Current Liabilities, Contingencies, and the Time Value of Money

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Chapter 9
Current Liabilities, Contingencies, and Payroll
Financial Accounting 4e by Porter and Norton
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McDonald's CorporationPartial Balance Sheet -
2001
Listed in order of liquidity
(in millions)

• Liabilities and shareholders' equity
• Current liabilities
• Notes payable 184.9
• Accounts payable 689.5
• Income taxes 20.4
• Other taxes 180.4
• Accrued interest 170.6
• Other accrued liabilities 824.9
• Current maturities of long-term debt 177.6
• Total current liabilities 2,248.3

Require payment within one year
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Accounts Payable

• Purchase of inventory, goods or services on credit

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Promissory Note
I promise to pay 1,000 plus 12 annual interest
on December 31, 2004. Date January 1,
2004 Signed_________
Lamanski Co.
S.J.Devona
Total repayment 1,120 1,000 (1,000 x 12)
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Current Maturities of Long-Term Debt

• Principal repayment on borrowings due within one
  year of balance sheet date

Due in upcoming year
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Taxes Payable

• Record expense when incurred not when paid

12/31/04
3/15/05
Record 2004 tax expense
Taxes Paid
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Contingent Liability

• Obligation involving existing condition
• Outcome not known with certainty
• Dependent upon some future event
• Actual amount is estimated

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Contingent Liability

• Accrue estimated amount if
• liability is probable
• amount can be reasonably estimated

In year criteria are met Expense
(loss) XXX Liability XXX
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Typical Contingent Liabilities

• Warranties
• Premium or coupon offers
• Lawsuits

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Recording Contingent Liabilities
Example

• Quickkey Computer sells a computer product for
  5,000 with a one-year warranty. In 2004, 100 of
  these products were sold for a total sales
  revenue of 500,000.
• Analyzing past records, Quickkey estimates that
  repairs will average 2 of total sales.

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Recording Contingent Liabilities
Probable liability has been incurred? Amount
reasonably estimable?
YES
YES
Record in 2004
Warranty Expense 100,000 Estimated
Liability 100,000
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Disclosing Contingent Liabilities
IF not probable but reasonably
possible OR amount not estimable
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Contingent Assets

• Contingent gains and assets are not recorded but
  may be disclosed in footnotes

• Conservatism principle applies

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Appendix

• Accounting Tools
• Payroll Accounting

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Calculation of Gross Wages

• Hourly
• Multiply the number of hours worked times
  employees hourly rate
• Salaried
• Paid at a flat rate per week, month, or year,
  regardless of hours

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Calculation of Net Pay

• Gross wages
• - Income tax (federal, state, local)
• - FICA
• - Voluntary deductions
• (includes health insurance, retirement
  contributions, savings plans, charitable
  contributions, union dues)
• Net pay

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Employer Payroll Taxes

• Not deducted from paycheck employer pays taxes
  per employee, in addition to salary
• FICA employers share
• Unemployment tax

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Payroll Accounting

Example
Gross wages for Kori Company for July are
100,000. The following amounts have been
withheld from employees paychecks Kori
Companys unemployment tax rate is 3. Make the
appropriate payroll entries.
Income Tax 20,000 FICA 7,650 United
Way contributions 5,000 Union dues 3,000
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Payroll Accounting

• Salary Expense 100,000
• Salary Payable 64,350
• Income Tax Payable 20,000
• FICA Payable 7,650
• United Way Payable 5,000
• Union Dues Payable 3,000
• To record July salary deductions

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Payroll Accounting

• Salary Payable
• Cash
• To record payment of employee salaries
• Payroll Tax Expense
• FICA Payable
• Unemployment Tax Payable
• To record employers payroll taxes

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Compensated Absences

• Employee absences for which the employee will be
  paid
• Vacation, illness, holidays
• Accrued as a liability if
• The services have been rendered
• The rights (days) accumulate
• Payment is probable and can be reasonably
  estimated

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End of Chapter 9