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11-1 Study ObjectivesQuestions ExercisesExercises Problems 1.Explain a current liability, and current liabilities. 1171A1B 2.Describe the accounting 221, 2, 71A, 2A1B, 2B 3.Explain the accounting for other current liabilities. 3, 43, 43, 4, 71A1B 4.Explain the financial 557, 8, 91A1B 5.Describe the accounting and 6, 765, 6, 71A1B 6.Compute and record the payroll for a pay period. 7, 810, 11, 12 3A, 4A, 5A3B, 4B, 5B 7.Describe and record employer payroll taxes. 912, 143A, 4A, 5A3B, 4B, 5B 8Discuss the objectives of internal control for payroll. 16, 1710 *9.Identify additional fringe 1115, 164A4B Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix 11-2 NumberDescription 1APrepare current liability entries, adjusting entries, Moderate30Ð40 2AJournalize and post note transactions and show balance 11-4 1. Jill is not correct. A current liability is a debt that can reasonably be expected to be paid: (a) from 11-5 12. 13. Payroll deductions can be classified as either mandatory (required by the government) or voluntary union dues, and charitable contributions. 14. 11-6 (a)A note payable due in two years is a long-term liability, not a current liability. (b)$30,000 of the mortgage payable is a current maturity of long-term debt. This amount should be reported as a current liability. (c)Interest payable is a current liability because it will be paid out of current 11-7 .............................$ Federal income taxes payable ................................ 95.00 159.64 11-8 Jan.15Wages Expense FICA Taxes Payable ($808 X 8%) ............... ................... Jan.15Wages Payable Jan.31Payroll Tax Expense ............................................. FICA Taxes Payable ($70,000 X 8%) .......... Payable ($70,000 X .8%) ......................... 560 State Unemployment Taxes Payable........ ($70,000 X 5.4%) (a)Timekeeping(c)Preparing the payroll (b)Hiring employees(d)Paying the payroll Jan.31Vacation Benefits Expense (80 X $120) ......... Vacation Benefits Payable ........................ 11-9 ($50,000 X 12% X 6/12) Interest Payable ($60,000 X 10% X 2/12) Interest Payable ......................................................1 Interest Payable ............................................................500 Interest Payable 11-10 (a)June 1Cash .................................................................... .......................................... (b)June 30Interest Expense ............................................. 900 Interest Payable ...................................... 900 [($90,000 X 12%) X 1/12] (c)Dec. 1Notes Payable .................................................. Interest Payable.............................................. ($90,000 X 12% X 6/12) ............................................................ (d)$5,400 Apr.10Cash ........................................................................... ................................................................. ................................... 15Cash ........................................................................... Sales ($23,540 Ö 1.07)................................. ................................... ($23,540 Ð $22,000) 11-11 (a)Nov.30Cash (12,000 X $20) (b)Dec.31Unearned Subscriptions ................................ ........................... ($240,000 X 1/12) (c)Mar.31Unearned Subscriptions ($240,000 X 3/12) (a)Estimated warranties outstanding: MonthEstimateUnits DefectiveOutstanding November December 960 1,860 600 400 300 560 (b)Warranty Expense (1,860 X $20) 11-12 (a)If a contingency is remote (unlikely to occur), it need not be recorded or disclosed. (b)Since the contingency is probable and reasonably estimable, the liability ....................................................................$ .................................. 11-13 (a)Current ratio 2004 $8,720 Ö $6,071 = 1.44:1 2005 $7,115 Ö $5,238 = 1.36:1 2004 $8,720 Ð $6,071 = $2,649 million 2005 $7,115 Ð $5,238 = $1,877 million (b)Current ratio (a)1.Regular 40 X $15.00 =$600.00 Overtime 2 X $22.50 = 45.00 Gross earnings$645.00 2.FICA taxesÑ$51.60 = ($645 X 8%). 3.Federal income taxes $55. 4.State income taxes $12.90 = ($645 X 2%). 11-14 C. Ogle$4,000 X 8% = $320. OgleÕs total gross earnings for the year D. Delgado$3, 900 X 8% = $312. DelgadoÕs total gross earnings for the year are $90,100. Thus, $3,900 of the gross earnings ($4,000 Ð $100) 11-15 11-16 (b)Jan.31Payroll Tax Expense Payable ($1,837 X .8%) ...................... State Unemployment Taxes Payable ($1,837 X 5.4%) .................... (a)(1)$ 1,100 [$10,000 see (2) below Ð $8,900]. (2)$10,000 (FICA taxes $800 Ö 8%). (3)$ 300 ($10,000 X 3%). (4)$ 2,340 ($10,000 Ð $7,660). (5)$ 6,000 ($10,000 Ð $4,000). (b)Feb.28Warehouse Wages Expense ............................... 800 Payable ............... 300 ............................... 100 28Wages Payable (a)FICA tax ($760,000 X 8%)................................................... SUTA tax ($100,000 X 5.4%) .............................................. .............................................. 800 Total payroll tax (b)Payroll Tax Expense FICA Taxes Payable .................... ............... 800 11-17 Mar.31Vacation Benefits Expense (10 X 2 X $120) Vacation Benefits Payable 31Pension Expense ($40,000 X 10%) 1.Vacation Benefits Expense Vacation Benefits Payable (20 X 5 X $120) 2.Pension Expense ............................................................................ 3.Vacation Benefits Payable (18 X 1 X $120) 11-18 (a)Jan. 5Cash Sales ($22,680 Ö 108%).......................... .............................. ($22,680 Ð $21,000) 12Unearned Service Revenue Service Revenue 14Sales Taxes Payable ....................................... ............................................................. 20Accounts Receivable .............................. (800 X $50 X 8%) 21Cash 25Cash Sales ($12,420 Ö 108%).......................... .............................. 920 ($12,420 Ð $11,500) (b)(1)Jan.31Interest Expense ...................................... 40 Interest Payable .............................. 40 ($18,000 X 8% X 1/12 = (2)Jan.31Warranty Expense ................................... ($40,000 X 7%) Liability .......................................... 11-19 (c)Current liabilities ........................................................................ ................. Sales taxes payable ($1,680 + $3,200 + $920) .................... ...................................................... Interest payable ............................................................................ 40 11-20 (a)Jan. 2Merchandise Inventory or Purchases Feb. 1Accounts Payable Mar.31Interest Expense ............................................. 450 ($30,000 X 9% X 2/12) Interest Payable ..................................... 450 Apr. 1Notes Payable Interest Payable.............................................. 450 July 1Equipment .........................................................51,000 Sept.30Interest Expense ............................................. ($40,000 X 10% X 3/12) Interest Payable ..................................... Oct. 1Notes Payable Interest Payable.............................................. Dec. 1Cash Notes Payable Dec.31Interest Expense ............................................. 100 ($15,000 X 8% X 1/12) Interest Payable ..................................... 100 11-21 4/130,000 10/140,000 2/130,000 7/140,000 12/115,000 12/31 Bal.15,000 4/1 450 10/1 1,000 3/31 450 9/30 1,000 12/31 100 12/31 Bal. 100 3/31 450 9/30 1,000 12/31 100 12/31 Bal. 1,550 (c)Current liabilities Interest payable ...................................................... 100 (d)Total interest is $1,550. 11-22 11-23 (b)Mar.15Store Wages Expense ............................ ........................ Payable ........................................... ........ Payable ........................................... 15Payroll Tax Expense ................................ ........................ ($2,480 X 8%) Payable ($2,480 X .8%) ............... Payable ($2,480 X 5.4%) ............ (c)Mar.16Wages Payable (d)Mar.31FICA Taxes Payable ................................. ($198.40 + $198.40) ............ ..................................................... 11-24 (a)Jan.10Union Dues Payable ........................... ................................................ 12FICA Taxes Payable ............................ ....... ................................................ 15U.S. Savings Bonds Payable ........... ................................................ 17State Income Taxes Payable ........... ................................................ 20Federal Unemployment Taxes Payable ............................................... Payable ............................................... ................................................ 31Office Salaries Expense ................... Payable ...................................... Payable ...................................... Payable ...................................... .................. 31Wages Payable 11-25 (b)1.Jan.31Payroll Tax Expense ($55,000 X 8%) Federal Unemployment Taxes Payable ($55,000 X .8%) ......... Payable ($55,000 X 5.4%)...... *2.31Vacation Benefits Expense ($55,000 X 6%) Vacation Benefits Payable 11-26 (a)Administrative Salaries Expense ElectriciansÕ Wages Expense ............................................... .............................. United Fund Contributions Payable ................. Hospital Insurance Premiums Payable ........... (b)Payroll Tax Expense ....................................................... FICA Taxes Payable ($485,000 X 8%) .............. .......... ($135,000 X .8%) ............... ($135,000 X 2.5%) Employee Federal Income Income 26,000 10,200 $1,770(1) 780(2) 26,000 2,080 (1) $59,000 X 3%. (2) $26,000 X 3%. 11-27 (a)Jan. 1Cash 5Cash ........................................................................ ............................. ................................. 400 ($10,400 Ð $10,000) 12Unearned Service Revenue ............................. ........................................ 14Sales Taxes Payable .......................................... ............................................................... 20Accounts Receivable ................................. (900 X $52 X 4%) 25Cash ................................. 720 ($18,720 Ð $18,000) (b)(1)Jan.31Interest Expense ........................................ 200 Interest Payable................................. 200 ($30,000 X 8% X 1/12) (2)Jan.31Warranty Expense ..................................... ($46,800 X 5%) Liability ............................................ 11-28 (c)Current liabilities ............................................................... Unearned service revenue ($15,000 Ð $9,000) ........... ............... ............................................. Interest payable................................................................... 200 11-29 (a)Jan. 2Merchandise Inventory or Purchases Feb. 1Accounts Payable ..........................................1 Mar.31Interest Expense ............................................. 300 ($18,000 X 10% X 2/12) Interest Payable ..................................... 300 Apr. 1Notes Payable Interest Payable.............................................. 300 July 1Equipment Notes Payable Sept.30Interest Expense ............................................. 600 ($24,000 X 10% X 3/12) Interest Payable ..................................... 600 Oct. 1Notes Payable Interest Payable.............................................. 600 Dec. 1Cash Dec.31Interest Expense ............................................. 100 ($10,000 X 12% X 1/12) Interest Payable ..................................... 100 11-30 4/118,000 10/124,000 2/118,000 7/124,000 12/110,000 12/31 Bal.10,000 4/1 300 10/1 600 3/31 300 9/30 600 12/31 100 12/31 Bal. 100 3/31 300 9/30 600 12/31 100 12/31 Bal. 1,000 (c)Current liabilities Interest payable ...................................................... 100 (d)Total interest is $1,000. 11-31 11-32 (b)Feb.15Store Wages Expense ............................ ......................... Payable ............................................ ........ ....................... 15Payroll Tax Expense ................................. ......................... ($2,284 X 8%) Payable ($2,284 X .8%) ............... Payable ($2,284 X 5.4%) ............. (c)Feb.16Wages Payable (d)Feb.28FICA Taxes Payable ................................. ($182.72 + $182.72) ............ ..................................................... 11-33 (a)Jan.10Union Dues Payable ........................... ............................................... 12FICA Taxes Payable ........................... Federal Income Taxes Payable ........ ............................................... 15U.S. Savings Bonds Payable ........... ............................................... 17State Income Taxes Payable ........... ............................................... 20Federal Unemployment Taxes Payable .............................................. Payable .............................................. ............................................... 31Office Salaries Expense .................. Payable ..................................... Payable ..................................... .................. Payable ..................................... 31Wages Payable 11-34 (b)1.Jan.31Payroll Tax Expense ($50,000 X 8%) Payable ($50,000 X .8%) ............ Payable ($50,000 X 5.4%) *2.31Vacation Benefits Expense ($50,000 X 5%) Vacation Benefits Payable 11-35 (a)Administrative Salaries Expense ........................................32 ................................................. ................................. United Fund Contributions Payable ................... Hospital Insurance Premiums Payable ............. (b)Payroll Tax Expense ......................................................... ................. ............. 960 ($120,000 X .8%) .................. ($120,000 X 2.5%) 27,000 11,000 $1,800(1) 810(2) 27,000 2,160 (1) $60,000 X 3%. (2) $27,000 X 3%. 11-36 BYP 11-1FINANCIAL REPORTING PROBLEM (a)Total current liabilities at December 31, 2005, $9,406 million. PepsiCoÕs total current liabilities increased by $2,654 ($9,406 Ð $6,752) million over (b)In Note 2 under the subheading ÒCommitments and Contingencies,Ó PepsiCo states: ÒWe recognize liabilities for contingencies and com- mitments when a loss is probable and estimable.Ó (c)The components of current liabilities are: Accounts payable and other current liabilities ............ 5,971 ........................................................... 11-37 BYP 11-2COMPARATIVE ANALYSIS PROBLEM (a)PepsiCoÕs largest current liability was Òaccounts payable and other liabilitiesÓ at $5,971 million. Its total current liabilities were $9,406 million. $4,518 million. Its total current liabilities were $9,836 million. (b)(in millions)PepsiCoCoca-Cola (1)Working capital$10,454 Ð $9,406 = $1,048$10,250 Ð $9,836 = $414 (2)Current ratio $10,454 $9,406 $10,250 $9,836 (c)Based on this information, it appears that both companies are only narrowly liquid. The working capital levels are both low, as are the current ratios. 11-38 BYP 11-3EXPLORING THE WEB (a)A worker who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have 11-39 BYP 11-3 (Continued) (e)In general, you must deposit income tax withheld and both the employer and employee social security and Medicare taxes (minus any advance EIC payments). You must deposit by using the Electronic Federal Tax Payment System (EFTPS) or by mailing or delivering a check, money order, or cash to an authorized financial institution or Federal Reserve bank using Form 8109 Federal Tax Deposit Co upon. However, some taxpayers are required to deposit by electronic funds transfer. 11-40 BYP 11-4DECISION MAKING ACROSS THE ORGANIATION 75 75 75 11,250 13,500 ............................... 112 (.8% X $14,000) ................................... 756 (5.4% X $14,000) .............................. 960 (2 X $40 X 12)$47,188 Kensingtown Processing Company would save $3,088 ($47,188 Ð $44,100), as shown, by discharging the two employees and accepting the Metcalfe (b)Donna should consider the following additional factors: (1)The effect on the morale of the continuing employees if two employees are terminated. (2)The anticipated efficiency of Metcalfe Services Inc. workers compared to the efficiency of the two employees who would be terminated. The effect on management control and supervision of using Metcalfe 11-41 BYP 11-5COMMUNICATION ACTIVITY 11-42 2.Federal unemployment taxes. These taxes provide benefits to employees first $7,000 of gross earnings paid to each employee during a calendar 3.State unemployment taxes. These taxes also provide benefits to employees 11-43 (a)The stakeholders in this situation are: (b)Not withholding federal and state taxes from employeesÕ payroll is 11-44 BYP 11-7ALL ABOUT YOU ACTIVITY Total state income tax$3,710 (b)The property tax on a $200,000 home at 2.1% is $4,200. (c)The state gasoline tax in Wisconsin is 32.9 cents per gallon and the federal (d)In Wisconsin the state sales tax rate is 5% and excludes food and prescription drug purchases. Therefore the sales tax is $200 ($4,000 X 5%). (e)The social security rate is 7.65% on income of $60,000 or $4,590. (f)Federal income taxes for a single person with a taxable income of $60,000 Total tax $11,538 11-45 State income tax ..............................................................$ 3,710 .......................................................................205 .............................................................................200 Social security tax Federal income tax .......................................................... 11,538 Total tax.............................................................................. Knowledge Comprehension 1.Explain a current liability, and current liabilities. 2.Describe the accounting for notes Q11-2E11-7 3.Explain the accounting for other 4.Explain the financial statement current liabilities. 5.Describe the accounting and contingent liabilities. 6.Compute and record the payroll 7.Describe and record employer payroll taxes. 8.Discuss the objectives of internal *9.Identify additional fringe benefits Financial Reporting Decision Making (a)AIVAMAR COMPANY EarningsDeductions Total HoursRegularOvertime Income Taxes InsuranceTotal Totals $ 480.00 520.00 600.00 39.00 90.00 559.00 690.00 44.72 55.20 37.00 58.00 25.00 25.00 106.72 138.20 $ 496.96 452.28 551.80 (a)DEL HARDWARE EarningsDeductions EmployeeHoursRegular 600.00 600.00 520.00 520.00 0 45.00 78.00 600.00 645.00 598.00 637.00 48.00 51.60 47.84 50.96 72.00 47.00 60.00 61.00 5.00 5.00 8.00 5.00 457.00 522.05 464.22 500.93 600.00 645.00 598.00 (a)HILLER DRUG STORE EarningsDeductions EmployeeHoursRegular 585.00 520.00 480.00 480.00 0 39.00 72.00 585.00 559.00 552.00 588.00 46.80 44.72 44.16 47.04 54.00 33.00 61.00 46.00 0 5.00 7.50 5.00 99.49 466.65 459.51 422.78 472.32 585.00 559.00 552.00 Knowledge Comprehension 1.Explain a current liability, and current liabilities. 2.Describe the accounting for notes Q11-2E11-7 3.Explain the accounting for other 4.Explain the financial statement current liabilities. 5.Describe the accounting and contingent liabilities. 6.Compute and record the payroll 7.Describe and record employer payroll taxes. 8.Discuss the objectives of internal *9.Identify additional fringe benefits Financial Reporting Decision Making 11-45 State income tax ..............................................................$ 3,710 .......................................................................205 .............................................................................200 Social security tax Federal income tax .......................................................... 11,538 Total tax..............................................................................