrowed $25,000 from the National Bank by issuing a 3-month, 12% note with a face value of $25,000. |
| Dec. | 31 | Recognized interest expense for 1 month on National Bank note. |
Instructions
(a) Prepare journal entries for the above transactions and events.
(b) Post to the accounts, Notes Payable, Interest Payable, and Interest Expense.
(c) Show the balance sheet presentation of notes and interest payable at December 31.
(d) $1,650
(d) What is total interest expense for the year?
Prepare payroll register and payroll entries.
(LO 6, 7)
P11-3B Otto Drug Store has four employees who are paid on an hourly basis plus time-and-a-half for all hours worked in excess of 40 a week. Payroll data for the week ended February 15, 2014, are shown below.
The following tax rates are applicable: FICA 7.65%, state income taxes 3%, state unemployment taxes 5.4%, and federal unemployment 0.8%. The first three employees are sales clerks (store wages expense). The fourth employee performs administrative duties (office wages expense).
Instructions
(a) Net pay $1,567.03
(a) Prepare a payroll register for the weekly payroll.
(b) Payroll tax expense $267.86
(b) Journalize the payroll on February 15, 2014, and the accrual of employer payroll taxes.
(c) Journalize the payment of the payroll on February 16, 2014.
(d) Cash paid $436.90
(d) Journalize the remittance to the Federal Reserve bank on February 28, 2014, of the FICA and federal income taxes payable to the government.
Journalize payroll transactions and adjusting entries.
(LO 6, 7, 9)
P11-4B The following payroll liability accounts are included in the ledger of Grandon Company on January 1, 2014.
| FICA Taxes Payable | $ 540 |
| Federal Income Taxes Payable | 1,100 |
| State Income Taxes Payable | 210 |
| Federal Unemployment Taxes Payable | 54 |
| State Unemployment Taxes Payable | 365 |
| Union Dues Payable | 200 |
| U.S. Savings Bonds Payable | 300 |
In January, the following transactions occurred.
| Jan. | 10 | Sent check for $200 to union treasurer for union dues. |
| 12 | Remitted check for $1,640 to the Federal Reserve bank for FICA taxes and federal income taxes withheld. | |
| 15 | Purchased U.S. Savings Bonds for employees by writing check for $300. | |
| 17 | Paid state income taxes withheld from employees. | |
| 20 | Paid federal and state unemployment taxes. | |
| 31 | Completed monthly payroll register, which shows salaries and wages $42,000, FICA taxes withheld $3,213, federal income taxes payable $2,540, state income taxes payable $500, union dues payable $300, United Fund contributions payable $1,300, and net pay $34,147. | |
| 31 | Prepared payroll checks for the net pay and distributed checks to employees. |
At January 31, the company also makes the following accruals pertaining to employee compensation.
1. Employer payroll taxes: FICA taxes 7.65%, state unemployment taxes 5.4%, and federal unemployment taxes 0.8%.
*2. Vacation pay: 5% of gross earnings.
Instructions
(a) Journalize the January transactions.
(b) Payroll tax expense $5,817; Vacation benefits expense $2,100
(b) Journalize the adjustments pertaining to employee compensation at January 31.
Prepare entries for payroll and payroll taxes; prepare W-2 data.
(LO 6, 7)
P11-5B For the year ended December 31, 2014, Stone Company reports the following summary payroll data.
Stone Company's payroll taxes are Social Security tax 6.2%, Medicare tax 1.45%, state unemployment 2.5% (due to a stable employment record), and 0.8% federal unemployment. Gross earnings subject to Social Security taxes of 6.2% total $340,000, and gross earnings subject to unemployment taxes total $90,000.
Instructions
(a) Salaries and wages payable $244,565
(a) Prepare a summary journal entry at December 31 for the full year's payroll.
(b) Payroll tax expense $29,705
(b) Journalize the adjusting entry at December 31 to record the employer's payroll taxes.
(c) The W-2 Wage and Tax Statement requires the dollar data shown below.
PROBLEMS: SET C
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Problem Set C.
COMPREHENSIVE PROBLEM
CP11 Morgan Company's balance sheet at December 31, 2013, is presented below.
During January 2014, the following transactions occurred. (Morgan Company uses the perpetual inventory system.)
1. Morgan paid $250 interest on the note payable on January 1, 2014. The note is due December 31, 2015.
2. Morgan purchased $261,100 of inventory on account.
3. Morgan sold for $440,000 cash, inventory which cost $265,000. Morgan also collected $28,600 in sales taxes.
4. Morgan paid $230,000 in accounts payable.
5. Morgan paid $17,000 in sales taxes to the state.
6. Paid other operating expenses of $30,000.
7. On January 31, 2014, the payroll for the month consists of salaries and wages of $60,000. All salaries and wages are subject to 7.65% FICA taxes. A total of $8,900 federal income taxes are withheld. The salaries and wages are paid on February 1.
Adjustment data:
8. Interest expense of $250 has been incurred on the notes payable.
9. The insurance for the year 2014 was prepaid on December 31, 2013.
10. The equipment was acquired on December 31, 2013, and will be depreciated on a straight-line basis over 5 years with a $2,000 salvage value.
11. Employer's payroll taxes include 7.65% FICA taxes, a 5.4% state unemployment tax, and an 0.8% federal unemployment tax.
Instructions
(You may need to set up T-accounts to determine ending balances.)
(a) Prepare journal entries for the transactions listed above and the adjusting entries.
(b) Prepare an adjusted trial balance at January 31, 2014.
(c) Prepare an income statement, an owner's equity statement for the month ending January 31, 2014, and a classified balance sheet as of January 31, 2014.
CONTINUING COOKIE CHRONICLE
(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 10.)
CCC11 Recall that Cookie Creations sells fine European mixers that it purchases from Kzinski Supply Co. Kzinski warrants the mixers to be free of defects in material and work-manship for a period of one year from the date of original purchase. If the mixer has such a defect, Kzinski will repair or replace the mixer free of charge for parts and labor.
Go to the book's companion website,www.wiley.com/college/weygandt, to see the completion of this problem.
Broadening Your Perspective
Financial Reporting and Analysis
Financial Reporting Problem: Apple Inc.
BYP11-1 The financial statements of Apple Inc. and the notes to consolidated financial statements appear in Appendix A. Instructions for accessing and using the company's complete annual report, including the notes to the financial statements, are also provided in Appendix A.
Instructions
Refer to Apple's financial statements and answer the following questions about current and contingent liabilities and payroll costs.
(a) What were Apple's total current liabilities at September 24, 2011? What was the increase/decrease in Apple's total current liabilities from the prior year?
(b) In Apple's Note 1 (“Summary of Significant Accounting Policies”), the company explains the nature of its contingencies. Under what conditions does Apple recognize (record and report) liabilities for contingencies?
(c) What were the components of total current liabilities on September 24, 2011?
Comparative Analysis Problem:
PepsiCo, Inc. vs. The Coca-Cola Company
BYP11-2 PepsiCo, Inc.'s financial statements are presented in Appendix B. Financial statements of The Coca-Cola Company are presented in Appendix C. Instructions for accessing and using the complete annual reports of PepsiCo and Coca-Cola, including the notes to the financial statements, are also provided in Appendices B and C, respectively.
Instructions
(a) At December 31, 2011, what was PepsiCo's largest current liability account? What were its total current liabilities? At December 31, 2011, what was Coca-Cola's largest current liability account? What were its total current liabilities?
(b) Based on information contained in those financial statements, compute the following 2011 values for each company:
(1) Working capital.
(2) Current ratio.
(c) What conclusions concerning the relative liquidity of these companies can be drawn from these data?
Comparative Analysis Problem:
Amazon.com, Inc. vs. Wal-Mart Stores, Inc.
BYP11-3 Amazon.com Inc.'s financial statements are presented in Appendix D. Financial statements for Wal-Mart Stores, Inc. are presented in Appendix E. Instructions for accessing and using the complete annual reports of Amazon and Wal-Mart, including the notes to the financial statements, are also provided in Appendices D and E, respectively.
Instructions
(a) At December 31, 2011, what was Amazon's largest current liability account? What were its total current liabilities? At January 31, 2012, what was Wal-Mart's largest current liability account? What were its total current liabilities?
(b) Based on information in these financial statements, compute the following 2011 values for Amazon and 2012 values for Wal-Mart:
(1) Working capital.
(2) Current ratio.
(c) What conclusions concerning the relative liquidity of these companies can be drawn from these data?
Real-World Focus
BYP11-4 The Internal Revenue Service provides considerable information over the Internet. The following site answers payroll tax questions faced by employers.
Address: www.irs.ustreas.gov/formspubs/index.html, or go to www.wiley.com/college/weygandt
Steps
1 Go to the site shown above.
2 Choose View Online, Tax Publications.
3 Choose Publication 15, Circular E, Employer's Tax Guide.
Instructions
Answer each of the following questions.
(a) How does the government define “employees”?
(b) What are the special rules for Social Security and Medicare regarding children who are employed by their parents?
(c) How can an employee obtain a Social Security card if he or she doesn't have one?
(d) Must employees report to their employer tips received from customers? If so, how?
(e) Where should the employer deposit Social Security taxes withheld or contributed?
Decision-Making Across the Organization
****BYP11-5 Cunningham Processing Company performs word-processing services for business clients and students in a university community. The work for business clients is fairly steady throughout the year. The work for students peaks significantly in December and May as a result of term papers, research project reports, and dissertations.
Two years ago, the company attempted to meet the peak demand by hiring part-time help. This led to numerous errors and much customer dissatisfaction. A year ago, the company hired four experienced employees on a permanent basis in place of part-time help. This proved to be much better in terms of productivity and customer satisfaction. But, it has caused an increase in annual payroll costs and a significant decline in annual net income.
Recently, Melissa Braun, a sales representative of Banister Services Inc., has made a proposal to the company. Under her plan, Banister will provide up to four experienced workers at a daily rate of $80 per person for an 8-hour workday. Banister workers are not available on an hourly basis. Cunningham would have to pay only the daily rate for the workers used.
The owner of Cunningham Processing, Carol Holt, asks you, as the company's accountant, to prepare a report on the expenses that are pertinent to the decision. If the Banister plan is adopted, Carol will terminate the employment of two permanent employees and will keep two permanent employees. At the moment, each employee earns an annual income of $22,000. Cunningham pays 7.65% FICA taxes, 0.8% federal unemployment taxes, and 5.4% state unemployment taxes. The unemployment taxes apply to only the first $7,000 of gross earnings. In addition, Cunningham pays $40 per month for each employee for medical and dental insurance. Carol indicates that if the Banister Services plan is accepted, her needs for temporary workers will be as follows.
Instructions
With the class divided into groups, answer the following.
(a) Prepare a report showing the comparative payroll expense of continuing to employ permanent workers compared to adopting the Banister Services Inc. plan.
(b) What other factors should Carol consider before finalizing her decision?
Communication Activity
BYP11-6 Mike Falcon, president of the Brownlee Company, has recently hired a number of additional employees. He recognizes that additional payroll taxes will be due as a result of this hiring, and that the company will serve as the collection agent for other taxes.
Instructions
In a memorandum to Mike Falcon, explain each of the taxes, and identify the taxes that result in payroll tax expense to Brownlee Company.
Ethics Case
BYP11-7 Robert Eberle owns and manages Robert's Restaurant, a 24-hour restaurant near the city's medical complex. Robert employs 9 full-time employees and 16 part-time employees. He pays all of the full-time employees by check, the amounts of which are determined by Robert's public accountant, Anne Farr. Robert pays all of his part-time employees in currency. He computes their wages and withdraws the cash directly from his cash register.
Anne has repeatedly urged Robert to pay all employees by check. But as Robert has told his competitor and friend, Danny Gall, who owns the Greasy Diner, “My part-time employees prefer the currency over a check. Also, I don't withhold or pay any taxes or worker's compensation insurance on those cash wages because they go totally unrecorded and unnoticed.”
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the legal and ethical considerations regarding Robert's handling of his payroll?
(c) Anne Farr is aware of Robert's payment of the part-time payroll in currency. What are her ethical responsibilities in this case?
(d) What internal control principle is violated in this payroll process?
All About You
BYP11-8 Medical costs are substantial and rising. But will they be the most substantial expense over your lifetime? Not likely. Will it be housing or food? Again, not likely. The answer is taxes. On average, Americans work 107 days to afford their taxes. Companies, too, have large tax burdens. They look very hard at tax issues in deciding where to build their plants and where to locate their administrative headquarters.
Instructions
(a) Determine what your state income taxes are if your taxable income is $60,000 and you file as a single taxpayer in the state in which you live.
(b) Assume that you own a home worth $200,000 in your community and the tax rate is 2.1%. Compute the property taxes you would pay.
(c) Assume that the total gasoline bill for your automobile is $1,200 a year (300 gallons at $4 per gallon). What are the amounts of state and federal taxes that you pay on the $1,200?
(d) Assume that your purchases for the year total $9,000. Of this amount, $5,000 was for food and prescription drugs. What is the amount of sales tax you would pay on these purchases? (Many states do not levy a sales tax on food or prescription drugs. Does yours?)
(e) Determine what your Social Security taxes are if your income is $60,000.
(f) Determine what your federal income taxes are if your taxable income is $60,000 and you file as a single taxpayer.
(g) Determine your total taxes paid based on the above calculations, and determine the percentage of income that you would pay in taxes based on the following formula: Total taxes paid ÷ Total income.
FASB Codification Activity
BYP11-9 If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following.
(a) What is the definition of current liabilities?
(b) What is the definition of a contingent liability?
(c) What guidance does the Codification provide for the disclosure of contingent liabilities?
Answers to Chapter Questions
Answers to Accounting Across the Organization Questions
p. 529 Contingencies: How Big Are They? Q: Why do you think most companies disclose, but do not record, contingent liabilities? A: A contingent liability may be probable, but often its amount is difficult to determine. If it cannot be determined, the company is not required to accrue it as a liability.
p. 540 It Costs $74,000 to Put $44,000 in Sally's Pocket Q: How are the Social Security and Medicare taxes computed for Sally's salary? A: As indicated in the story, Sally's gross earnings were $59,000. The Social Security tax is 6.2% for both employee and employer up to gross earnings of $110,100 (2012 guidelines). As shown, both Sally and Bogan pay $3,658, which is 6.2% × $59,000. In addition, the Medicare tax is 1.45% on all gross earnings for both employee and employer. As shown, both Sally and Bogan pay $856, which is 1.45% × $59,000.
Answers to Self-Test Questions
1. a 2. d 3. b ($88,500 × 12% × 4/12) 4. d 5. b ($4,515 ÷ 1.05) 6. b ($18,000 × 3/12) 7. a 8. d 9. c 10. b 11. d ($14 × 40) + ($21 × 5) 12. c 13. c 14. b 15. d *16. d
A Look at IFRS
IFRS and GAAP have similar definitions of liabilities. IFRS related to reporting and recognition of liabilities are found in IAS 1 (revised) (“Presentation of Financial Statements”) and IAS 37 (“Provisions, Contingent Liabilities, and Contingent Assets”). The general recording procedures for payroll are similar, although differences occur depending on the types of benefits that are provided in different countries. For example, companies in other countries often have different forms of pensions, unemployment benefits, welfare payments, and so on. The accounting for various forms of compensation plans under IFRS is found in IAS 19 (“Employee Benefits”) and IFRS 2 (“Share-based Payments”). IAS 19 addresses the accounting for a wide range of compensation elements, including wages, bonuses, post-employment benefits, and compensated absences. Both of these standards were recently amended, resulting in significant convergence between IFRS and GAAP.
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 outflow 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.
- 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.
- Under IFRS, companies sometimes will net current liabilities against current assets 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. Contingent liabilities are defined in IAS 37 as being:
- A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity; or
- A present obligation that arises from past events but is not recognized because:
- It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
- The amount of the obligation cannot be measured with sufficient reliability.
- 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 an 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 accounting for defined contribution plans is similar. For defined benefit plans, there are still some significant technical differences in the reporting between GAAP and IFRS. However, the IASB and FASB are working on a joint project on pensions that will most likely eliminate the differences between the two, while dramatically changing the approach used by both.
Looking to the Future
The FASB and IASB are currently involved in two projects, each of which has implications for the accounting for liabilities. One project is investigating approaches to differentiate between debt and equity instruments. The other project, the elements phase of the conceptual framework project, will evaluate the definitions of the fundamental building blocks of accounting. The results of these projects could change the classification of many debt and equity securities.
IFRS Practice
IFRS Self-Test Questions
1. Which of the following is false?
(a) Under IFRS, current liabilities must always be presented before noncurrent liabilities.
(b) Under IFRS, an item is a current liability if it will be paid within the next 12 months.
(c) Under IFRS, current liabilities are shown in order of liquidity.
(d) Under IFRS, a liability is only recognized if it is a present obligation.
2. Under IFRS, a contingent liability is:
(a) disclosed in the notes if certain criteria are met.
(b) reported on the face of the financial statements if certain criteria are met.
(c) the same as a provision.
(d) not covered by IFRS.
3. Under IFRS, obligations related to warranties are considered:
(a) contingent liabilities.
(b) provisions.
(c) possible obligations.
(d) None of these.
4. Which of the following statements is true?
(a) The accounting for issues related to payroll are not covered in any IFRS.
(b) The accounting for payrolls is similar under IFRS and U.S. GAAP.
(c) Salary and wages payable is considered a contingent liability under IFRS.
(d) IFRS does not normally report liabilities in order of liquidity.
5. The joint projects of the FASB and IASB could potentially:
(a) change the definition of liabilities.
(b) change the definition of equity.
(c) change the definition of assets.
(d) All of the above.
IFRS Exercises
IFRS11-1 Define a provision and give an example.
IFRS11-2 Define a contingent liability and give an example.
IFRS11-3 Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for liabilities.
International Financial Statement Analysis: Zetar plc
IFRS11-4 The financial statements of Zetar plc are presented in Appendix F. Instructions for accessing and using Zetar's annual report are also provided in Appendix F.
Instructions
Use the company's complete annual report to answer the following questions.
(a) According to the notes to the financial statements, what types of transactions do trade payables relate to? What was the average amount of time it took the company to pay its payables?
(b) Note 3.4 discusses provisions that the company records for certain types of activities. What do the provisions relate to, what are the estimates based on, and what could cause those estimates to change in subsequent periods?
(c) What was the average interest rate paid on bank loans and overdrafts?
Answers to IFRS Self-Test Questions
1. a 2. a 3. b 4. b 5. d
Remember to go back to The Navigator box on the chapter opening page and check off your completed work.
__________
1Congress sets the tax rate and the tax base for FICA taxes. For example, in 2011 the tax rate on gross earnings subject to Social Security taxes for employees was lowered to 4.2% to provide more spendable income to stimulate the economy.
2In a few states, the employee is also required to make a contribution. In this textbook, including the homework, we will assume that the tax is only on the employer.