Current Liabilities and

Payroll Accounting
Chapter 11

Wild, Kwok, Shaw

Principles of Financial Accounting, 3e
(Custom Edition)

Copyright © 2023 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 Chapter 11 Learning Objectives
CONCEPTUAL
C1 Describe current and long-term liabilities and their characteristics.
C2 Identify and describe known current liabilities_流動負債.
C3 Explain how to account for contingent liabilities_或有負債.

ANALYTICAL
A1 Compute the times interest earned ratio_利息保障倍數 and use it to
analyze liabilities.

PROCEDURAL
P1 Prepare entries to account for short-term notes payable.
P2 Compute and record employee payroll deductions and liabilities.
P3 Compute and record employer payroll expenses and liabilities.
P4 Account for estimated liabilities, including warranties and bonuses.
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 Learning Objective C1

Describe current and long-term

liabilities and their
characteristics.
Liabilities are good or bad?

IAS 37 Provisions, Continent Liabilities and Contingent Assets as a present obligation of the entity
arising from past events, the settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits.
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Defining Liabilities
Do you have liabilities?
⚫ Tuition loan
⚫ Motor loan
⚫ Rent
Exhibit
11.1
https://www.youtube.com/watch?v=qOz1a1aIWc0

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Learning Objective C1: Describe current and long-term liabilities and their characteristics.
 Classifying Liabilities
流動負債 長期負債

Current Liabilities Long-Term

Liabilities

Due within one year Due after one year or

or the company’s the company’s
operating cycle if operating cycle if
longer. longer.

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Learning Objective C1: Describe current and long-term liabilities and their characteristics.
 Current and Long-Term Exhibit
11.2
Liabilities
• Current liabilities are due within one year
or the company’s operating cycle if longer.
• Long-term liabilities are due after one year
or the company’s operating cycle if longer.

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

Uncertainty in
Whom to Pay

Uncertainty in
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 Payable 應付(營業)稅款

On August 31, Harvey Norman sold goods for $6,000 that are
subject to a 10% GST(Goods and Services tax_營業稅).

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Learning Objective C2: Identify and describe known current liabilities.
 Unearned / Deferred Revenues 遞延收入

On June 30, Selena Gomez sells $5,000,000 in

tickets for eight concerts.

On Oct. 31, Selena performs a concert. (Unearned→ Earned)

$5,000,000 × 1/8 = $625,000

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Learning Objective C2: Identify and describe known current liabilities.
 Learning Objective P1

Prepare entries to account for

short-term notes payable.
應付票據

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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.

Asset ←→ Liability
Notes Receivable ←→ Notes Payable
Account Receivable ←→ Account Payable

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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%(Loan shark高利貸) $500
note to replace its existing $600 Account Payable.

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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.

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

Interest Expense: 利息費用

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Learning Objective P1: Prepare entries to account for short-term notes payable.
 Note Given To Borrow From Bank

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

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Learning Objective P1: Prepare entries to account for short-term notes payable.
 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

12/16/2021 to 12/31/2021 = 15 days.

Interest expense = $2,000 × 12% × 15/360 = $10.

01/01/2022 to 02/14/2022 = 45 days.

Interest expense = $2,000 × 12% × 45/360 = $30.
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Learning Objective P1: Prepare entries to account for short-term notes payable.
 Learning Objective P2

Compute and record employee

payroll deductions and
liabilities.

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 Payroll Liabilities
Payroll liabilities are from salaries and
wages, employee benefits, and payroll
taxes levied on the employer.

Be an employer or an employee??
https://youtu.be/kYk7XLl5mPE?si=FwLDKJgxq_9sWP9U

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Learning Objective P2: Compute and record employee payroll deductions and liabilities.
 Recording Employee Payroll
An entry to record payroll expenses and
deductions for an employee might look like this:

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Learning Objective P2: Compute and record employee payroll deductions and liabilities.
 Learning Objective P3

Compute and record employer

payroll expenses and liabilities.

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 Multi-Period Known Liabilities
Includes Unearned Revenues and Notes Payable

Unearned Revenues from Notes Payable often

magazine subscriptions extend over more than one
often cover more than one accounting period. A three-
accounting period. A portion year note would be
of the earned revenue is classified as a current
recognized each period and liability for one year and a
the Unearned Revenue long-term liability for two
account is reduced. years.

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Learning Objective C2: Identify and describe known current liabilities.
 Internal Control of Payroll
Exhibit
11.3

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Learning Objective P3: Compute and record employer payroll expenses and liabilities.
 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: vacation pay, warranties

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Learning Objective P4: Account for estimated liabilities, including warranties and bonuses.
 Vacation Benefits
Assume an employee earns two weeks of paid
vacation each year.

When employee takes vacation, following

journal entry is recorded:

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Learning Objective P4: Account for estimated liabilities, including warranties and bonuses.
 Bonus Plans
Assume that a bonus of $10,000 will be paid to
employees to be shared by all:

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Learning Objective P4: Account for estimated liabilities, including warranties and bonuses.
Warranty Liabilities(保固): 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, 2021, 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.

On Jan. 9, 2022, the customer returns the car for repairs.

The dealer replaces parts costing $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.

• IAS 37 Provisions, Contingent Liabilities, and Contingent Assets

• IFRS 9 Financial Instruments (related to certain financial liabilities)
• IFRS 15 Revenue from Contracts with Customers (related to contingent obligations)

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 Accounting for Exhibit

Contingent Liabilities 11.4

https://youtu.be/lK9hk-2nLv4?si=wDBEiIbDM7OHmFVg

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Learning Objective C3: Explain how to account for contingent liabilities.
 Probable and Possible
Contingent Liabilities
Potential Legal Claims – A potential claim is
recorded if the amount can be reasonably estimated
and payment for damages is probable. If a legal
claim or lawsuit cannot be reliably estimated or is
less than probable but possible, then it is disclosed.

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.

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Learning Objective C3: Explain how to account for contingent liabilities.
 Remote Contingencies Liabilities
and Uncertainties
Remote Contingent Liabilities – Disclosure not
required but company may voluntarily disclose to
provide transparency.

Uncertainties – Uncertainties from future events are

not contingent liabilities because they are future
events and do not arise from past transactions. These
are not disclosed.

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Learning Objective C3: Explain how to account for contingent liabilities.
 Learning Objective A1

Compute the times interest

earned ratio(利息保障倍數)
and use it to analyze liabilities.

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 Times Interest Earned: Illustration
Exhibit
11.5

Calculation for IAS Company for 2021:

$150,000 / $60,000 = 2.5 times
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Learning Objective A1: Compute the times interest earned ratio and use it to analyze liabilities.
Ethic Challenge
John is a sales manager for an automobile dealership. He earns a bonus each
year based on revenue from the number of autos sold in the year less related
warranty expenses. Actual warranty expenses have varied over the prior 10
years from a low 3% of an automobile’s selling price to a high of 10%. In the
past, John has tended to estimate warranty expense on the high end to be
conservative. He must work with the dealership’s accountant at year-end to
arrive at the warranty expense accrual for cars sold each year.
Required:
1. Does the warranty accrual decision create any ethical dilemma for John?
2. Because warranty expense vary, what percent do you think John should
choose for the current year? Justify your response

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End of Chapter 11

https://youtu.be/1qWVQl622vo?si=Z3Em46mgZANOt0v9

https://youtu.be/-PBmBQ4qW_w?si=-I-WDm7DvETiBkIy
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