Current Liabilities and

Payroll Accounting
Chapter 11

Wild and Shaw

Fundamental Accounting Principles
24th Edition

Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Learning Objective C1

Describe current and long-term

liabilities and their
characteristics.

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 Defining Liabilities

The company is A probable

As a result of presently future payment
past transaction obligated to of assets or
or event make services

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Learning Objective C1: Describe current and long-term liabilities and their characteristics.
 Classifying Liabilities
Current Liabilities Long-Term
Liabilities

Due within the Due after the current

current period period

What is the current period?

The longer of one year or
operating cycle
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Learning Objective C1: Describe current and long-term liabilities and their characteristics.
 Operating Cycle
It is the period from spending cash -------------> collecting cash back

For a supermarket?! The operating cycle is 3 months

So, what is the current period? = One year
The longer of one year or operating cycle

What are current liabilities What are long-term liabilities

for this supermarket?! for this supermarket?!

Liabilities due within Liabilities due after one

one year year
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Learning Objective C1: Describe current and long-term liabilities and their characteristics.
 Operating Cycle
It is the period from spending cash -------------> collecting cash back

For a car manufacturer?! The operating cycle is 15 months

So, what is the current period? = 15 months
The longer of one year or operating cycle

What are current liabilities What are long-term liabilities

for this manufacturer?! for this manufacturer?!

Liabilities due within 15 Liabilities due after 15

months months
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Learning Objective C1: Describe current and long-term liabilities and their characteristics.
 Uncertainty In Liabilities
Unearned
revenues

Uncertainty in Electrical power

Whom to Pay bill

Note payable to Uncertainty in

the holder When to Pay

Uncertainty in How
Much to Pay
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Learning Objective C1: Describe current and long-term liabilities and their characteristics.
 Learning Objective C2

Identify and describe known

current liabilities.

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 Known Liabilities
Accounts Payable

Sales Taxes Payable

Unearned Revenues

Short-Term Notes Payable

Payroll Liabilities

Multi-Period Known Liabilities

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Learning Objective C2: Identify and describe known current liabilities.
 Sales Taxes and Value Added Tax (VAT)
The main purpose of taxes:
To generate revenue for the government

Types of taxes:
Direct tax, e.g. Income tax and corporate tax
Indirect tax, e.g. Sales tax and value added tax

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Learning Objective C2: Identify and describe known current liabilities.
 Sales Taxes and Value Added Tax (VAT)
Sales Tax:
Tax imposed by the government on the sale of
goods and services
It is a single point tax

Value Added Tax (VAT):

Tax imposed at every level of value addition
It is a multi-point tax
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Learning Objective C2: Identify and describe known current liabilities.
 Sales Taxes Payable
On August 31, Home Depot sold materials for
$6,000 that are subject to a 5% sales tax.

Aug. 31 Cash ………………………. 6,300

Sales ………..……………..……..……. 6,000
Sales taxes payable ………………. 300

$6,000 × 5% = $300
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Learning Objective C2: Identify and describe known current liabilities.
 Unearned Revenues
On June 30, Selena Gomez sells $5,000,000 in
tickets for eight concerts.

Jun. 30 Cash ………………………. 5,000,000

Unearned ticket revenue …….....……. 5,000,000

On Oct. 31, Selena performs a concert.

Oct. 31 Unearned ticket revenue …………. 625,000
Ticket revenue …………….....…………. 625,000

$5,000,000 × 1/8 = $625,000 13

 Learning Objective P1

Prepare entries to account for

short-term notes payable.

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 Short-Term Notes Payable
• A written promise to pay a specified amount
on a stated future date within one year.

• Most notes bear interest.

• May arise from:

• Overdue account payable
• Borrowing from bank
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Learning Objective P1: Prepare entries to account for short-term notes payable.
 Note Given to Extend
Credit Period: Date of Replacement
On August 23, Brady Company asks McGraw to accept
$100 cash and a 60-day, 12% $500 note to replace its
existing $600 Account Payable.

Aug. 23 Accounts payable - McGraw ……………. 600

Cash ………..…………………..……...……. 100
Notes payable - McGraw ……………. 500

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Learning Objective P1: Prepare entries to account for short-term notes payable.
 Note Given to Extend
Credit Period: Date of Payment
On October 22, Brady pays the note plus interest to
McGraw.

Oct. 22 Notes payable - McGraw ……………. 500

Interest expense ..………..……...……. 10
Cash ……………………………………. 510

Interest expense = $500 × 12% × (60 ÷ 360) = $10

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Learning Objective P1: Prepare entries to account for short-term notes payable.
 Note Given To Borrow From Bank
On Sept. 30, a company borrows $2,000 from a
bank at 12% interest for 60 days.
Sep. 30 Cash ………………………. 2,000
Notes payable …….....……. 2,000

On Nov. 29, the company repays the principal of

the note plus interest.
Nov. 29 Notes payable ..……..………. 2,000
Interest expense ..……..…… 40
Cash ……………………………. 2,040

Interest expense = $2,000 × 12% × (60 ÷ 360) = $40

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 When Note Extends over
Two Periods

Note End of Maturity

Date Period Date

An adjusting entry is required to

record Interest Expense incurred
to date.

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Learning Objective P1: Prepare entries to account for short-term notes payable.
 End-of-Period Adjustment
to Notes
On Dec. 16, 2019, a company borrows $2,000 from a bank at 12% interest
for 60 days. An adjusting entry is needed on December 31.
Dec. 31 Interest expense ……………. 10
Interest payable …….....……. 10

$2,000 × 12% × (15 ÷ 360) = $10

On Feb. 14, 2020, the company repays this principal and interest on the note.
Feb. 14 Interest expense ..……..………. 30
Interest payable ..……..……….. 10
Notes payable ………..……… 2,000
Cash ……………………………. 2,040
$2,000 × 12% × (45 ÷ 360) = $30
 Learning Objective P4

Account for estimated

liabilities, including warranties
and bonuses.

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 Estimated Liabilities
• An estimated liability is a
known obligation of an
uncertain amount that can be
reasonably estimated.
• Examples: pensions, health
care, vacation pay, warranties

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Learning Objective P4: Account for estimated liabilities, including warranties and bonuses.
 Warranty Liabilities: Definition
• Seller’s obligation to replace or fix a product (or
service) that fails to perform as expected within
a specified period.

• Seller reports expected warranty expense in the

period when revenue from the sale is reported.

• Seller reports warranty as a liability.

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Learning Objective P4: Account for estimated liabilities, including warranties and bonuses.
 Warranty Liabilities: Journal Entries
On Dec. 1, 2019, a dealer sells a car for $16,000 with a
maximum one-year or 12,000 mile warranty covering parts.
Past experience indicates warranty expenses average 4% of
a car’s selling price.
Dec. 1 Warranty expense ……………. 640
Estimated warranty liability …..……. 640

On Jan. 9, 2020, the customer returns the car for repairs.

The dealer replaces parts costing $200.
Jan. 9 Estimated warranty liability ………. 200
Auto parts inventory …………....……. 200

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Learning Objective P4: Account for estimated liabilities, including warranties and bonuses.
 Learning Objective C3

Explain how to account for

contingent liabilities.

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 Accounting for
Contingent Liabilities

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Learning Objective C3: Explain how to account for contingent liabilities.
 Reasonably Possible
Contingent Liabilities
Potential Legal Claims – A potential claim is
recorded if the amount can be reasonably estimated
and payment for damages is probable.
Debt Guarantees – The guarantor usually
discloses the guarantee in its financial statement
notes. If it is probable that the debtor will default, the
guarantor reports the guarantee as a liability.
Other Contingencies – Include environmental
damages, possible tax assessments, insurance
losses and government investigations.
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Learning Objective C3: Explain how to account for contingent liabilities.
End of Chapter 11

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