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CHAPTER 11

CURRENT LIABILITIES AND PAYROLL

EYE OPENERS

1. A discounted note payable has no statedinterest rate, but provides interest by dis-counting the note proceeds. The discount,which is the difference between the pro-ceeds and the face of the note, is the inter-est and is accounted for as such.

2. a. Income or withholding taxes, social se-curity, and Medicare

b. Employees Federal Income Tax Pay-able, Social Security Tax Payable, andMedicare Tax Payable

3. There is a ceiling on (c) the social security

portion of the FICA tax and (d) the federalunemployment compensation tax.

4. The deductions from employees earningsare for amounts owed (liabilities) to othersfor such items as federal taxes, state andlocal income taxes, and contributions topension plans.

5. Yes. Unemployment compensation taxesare paid by the employer on the first $7,000of annual earnings for each employee.

Therefore, hiring two employees, each earn-ing $12,500 per year, would require thepayment of twice the unemployment taxthan if only one employee, earning $25,000,

was hired.6. 1. a

2. c3. c4. b5. b

7. The use of special payroll checks relievesthe treasurer or other executives of the taskof signing a large number of regular checkseach payday. Another advantage of this sys-tem is that reconciling the regular bankstatement is simplified. The paid payrollchecks are returned by the bank separately

from regular checks and are accompaniedby a statement of the special bank account.Any balance shown on the banks statementwill correspond to the sum of the payrollchecks outstanding because the amount ofeach deposit is exactly the same as the totalamount of checks drawn.

8. a. Input data that remain relatively un-changed from period to period (andtherefore do not need to be reintroduced

into the system frequently) are calledconstants.

b. Input data that differ from period to pe-riod are called variables.

9. a. If employees attendance records arekept and their preparation supervised insuch a manner as to prevent errors andabuses, then one can be assured thatwages paid are based on hours actuallyworked. The use of In and Out cards,whereby employees indicate by punch-ing a time clock their time of arrival and

departure, is especially useful. Em-ployee identification cards or badgescan be very helpful in giving additionalassurance. Employee identificationcards and badges can also contain barcodes that can be used by electronicscanners to account for employee timeand control access to authorized loca-tions.

b. The requirement that the addition ofnames on the payroll be supported bywritten authorizations from the Person-nel Department can help ensure thatpayroll checks are not being issued to

fictitious persons. Endorsements onpayroll checks can be compared withother samples of employees signatures.Many businesses directly deposit payrollchecks to employee bank accounts, the-reby eliminating the need for endorse-ment and check disbursement controls.

10. If the vacation payment is probable and canbe reasonably estimated, the vacation payexpense should be recorded during the pe-riod in which the vacation privilege isearned.

11. Employee life expectancies, expected em-

ployee retirement dates, employee turnover,employee compensation levels, and invest-ment income on pension contributions arefactors that influence the future pension ob-ligation of an employer.

12. To match revenues and expenses properly,the liability to cover product warrantiesshould be recorded in the period duringwhich the sale of the product is made.

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13. When the defective product is repaired, therepair costs would be recorded by debitingProduct Warranty Payable and creditingCash, Supplies, or another appropriate ac-count.

14. Yes. Since the $5,000 is payable within oneyear, Company A should present it as a cur-rent liability at September 30.

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