Full file at
Chapter 11
Current Liabilities and Payroll
Questions
1.A current liability is one that is payable within the coming year or within the company’s normal operating cycle if longer than a year. All other liabilities are long-term.
A contingent liability is a potential liability that depends on a future event arising out of past events. The future event will determine the amount and existence of the liability. A contingent liability may or may not become an actual obligation.
2.The company reports current liabilities for the short-term note payable of $50,000 and for interest payable of $1,000 ($50,000 × 0.04 × 6/12).
3.Retailers act as collecting agents for the federal government. Stores charge their customers GST, but the GST belongs to the federal government. The store has a liability to pay the federal government (Receiver General) the amount of tax collected less applicable input tax credits.
4.Current portion of long-term debt is the amount of the principal of long-term debt due within one year. Because this amount is due within one year, it is reported as a current liability on the balance sheet.
5.An accrued expense is an expense that has been incurred, but has not been paid. Because the expense has been incurred but not paid, it must be accrued, thus it is a liability.
6.Accounts payable and short-term notes payable are both current liabilities, that is, both are due and payable within one year or within the company’s operating cycle.
Differences:
Accounts payable are amounts owed for products or services that are purchased on open account.
Short-term notes payable are a form of financing.
Accounts payable have no interest obligation (however, if paid late, interest or late payment charges could be incurred); short-term notes payable have a defined rate of interest due over the term of the note.
7.At the beginning of the school term, tuition collected in advance is a liability of the school because it is an unearned revenue. At the end of the term, the tuition is a revenue because the tuition has been earned.
8.A customer deposit is a liability because the company has not provided service for the deposit and must refund that cash to its customers under certain conditions. The security deposit collected by telephone and other utility companies is an example.
9.The company’s warranty expense for the year is $50,000, the estimate based on the current year’s sales. The matching objective demands that this expense be matched against the period’s revenues.
10.A contingent liability of a definite amount arises from guaranteeing the note payable or loan of another business. A contingent liability of indefinite amount arises from pending lawsuits in which the business is the defendant and for which a loss is either unlikely or not estimable.
11.The two basic categories of current liabilities are:
–current liabilities of known amount
Accounts payableAccrued expenses
Sales tax payablePayroll liabilities
GST payableSalary, commission and bonus
Short-term notes payablepayable
Current portion of long-termUnearned revenues
debt
–current liabilities that must be estimated
Estimated warranty payable
Estimated vacation pay liability
Income tax payable
12.Service businesses sell their employees’ services, so employment compensation is their major expense of doing business, just as cost of goods sold is the largest expense in merchandising.
13.The compensation of the factory supervisor is the company’s payroll expense. The company would debit the salary to Salary Expense. The compensation of the outside consultant would be debited to Consulting Expense.
14.Two elements of an employer’s payroll expense in addition to salaries, wages, commissions, and overtime pay are employee government benefits expense and fringe benefits.
15.The amount of income tax withheld from employee paycheques depends on the employee’s gross pay, the amount of nonrefundable tax credits claimed on the Personal Tax Credit Form (TD1) and the tax rate set by CRA.
16.Canada Pension Plan is a pension plan administered by the federal government. The Quebec Pension Plan is administered by the Quebec government. The governments collect contributions from employees and employers to fund the plan. The funds are used to pay retirement pensions, disability pensions, and death benefits to eligible Canadians and Quebec residents.
17.Required deductions:Income tax, Canada (or Quebec) Pension, and Employment Insurance
Optional deductions:Charitable donations, Canada Savings Bonds, Employee savings plans, and Employee Benefits premiums
18.Three employee benefit expenses are Canada (or Quebec) Pension, Employment Insurance, Workers’ Compensation and, where applicable, Provincial Payroll taxes regarding health and education.
19.The employee and employer both pay Employment Insurance premiums; the employer’s share is 1.4 times the employee’s share. The purpose of the Employment Insurance Fund is to provide assistance to the contributors (employees) to the fund who cannot work for a variety of reasons.
20.The payroll register, a special journal resembling the cash payments journal or cheque register, lists the employees and the amounts needed to record salary or wage expense for the pay period. It also serves as a cheque register for payroll by listing each payroll cheque number.
The earnings record for each employee provides the business with the information needed for filing employee withholdings and benefits returns with the federal and provincial governments. The earnings record also holds the information needed to prepare the statement of remuneration paid, Form T4, given to each employee at the end of the year.
A special payroll bank account is sometimes used to disburse paycheques to employees.
Payroll cheques are used to pay employees. A paycheque is like any other cheque except that its attachment lists the employee’s gross pay, payroll deductions, and net pay. Note that many employers pay their employees through EFT (electronic funds transfer) and instead supply employees with a pay statement that provides the same information as the payroll cheque stub would have.
21.Employment insurance premiums are determined annually by the federal government. Assuming a rate of 1.83% on earnings up to $45,900, the maximum employment insurance premium this employee can pay is $839.97. The employer will contribute 1.4 times this amount or $1,175.96.
22.The two principal types of internal controls over payroll are controls for efficiency and controls for safeguarding payroll disbursements. Good internal controls for efficiency save time and money in reconciling the bank account. These controls include following established policies for hiring and terminating employees and complying with government regulations. Controls that safeguard cash minimize fraud and ensure that the correct amount of cash is paid to the appropriate employees.
23.Some companies use a special payroll bank account to keep the payroll cheques separate from the day-to-day business cheques. It may be easier to complete two bank reconciliations that are less complicated than one complicated bank reconciliation. Any payroll issues may also be highlighted in a separate payroll bank-account reconciliation.
24.Three internal controls designed to safeguard payroll cash are (1) the separation of the responsibility for hiring and terminating employees from the responsibility for distributing paycheques; (2) ensuring paycheques are issued to the actual employee payee on the cheque; 3) establishing a formal time-keeping system to ensure that employees actually worked the number of hours claimed. The requirement that each employee wear an identification badge that bears his or her picture and the designation of an employee from the home office as the occasional distributor of paycheques are controls that help ensure that cash is paid only to bona fide employees.
Starters
(10 min.) S 11-1
Req. 1
General JournalDATE
2013 / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
a. / Dec. / 31 / Interest Expense ($32,0000.056/12) / 800
Interest Payable / 800
Accrued interest expense at year end.
2014
b. / June / 30 / Note Payable, Short-Term / 32,000
Interest Payable / 800
Interest Expense ($32,000 × 0.05 × 6/12) / 800
Cash / 33,600
Paid note and interest at maturity.
(5-10 min.) S 11-2
Mission Corp.Balance Sheet (partial)
December 31, 2013
ASSETS / LIABILITIES
Current liabilities:
Note payable, short-term / $32,000
Interest payable / 800
Mission Corp.
Income Sheet (partial)
For the Year Ended December 31, 2013
Revenues:
Expenses:
Interest expense / $800
(10 min.) S 11-3
Req. 1
General JournalDATE 2014 / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
Jan. / 31 / Cash ($600,0000.30) / 180,000
Notes Receivable ($600,000 – $180,000) / 420,000
Sales Revenue / 600,000
To record sales.
Warranty Expense ($600,0000.03) / 18,000
Estimated Warranty Payable / 18,000
Estimated Warranty Payable / 9,000
Cash / 9,000
To pay warranty claims.
Req. 2
Estimated Warranty Payable9,000 / 18,000
Bal. / 9,000
The estimated warranty balance at the end of 2014 is $9,000.
(5-10 min.) S 11-4
Warranty expense = $18,000
The warranty expense for the year does not necessarily equal the year’s cash payments for warranties. Cash payments for warranties do not determine the amount of warranty expense for that year. Instead, the warranty expense is estimated and matched against revenue during the period of the sale, regardless of when the company pays for the warranty claims.
The matching objective addresses this situation.
(5-10 min.) S 11-5
1.These are contingent liabilities because at the time of the note Harley-Davidson, Inc. was not liable for any of these product losses because they had not yet occurred.
2.The contingency can become a real liability if the user of a Harley-Davidson product suffers a loss for which the company is responsible.
Harley-Davidson must pay for all losses up to $3 million and all losses above $25 million per claim. The company is insured against losses for individual claims between $3 million and $25 million—for these losses, the company would pay the deductible amount specified in its insurance policy.
(10 min.) S 11-6
1.Straight-time pay for 40 hours...... $840.00
Overtime pay for 10 hours: [10($840/401.5)]...... 315.00
Total pay...... $1,155.00
2.Total pay...... $1,155.00
Less:Withheld income tax ($1,1550.20)...... $231.00
Withheld CPP ($1,1550.0495)...... 57.17
Withheld EI ($1,1550.0183)...... 21.14 309.31
Net pay...... $845.69
(10 min.) S 11-7
Straight-time pay for 40 hours...... $ 840.00
Overtime pay for 10 hours: [10(840/40 1.5)]...... 315.00
Total pay to employee...... 1,155.00
Employer payroll expenses:
CPP expense ($57.17 from S11-6)...... 57.17
EI expense (1.4$from S11-6)...... 29.60
Pension ($1,1550.05)...... 57.75
Provincial health insurance ($60 / 4)...... 15.00
Disability insurance ($8 / 4)...... 2.00 161.52
Total expense of employer...... $ 1,316.52
(10-20 min.) S 11-8
a.
JournalDATE / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
Salary Expense (see S 11-6) / 1,155.00
Employee Income Tax Payable (S 11-6) / 231.00
Canada Pension Plan Payable (S 11-6) / 57.17
Employment Insurance Payable (S 11-6) / 21.14
Salary Payable / 845.69
To record salary expense and employee withholdings.
b.
JournalDATE / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
Pension Expense (S 11-7) / 57.75
Provincial Health Insurance Expense (S 11-7) / 15.00
Disability Insurance Expense (S 11-7) / 2.00
Employee Benefits Payable / 74.75
To record employee benefits payable.
c.
JournalDATE / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
Employee Benefits Expense / 86.77
Canada Pension Plan Payable (S 11-7) / 57.17
Employment Insurance Payable (S 11-7) / 29.60
To record employer’s payroll expenses.
EI Payable is calculated as $21.14 x 1.4 = $29.60.
(5-10 min.)S 11-9
JournalDATE / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
Mar. / 15 / Employment Insurance Payable / 50.74
Canada Pension Plan Payable / 114.34
Employee Income Tax Payable / 231.00
Cash / 396.08
To record remittance to CRA.
EI Payable = $21.14 + $29.60 = $50.74
CPP Payable = $57.17 + $57.17 = $114.34
(10 min.) S 11-9Mar5937
(10-15 min.)S 11-10
Gross pay...... $4,000
Less:
Withheld income tax deductions ($4,0000.20).. $(800)
Pension contribution ($4,0000.04)...... (160)
Health insurance premium...... (60) (1,020)
Net pay...... $2,980
(10 min.) S 11-11
1.Total salary expense ($1,155.00 + $74.75 + $86.77)...... $1,316.52
2.Net (take-home) pay...... $845.69
3.Employee paid:
a.Income tax...... $231.00
b.CPP...... $57.17
EI...... 21.14 $78.31
4.Employer’s expense for:
a.CPP and EI ($57.17 + $29.60)...... $86.77
b.Benefits ($57.75 + $15.00 + $2.00)...... $74.75
(5-10 min.) S 11-12
Internal controls to safeguard payroll disbursements:
- Separate the duties of hiring and firing employees from payroll accounting and from distributing paycheques.
- Issue paycheques only to employees with a photo ID or use a secure electronic deposit system.
- Have a formal time-keeping system.
- Use a separate payroll bank account and reconcile the payroll bank account every month.
- Hire and retain trustworthy employees
(5-10 min.)S 11-13
a.C
b.C
c.C
d.C and, in some cases, L for any portion of the warranty liability due in more than one year
e.C and, in some cases, L for unearned revenue to be earned more than one year from the balance-sheet date
f.C
g.L
h.C
Exercises
(5-10 min.) E 11-1
General JournalDATE
2013 / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
June / 1 / Delivery Truck / 86,000
Note Payable, Short-term / 86,000
Dec. / 31 / Interest Expense ($86,000 × 0.06 × 7/12) / 3,010
Interest Payable / 3,010
2014
June / 1 / Note Payable, Short-term / 86,000
Interest Payable / 3,010
Interest Expense ($86,000 × 0.06 × 5/12) / 2,150
Cash [$86,000 + ($86,000 × 0.06)] / 91,160
(5-15 min.) E 11-2
General JournalDATE / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
June / 30 / Cash / 128,800
Sales Revenue / 115,000
Sales Tax Payable ($115,000 × 0.07) / 8,050
GST Payable ($115,000 × 0.05) / 5,750
July / 6 / Sales Tax Payable / 8,050
GST Payable / 5,750
Cash / 13,800
(5-15 min.) E 11-3
December 31
2011201220132014
Current liabilities:
Current portion of
long-term debt$500,000$500,000$500,000$500,000
Interest payable80,00060,00040,00020,000
Long-term liabilities:
Long-term debt1,500,0001,000,000500,000—
Interest computations:
$2,000,000 × 0.04=$80,000
1,500,000 × 0.04=60,000
1,000,000 × 0.04=40,000
500,000 × 0.04=20,000
(15-20 min.) E 11-4
Salem ElectronicsBalance Sheet (partial)
December 31, 2012
Current liabilities (partial):
1.Unearned sales revenue / $105,000
2.Employee income tax payable ($600,000 × 0.16) / 96,000
Canada Pension Plan payable ($600,000 × 0.099) / 59,400
Employment Insurance payable ($600,000 × 0.0183) × (1 + 1.4) / 26,352
3.Estimated warranty payable ($30,000,000 × 0.01) / 300,000
4.Current portion of long-term note payable / 10,000
Interest payable ($50,000 × 0.05 × 29/365) / 199
Total current liabilities / $ 596,951
Long-term liabilities (partial):
Note payable ($50,000 – $10,000) / $ 40,000
(10-15 min.) E 11-5
Current ratio / = / Total current assets / = / $325,000 / = / 1.69Total current liabilities / $192,500
Epsot Marketing Services should pay off $60,000 of current liabilities; then the current ratio will be:
$325,000 – $60,000 / = / $265,000 / = / 2.25$192,500 – $60,000 / $132,500
Equation:
$325,000 – x / = / 2.00$192,500 – x
325,000 – x / = / 2.00(192,500 – x)
325,000 / = / x + 385,000 – 2.00 x
–x / = / –60,000
x / = / 60,000
Req. 1(5-10 min.) E 11-6
General JournalDATE
2014 / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
Jan. / 2 / Cash / 60,000
Retainer Fees / 60,000
Received retainer fees in advance.
Jan. / 31 / Retainer Fees / 5,000
Service Revenue / 5,000
Earned revenue that was collected in advance.
Req. 2
Retainer FeesJan. 31, 2014 / 5,000 / Jan. 2, 2014 / 60,000
Bal. / 55,000
The value of services to be provided in the remaining 11 months is $55,000.00.
(5-10 min.) E 11-7
Req. 1
General JournalDATE
2014 / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
Oct. / 1 / Cash [$100 + ($100 × 0.07) + ($100 × 0.05)] / 112.00
Unearned Subscription Revenue / 100.00
GST Payable / 7.00
PST Payable / 5.00
Nov. / 15 / PST Payable / 5.00
GST Payable / 7.00
Cash / 12.00
Dec. / 31 / Unearned Subscription Revenue ($100 ÷ 63) / 50.00
Subscription Revenue / 50.00
Req. 2
Unearned Subscriptions Revenue50.00 / 100.00
Bal. / 50.00
The National Post owes the subscriber $50.00 at December 31, 2014.
Req. 3
General JournalDATE
2014 / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
Oct. / 1 / Cash($100 + ($100 × 0.12) / 112.00
Unearned Subscription Revenue / 100.00
HST Payable / 12.00
Nov. / 15 / HST Payable / 12.00
Cash / 12.00
Dec. / 31 / Unearned Subscription Revenue ($100 ÷ 63) / 50.00
Subscription Revenue / 50.00
Req. 1 (warranty entries)(5-15 min.) E 11-8
General JournalDATE 2014 / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
Dec. / 31 / Warranty Expense ($1,038,000 × 0.03) / 31,140
Estimated Warranty Payable / 31,140
Estimated Warranty Payable / 27,900
Cash / 27,900
Req. 2 (ending balance of Estimated Warranty Payable)
Estimated Warranty PayablePayments during / Jan. 1, 2014 / 24,800
period / 27,900 / Exp. for period / 31,140
End. bal. / 28,040
The balance of Estimated Warranty Payable is $28,040.
(5-10 min.) E 11-9
The contingent liability is material (25%) relative to Ludeman Security Systems’total liabilities of $4.0 million. The lawsuit should be disclosed in a note to the financial statements.
The note disclosure would be:
Note X—
The company is a defendant in lawsuits brought against the monitoring service of its installed systems. Damages of $1,000,000 are claimed against the company, but management denies the charges and is vigorously defending itself. Although management cannot predict the lawsuit outcomes at this time, management does not believe that any liabilities resulting from them will significantly affect the company’s financial position.
Instructional Note: Any note that captures the essence of the situation is acceptable.
(5-10 min.) E 11-10
Since the court has awarded a judgment against Ludeman Security Systems, what was previously a contingent liability is now a current liability for a known amount of the $300,000 loss assessed against the company.
The financial statement disclosure and entry follow:
Ludeman Security Systems would report:
Income statement:Loss from damage claim (Note X) / $300,000
Balance sheet:
Liability for damage claim (Note X) / $300,000
The note disclosure would be:
Note X—
The company is a defendant in lawsuits brought against the monitoring service of its installed systems. Damages of $300,000 have been rendered against the company, but management plans to seek leave to appeal the charges.
Instructional Note: Any note that captures the essence of the situation is acceptable.
General JournalDATE / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
Loss from Damage Claim / 300,000
Liability for Damage Claim / 300,000
(10–15 min.)E 11-11
General JournalDATE / ACCOUNT TITLES AND EXPLANATIONS / POST. REF. / DEBIT / CREDIT
Dec. / 31 / Income Tax Expense / 16,000
Income Tax Payable / 16,000
To record the monthly estimate or installment
2014
Jan. / 15 / Income Tax Payable / 16,000
Cash / 16,000
($10,000 x 11 = $110,000; $126,000 - $110,000 = $16,000)
(10-15 min.) E 11-12
Gross pay: $1,875 + ($50,000 × 0.07) / $5,375.00Deductions:
Charitable contribution / $50.00
Dental insurance / 49.15
Income tax ($5,375.00 × 0.20) / 1,075.00
Employment Insurance premium ($5,375.00 × 0.0183) / 98.36
Canada Pension Plan [($5,375.00 – $291.67*) × 0.0495] / 251.62 / 1,524.13
Net Pay / $3,850.87
* Basic exemption 12 = $3,500 12 = $291.67
Req. a (gross pay and net pay)(10-15 min.) E 11-13
Straight-time earnings for 35 hours (35 × $10.50) / $367.50Overtime pay for the next 5 hours:
5 hours × $10.50 × 1.5 / 78.75
Total gross pay for the week / $446.25
Deductions:
Withheld income tax ($446.25 × 0.25) / 111.56
CPP contributions [($446.25 – $67.31*) × 0.0495] / 18.76
EI premiums ($446.25 × 0.0183) / 8.17
RRSP contribution / 10.00
Total deductions / 148.49
Net pay / $297.76
* $3,500 52 = $67.31