Current Liabilities

Current Liabilities

Practice As You Learn

There are 4 things that you may have to do related to current liabilities:

1) Record sales tax
2) Record salary expense and payroll liabilities
3) Record warranty liabilities
4) Record contingencies

1)  To record sales tax: 

1st   Compute the amount of sales tax to be paid to the city or state

Total Sales
x  % given as sales tax
=   Sales tax payable

Record the sales tax payable as a credit
Record the total sales amount with a credit
Record cash for the total of the two as a debit

2)  To record salary expense and payroll liabilities for the employee:

1st – Identify the total amount earned as salary expense, record with a debit

2nd – calculate FICA and Medicare using the percentages given 
These will each be recorded as a payable

3rd –  Identify all other items the employee has withheld from the paycheck
These will each be recorded as a payable

Record each of the above as “_______ payable” 

4th – Plug the difference to salaries payable to balance the journal entry

To record payroll liabilities for the employer

1st –  Calculate FUTA using the given rate x salary expense

2nd – Calculate SUTA using the given rate x salary expense

3rd – Calculate FICA and Medicare using the given rate x salary expense

Record each of the above as a “____ payable”

4th – Total the payables and record a debit to “payroll tax expense” for the total of the other payables to balance the journal entry

3)  To record warranty liabilities:

1st – Calculate the “warranty payable” by
Sales this period x estimated warranty %

2nd – Record the calculated amount as a debit to “warranty expense” and the same amount as a credit to “warranty payable”

Use only the current year sales to compute the liability.

3rd—As the company pays on a claim, do not record an expense, reduce the previously recorded “warranty liability”

4)  To record contingencies:

For “probable”, a journal entry to record the expense and the payable is made if the amount can be reasonably estimated

Record the low end of the estimated amount.

_______ Expense        $XXXX

       ______ Payable               $XXXX

Call the expense and the payable whatever it is related to.

You must also disclose the situation

For “reasonably possible”, no expense is recorded, only a disclosure is made

For “remote” you do nothing, do not make a journal entry or mention it anywhere

Practice Problem 1 – Current Liabilities: Sales Tax Payable

A company had sales for this period of $120,000.  The city sales tax rate is 8.2%. Record the sales and the related sales tax liability.

Practice Problem 2 – Current Liabilities: Payroll Liabilities

A company has three employees who each make $25,000, $39,000 and $105,000 respectively.  Each employee withholds income tax of $4,200 and withholds for health insurance that costs $4,000 and parking fees that cost $800.  The government tax rates are as follows: FICA SS 6.2% of the first $90,000, FICA Medicare 1.45% of all, FUTA .8% of the first $7,000 and SUTA 4.1% of the first $7,000.

A.  Record the journal entry to record salary expense

B.  Record the journal entry to record the payroll tax expense

Practice Problem 3 – Current Liabilities: Warranty Liabilities

A tire company offers a free 2-year warranty on all tires sold.  This company had sales of $560,000 last year and $620,000 this year.  Claims on the warranty have historically occurred at a rate of 4% of sales.  $22,000 in warranty claims occurred last year and $19,000 occurred this year.

A.  Record the warranty liability for last year and this year.

B.  Record the claims against the warranty for last year and this year.

Practice Problem 4 – Current Liabilities:  Contingencies

A company is involved in a product liability lawsuit.  The plaintiff is asking for $10,000,000 in damages. The company’s lawyers believe the company was in the wrong and the lawsuit will be settled for between $1,000,000 and $2,000,000.  The suit is not expected to go to court for 2 more years.