Chapter 12 — Current Liabilities and Payroll
The module's primary reading · ~40–50 minutes · Objective 7 (account for long-lived assets, including cost, depreciation by three methods, and disposal, and for current liabilities, including payroll), with Objective 3 (apply accrual accounting: recognize revenue and expenses in the right period, prepare adjusting entries for deferrals and accruals, and prepare an adjusted trial balance) and Objective 4 (complete the accounting cycle: prepare an income statement, a statement of retained earnings, and a classified balance sheet, journalize closing entries, and prepare a post-closing trial balance) called back · Read it first this week; the lecture, the slides, the tutorial, the quiz, and the workshop all build on it.
In plain language
Every business owes money in the short run: to suppliers, to lenders, to the government, and to its own workers. Those debts are its current liabilities (the amounts it must pay, or the work it must do, within about a year). This week you learn the common ones and how to record each. Most of the week is about payroll (the pay a business owes its employees and the taxes that ride along with it). You will find out why a worker who earns $1,140 in a week takes home less, and why the business pays more.
Why you already care about this
Picture the bicycle shop's mechanic at the end of a long week. The mechanic worked 45 hours: 40 regular hours and 5 more to finish a rush of spring tune-ups. At $24 an hour, plus extra for the overtime, the mechanic earned $1,140. Then the paycheck arrives, and it says $957.79. Where did the other $182.21 go?
You may have lived this moment yourself. Your first paycheck from a café, a warehouse, or a campus job was smaller than the hours times the rate. Lines on the pay stub took some away: Social Security, Medicare, income tax. Nobody stole the money. Your employer held it back and sent it to the government in your name. And your employer paid a second set of taxes of its own that never showed up on your stub at all.
By the end of this chapter you will be able to:
- list the common current liabilities and record a note payable, sales tax, and the current portion of a long loan;
- compute gross pay with overtime under the Fair Labor Standards Act;
- compute Social Security and Medicare withholdings at the 2026 rates, including the wage base;
- compute net pay and record a payroll in one balanced entry;
- record the employer's own payroll taxes and the payments that settle every payroll liability;
- say when a possible loss is recorded, disclosed, or left out.
Carry this sentence with you: gross pay is the cost; net pay is not the cost, only the check.
Where we are
- Already covered: Week 2 defined a liability. Week 4 recorded accrued expenses, such as wages earned but not yet paid. Week 5 split the balance sheet into current and long-term items. Week 10 computed simple interest on a note receivable.
- This week: the common current liabilities, notes payable, sales taxes payable, the current portion of long-term debt, payroll from gross pay to net pay, the employer's payroll taxes, and loss contingencies in words.
- How they connect: payroll is a Week 4 accrued expense with more lines, and every liability you meet lands in Week 5's current liabilities section.
- Where we're going next: Week 13, Long-Term Liabilities, moves to the debts a business repays over many years, starting with bonds.
Week 2 told you that a liability is an obligation to transfer resources to others. Week 5 told you that current liabilities are the obligations due within one year or the operating cycle. The shop's Month 1 balance sheet already listed three. Accounts Payable was $300, Wages Payable was $400, and Unearned Revenue was $900. Together they total 300 + 400 + 900 = $1,600. Week 4 gave you the Wages Payable line: the mechanic had worked days the shop had not yet paid for. This week you meet the rest of the family, and you take that wages line apart.
1. Read the common current liabilities
Think about a household at the end of a month. There is the credit card bill, the phone bill, and a short loan from a relative that must be repaid by summer. Each is a promise to pay soon. Not one of them is something the household used up. Each is something it owes.
A business keeps the same kind of list.
Current liabilities are obligations expected to be paid within one year or the operating cycle, such as accounts payable, short-term notes payable, sales taxes payable, unearned revenue, payroll liabilities, and the current portion of long-term debt.
Worked example — the common current liabilities, one line each. Read each row as "the business owes this, to this person, because of this event."
| Current liability | Owed to | Created when |
|---|---|---|
| Accounts Payable | a supplier | the business buys on account |
| Notes Payable (short-term) | a lender | the business signs a written promise to repay |
| Sales Taxes Payable | the state or city | the business collects sales tax from a customer |
| Unearned Revenue | a customer | the customer pays before the work is done |
| Payroll liabilities | employees and the government | employees work and taxes are withheld and owed |
| Current portion of long-term debt | a lender | part of a long loan comes due within the year |
Unearned Revenue is the odd one out. The shop will settle it with work, not with cash. When the cycling club paid $1,200 for tune-ups in Week 2, the shop owed the club the tune-ups. In words: every row is a claim someone outside the business holds against it, due within a year.
Misconception check. Students often treat a liability as an expense, because both feel like "money going out." They are different things. An expense is something used up to earn revenue in a period. A liability is a debt still owed. Paying Accounts Payable lowers a liability and Cash; it records no expense at all, because the expense, if any, was recorded when the goods or services were used.
2. Find the interest on a note payable
Turn back to a note you already know. In Week 10, a youth cycling program signed a $6,000, 6 percent, 3-month note to the bicycle shop. On the shop's books it was a note receivable. On the program's books, the very same piece of paper is a debt.
A note payable (a debt you owe on a signed promise) is a liability created when a business signs a written promise to repay a sum, usually with interest, by a stated date. A short-term note due within a year is a current liability.
When a business borrows cash with a note, it debits Cash and credits Notes Payable for the face. The interest is a cost of using the lender's money over time. It goes to Interest Expense, the expense account for the interest a borrower owes for the time it has used someone else's money.
The interest formula is the one you met in Week 10: Interest = Face × Rate × Time, with Time as a fraction of a year.
Worked example — the program pays its note (Dataset G, from the borrower's side, illustrative). You follow the program's arithmetic first, then its entry.
- Interest: $6,000 × 6% × 3⁄12 = $90.
- The amount due at maturity: 6,000 + 90 = $6,090.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Maturity | Notes Payable | 6,000 | |
| Interest Expense | 90 | ||
| Cash | 6,090 | ||
| Repays the note's face and its 3 months of interest. |
The entry balances: debits 6,000 + 90 = 6,090 = credits 6,090. In words: the program hands over $6,090, of which $6,000 ends the debt and $90 is the cost of borrowing for three months.
One caveat about timing. If the program's accounting period ends before the note is due, it owes interest it has not paid yet. That is a Week 4 accrued expense: debit Interest Expense and credit Interest Payable for the months that have passed.
Misconception check. Students often figure a 3-month note's interest as a full year's, because the rate is stated per year. A full year would be 6,000 × 0.06 = $360, versus the $90 the note owes, a 4-fold error, because 360 ÷ 90 = 4. Multiply by the fraction of the year the note runs.
3. Collecting sales tax for the government
Picture a campus bookstore's register on a busy afternoon. A student buys a hoodie, and the screen adds a line for tax before the total. The store collects that tax, but it never belonged to the store. The store holds it until it sends the money to the state.
Sales taxes payable is a current liability for the sales tax a seller has collected from customers and owes to the state or city until it sends the money in.
Sales tax rates are set by each state and city. The rate below is illustrative and describes no real place.
Worked example — a day of sweatshirt sales (illustrative). A campus bookstore sells $2,000 of sweatshirts for cash at an illustrative 8 percent sales tax rate.
- The tax: 2,000 × 0.08 = $160.
- The cash the customers pay: 2,000 + 160 = $2,160.
| Entry | Account | Debit | Credit |
|---|---|---|---|
| Sale | Cash | 2,160 | |
| Sales Revenue | 2,000 | ||
| Sales Taxes Payable | 160 | ||
| Records the sale and the tax collected for the state. | |||
| Payment | Sales Taxes Payable | 160 | |
| Cash | 160 | ||
| Sends the collected tax to the state. |
The sale entry balances: debits 2,160 = credits 2,000 + 160 = 2,160. In words: the store earned $2,000, and the other $160 passed through its register on the way to the government.
Misconception check. Students often record all $2,160 as revenue, because all of it landed in the cash drawer. The store did not earn the $160. It did no work for it and cannot keep it. Sales tax collected is a liability, Sales Taxes Payable, never revenue.
4. Split a long loan: the current portion
Think about a car loan with five years of payments. This year's payments are due soon. The rest are years away. If someone asked what you owe in the next twelve months, you would count only this year's share.
A balance sheet asks the same question.
The current portion of long-term debt is the part of a long-term loan that is due within the next year. It is reported as a current liability, while the rest stays long-term.
Worked example — a landscaping company's equipment loan (illustrative). A landscaping company owes $50,000 on a five-year note that it repays at $10,000 a year.
- Current portion: the $10,000 due in the next year.
- Long-term portion: 50,000 − 10,000 = $40,000.
| Balance sheet section | Line | Amount |
|---|---|---|
| Current liabilities | Current portion of long-term debt | $10,000 |
| Long-term liabilities | Notes Payable, less current portion | 40,000 |
| Total owed on the note | $50,000 |
In words: the company still owes $50,000; the balance sheet tells a reader that $10,000 of it is due within a year. No journal entry changed the debt. Only its classification changed.
Misconception check. Students often leave a long loan entirely in long-term liabilities until its final year, because the loan "is" a long-term loan. Classification follows the due dates, not the loan's name. Each year, the share due in the next twelve months moves into current liabilities, so a lender can see what must be paid soon.
5. Compute gross pay, with overtime
Now the biggest current liability for many small businesses: what it owes its people. Start where every pay stub starts, with the hours.
Gross pay (your pay before anything is taken out) is the total an employee earns for a pay period, regular pay plus any overtime pay, before anything is withheld.
Overtime has a rule from its source. The Fair Labor Standards Act (FLSA) is the federal law that sets it. In the U.S. Department of Labor's words: "Unless exempt, employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay."
Time and one-half means the regular rate times 1.5. Some jobs are exempt, and this course does not decide who is; it only applies the rule as the Department of Labor states it.
Worked example — the mechanic's gross pay (Dataset I, illustrative wages). The mechanic is paid $24 an hour and worked 45 hours this workweek.
- Regular pay: 40 hours × $24 = $960.
- Overtime rate: time and one-half, $24 × 1.5 = $36 an hour.
- Overtime pay: 5 hours × $36 = $180, for the 45 − 40 = 5 hours over 40 in the workweek.
- Gross pay: 960 + 180 = $1,140.
In words: the mechanic earned $1,140 this week, and $180 of it is the overtime premium the FLSA requires for the five hours past 40.
Misconception check. Students often pay overtime hours at the regular rate, because an hour is an hour. At $24, those 5 hours would pay only 5 × 24 = $120, versus the $180 the rule requires. The FLSA sets the overtime rate at not less than time and one-half, so the multiplier 1.5 belongs on every hour over 40.
6. Withholding Social Security and Medicare
Here is where the paycheck starts to shrink. An employer keeps back part of gross pay and sends it to others on the employee's behalf.
Withholdings (the amounts held back from your pay) are amounts an employer keeps back from an employee's gross pay and sends to others for the employee, such as Social Security tax, Medicare tax, income taxes, and voluntary deductions. A voluntary deduction is one the employee chooses, such as a retirement plan contribution.
Two federal taxes come first. Together people often call them FICA taxes. The rates come from their issuing bodies. For wages paid in 2026, the Social Security Administration and IRS Publication 15 (2026) state them this way:
- Social Security tax is 6.2 percent each for employees and employers, charged only on wages up to that year's wage base.
- The wage base (a yearly ceiling on taxed wages) is the most wages in a year on which Social Security tax is charged; the Social Security Administration's 2026 wage base is $184,500.
- Medicare tax is 1.45 percent each for employees and employers, charged on all wages, with no wage base.
There is one more Medicare line to know by name. An Additional Medicare Tax of 0.9 percent is withheld on an employee's wages above $200,000. You name it in words only; it does not touch any paycheck in this chapter.
Income tax is withheld too, both federal and, in many states, state. Real federal income tax withholding comes from the IRS's own tables and the employee's withholding form. This course does not compute it. The shop's $95.00 is an illustrative amount, given to you so the rest of the arithmetic can be shown.
Worked example — the mechanic's withholdings (Dataset I, at the 2026 rates). The mechanic's wages are well below the $184,500 wage base, so the full paycheck is taxed for Social Security.
- Social Security withheld: 1,140 × 0.062 = $70.68.
- Medicare withheld: 1,140 × 0.0145 = $16.53.
- Federal income tax withheld: $95.00, an illustrative amount, never computed from the IRS tables.
- Total withheld: 70.68 + 16.53 + 95.00 = $182.21.
Payroll runs to the cent. You round each tax to the nearest cent, as the shop's figures do.
Misconception check. Students often think income tax withholding can be figured with one flat rate, the way Social Security can. It cannot. Federal income tax withholding depends on the IRS's tables and on what the employee reports, which is why this course labels the $95.00 illustrative and never keys a computation of it. Only the Social Security and Medicare rates are pinned, as their issuing bodies state them.
Pause and think. Choose one: (a) Think of a job you have held or would like to hold. Which line of its pay stub would you check first, and why? (b) Think of a small business you know. Why might its owner care more about gross pay than about net pay?
7. Find net pay and record the payroll
What is left after the withholdings is what the employee takes home.
Net pay is the take-home amount of a paycheck: gross pay minus all withholdings.
Worked example — the mechanic's net pay (Dataset I, illustrative). You subtract the withholdings, then check that everything adds back.
- Net pay: 1,140 − 182.21 = $957.79.
- The check on your work: 70.68 + 16.53 + 95.00 + 957.79 = $1,140.00, back to gross pay.
| Line | Amount |
|---|---|
| Regular pay: 40 hours × $24 | $960.00 |
| Overtime pay: 5 hours × $36 (time and one-half) | 180.00 |
| Gross pay | $1,140.00 |
| Social Security withheld (6.2 percent) | (70.68) |
| Medicare withheld (1.45 percent) | (16.53) |
| Federal income tax withheld (illustrative) | (95.00) |
| Net pay | $957.79 |
Now you record it. Walk it the way you walk every transaction. What happened: the mechanic earned a week's wages. Which accounts change: Wages Expense goes up by the whole gross pay, because that is what the week of work cost. Three tax liabilities go up, because the shop now holds money it owes the government. Wages Payable goes up, because the shop owes the mechanic the net pay until the check is handed over.
| Entry | Account | Debit | Credit |
|---|---|---|---|
| 1 | Wages Expense | 1,140.00 | |
| Social Security Tax Payable | 70.68 | ||
| Medicare Tax Payable | 16.53 | ||
| Federal Income Tax Payable | 95.00 | ||
| Wages Payable | 957.79 | ||
| Records the week's gross pay, the withholdings, and the net pay owed. |
Debits 1,140.00 = credits 70.68 + 16.53 + 95.00 + 957.79 = 1,140.00. In words: the week of work cost the shop $1,140.00 in wages, and every dollar of it is now owed to someone, the mechanic or the government.
In practice (your tools). In a free spreadsheet such as Google Sheets, build a one-row payroll register. Put hours in column A, the rate in B, and gross pay in C with =MIN(A2,40)*B2+MAX(A2-40,0)*B2*1.5. Compute Social Security in D with =ROUND(C2*0.062,2) and Medicare in E with =ROUND(C2*0.0145,2). Type the illustrative income tax in F, and find net pay in G with =C2-D2-E2-F2. Add a check cell, =D2+E2+F2+G2-C2, that should show 0.
Misconception check. Students often debit Wages Expense for the net pay, $957.79, because that is the check. The withholdings are still part of what the mechanic earned; the shop only sends them somewhere else. Wages Expense is the gross pay, $1,140.00, and the paycheck is only what is left after the withholdings.
8. Add the employer's payroll taxes, and pay everyone
The withholdings are the employee's taxes. The employer owes taxes of its own on the same wages, and they cost the employer extra.
Payroll Tax Expense is the expense account for the employer's own payroll taxes, such as its matching Social Security and Medicare and its unemployment taxes, which are a cost on top of gross pay.
The employer also pays unemployment taxes, federal and state taxes it pays, not withheld from employees, that fund benefits for workers who lose their jobs. This course names them in words; their rates are not part of this course's figures, so the entries below show only the matching Social Security and Medicare.
Worked example — the shop's own taxes and the payments (Dataset I, illustrative). You record the match, then the two payments.
- The match: 70.68 + 16.53 = $87.21, the same Social Security and Medicare the mechanic paid.
| Entry | Account | Debit | Credit |
|---|---|---|---|
| 2 | Payroll Tax Expense | 87.21 | |
| Social Security Tax Payable | 70.68 | ||
| Medicare Tax Payable | 16.53 | ||
| Records the shop's matching Social Security and Medicare. | |||
| 3 | Wages Payable | 957.79 | |
| Cash | 957.79 | ||
| Pays the mechanic the net pay. | |||
| 4 | Social Security Tax Payable | 141.36 | |
| Medicare Tax Payable | 33.06 | ||
| Federal Income Tax Payable | 95.00 | ||
| Cash | 269.42 | ||
| Sends the withheld and matching taxes to the government. |
Entry 2 balances: debits 87.21 = credits 70.68 + 16.53 = 87.21. In Entry 4, Social Security is 70.68 × 2 = 141.36 and Medicare is 16.53 × 2 = 33.06, because each payable now holds both shares. Debits 141.36 + 33.06 + 95.00 = 269.42 = credits 269.42.
Now add up the week. The week's total payroll cost to the shop: gross pay 1,140.00 + the employer's taxes 87.21 = $1,227.21, which equals the cash paid out, 957.79 + 269.42 = $1,227.21.
In words: the mechanic earned $1,140 and takes home $957.79. The shop's week of payroll cost it $1,227.21, because the withholdings are the mechanic's taxes the shop passes on, and the $87.21 match is the shop's own tax.
Misconception check. Students often think the employer's share of Social Security and Medicare comes out of the employee's pay, because the two amounts match to the cent. Look at the paycheck table again: the $87.21 match appears nowhere on it. The employer's share is a second cost, recorded as Payroll Tax Expense, on top of gross pay.
Pause and think. Choose one: (a) If you were the shop's founder planning to hire a second mechanic, which weekly cost would you budget for, $1,140.00 or $1,227.21, and why? (b) If you were the mechanic, which line of the shop's four entries would you most want to see recorded on time, and why?
9. Apply the wage base
Social Security has a ceiling, and Medicare does not. That difference matters only for the highest earners, but when it applies, a careless payroll overcharges them.
Worked example — a second employee near the wage base (Dataset I, illustrative). A second employee's wages before this paycheck already total $184,000. This week's paycheck is $1,140.
- Room left below the wage base: 184,500 − 184,000 = $500.
- Social Security withheld: only that $500 is taxed, so 500 × 0.062 = $31.00.
- Medicare withheld: Medicare has no wage base, so 1,140 × 0.0145 = $16.53.
- The Additional Medicare Tax test: wages reach 184,000 + 1,140 = $185,140, still below $200,000, so none is withheld.
In words: the second employee pays Social Security on $500 of this paycheck and on nothing after it this year, while Medicare keeps applying to every dollar.
The shop matches on the same base, so its own Social Security on this paycheck is $31.00 as well. A limitation worth naming: this course pins only the 2026 rates and wage base. The wage base changes each year, so any other year's payroll needs that year's figure from the Social Security Administration.
Misconception check. Students often charge Social Security on every dollar of wages, because Medicare works that way. Charged on the whole paycheck, the second employee's Social Security would be 1,140 × 0.062 = $70.68 instead of $31.00, an overcharge of 70.68 − 31.00 = $39.68. Social Security stops at the wage base; Medicare does not.
10. Decide when a loss contingency is recorded
Some debts are not certain yet. Imagine a customer who says a repaired bicycle failed on a hill and files a claim against the shop. The shop might lose, or it might not. It might know the amount, or it might not.
A loss contingency is a possible loss that depends on a future event. Standard financial accounting usage sorts it into three cases:
- It is recorded when the loss is probable and the amount can be reasonably estimated.
- It is disclosed in the notes to the statements when the loss is reasonably possible, or probable but not reasonably estimable.
- A remote loss needs neither.
Worked example — the customer's claim, three ways (in words). You read the same claim under three different opinions from the shop's lawyer.
- The shop's lawyer says the shop will probably lose, and the amount can be reasonably estimated: the shop records the loss and a liability.
- The lawyer says a loss is reasonably possible but not likely: the shop describes the claim in the notes and records nothing.
- The lawyer says the claim has almost no chance of success: the loss is remote, and the shop neither records nor discloses it.
In words: how likely the loss is, and whether its amount can be estimated, decide whether it reaches the statements, the notes, or neither.
Here is an honesty note about scope. This course teaches contingencies in words only. Real cases call for judgment by managers, lawyers, and auditors, and this chapter does not key any amount for them.
Misconception check. Students often think a business must record every lawsuit filed against it, because a lawsuit sounds like a debt. A claim becomes a recorded liability only when the loss is probable and reasonably estimable. Many claims belong only in the notes, and remote ones appear nowhere.
Key terms
- Current liabilities — Obligations expected to be paid within one year or the operating cycle, such as accounts payable, short-term notes payable, sales taxes payable, unearned revenue, payroll liabilities, and the current portion of long-term debt. (first used: 1. Read the common current liabilities)
- Payroll liabilities — The amounts a business owes because of its payroll: net pay not yet paid to employees, taxes withheld from their pay, and the employer's own payroll taxes. (first used: 1. Read the common current liabilities)
- Note payable — A liability created when a business signs a written promise to repay a sum, usually with interest, by a stated date; a short-term note due within a year is a current liability. (first used: 2. Find the interest on a note payable)
- Interest Expense — The expense account for the interest a borrower owes for the time it has used someone else's money. (first used: 2. Find the interest on a note payable)
- Sales taxes payable — A current liability for the sales tax a seller has collected from customers and owes to the state or city until it sends the money in. (first used: 3. Collecting sales tax for the government)
- Current portion of long-term debt — The part of a long-term loan that is due within the next year, reported as a current liability while the rest stays long-term. (first used: 4. Split a long loan: the current portion)
- Gross pay — The total an employee earns for a pay period, regular pay plus any overtime pay, before anything is withheld. (first used: 5. Compute gross pay, with overtime)
- Fair Labor Standards Act (FLSA) — The federal law under which covered, nonexempt employees must receive overtime pay for hours worked over 40 in a workweek at not less than time and one-half their regular rates of pay. (first used: 5. Compute gross pay, with overtime)
- Withholdings — Amounts an employer keeps back from an employee's gross pay and sends to others for the employee, such as Social Security tax, Medicare tax, income taxes, and voluntary deductions. (first used: 6. Withholding Social Security and Medicare)
- Social Security tax — A federal payroll tax, 6.2 percent each for employees and employers for wages paid in 2026, charged only on wages up to that year's wage base. (first used: 6. Withholding Social Security and Medicare)
- Wage base — The most wages in a year on which Social Security tax is charged; for 2026 the Social Security Administration sets it at $184,500. (first used: 6. Withholding Social Security and Medicare)
- Medicare tax — A federal payroll tax, 1.45 percent each for employees and employers in 2026, charged on all wages with no wage base. (first used: 6. Withholding Social Security and Medicare)
- Additional Medicare Tax — An extra 0.9 percent Medicare tax that an employer withholds on an employee's wages above $200,000, named in this course in words only. (first used: 6. Withholding Social Security and Medicare)
- Net pay — The take-home amount of a paycheck: gross pay minus all withholdings. (first used: 7. Find net pay and record the payroll)
- Payroll Tax Expense — The expense account for the employer's own payroll taxes, such as its matching Social Security and Medicare and its unemployment taxes, which are a cost on top of gross pay. (first used: 8. Add the employer's payroll taxes, and pay everyone)
- Unemployment taxes — Federal and state taxes an employer pays, not withheld from employees, that fund benefits for workers who lose their jobs. (first used: 8. Add the employer's payroll taxes, and pay everyone)
- Loss contingency — A possible loss that depends on a future event, recorded when probable and reasonably estimable, disclosed in the notes when reasonably possible or probable but not estimable, and left out when remote. (first used: 10. Decide when a loss contingency is recorded)
Summary
- A current liability is owed within a year; it is a debt, not an expense.
- A note payable's interest is face times rate times the fraction of a year.
- Sales tax collected is Sales Taxes Payable, never revenue.
- The part of a long loan due within a year is a current liability.
- Overtime is at least time and one-half for hours over 40 in a workweek.
- For 2026, Social Security is 6.2 percent up to $184,500; Medicare is 1.45 percent on all wages.
- Net pay is gross pay minus every withholding.
- Wages Expense is the gross pay; the employer's match is Payroll Tax Expense.
- A loss contingency is recorded only when probable and reasonably estimable.
Check your understanding
Work these before looking at the answers — they are ungraded, and the answers (with reasoning) are at the bottom of the page.
- A food truck (illustrative) signs a $4,000, 9 percent, 4-month note with its bank. Compute the interest and the amount due at maturity, and write the entry the truck makes when it repays the note.
- A hardware store (illustrative) sells $750 of paint for cash at an illustrative 6 percent sales tax rate. Compute the tax and the cash collected, and write the sale entry.
- A tutoring center (illustrative) pays a tutor $20 an hour, and the tutor worked 44 hours in one workweek. Compute gross pay, then the Social Security and Medicare withheld at the 2026 rates.
- A dog-grooming service faces a former customer's claim. Its lawyer says a loss is reasonably possible but not likely. Explain what the service records, what it discloses, and why.
Answers (worked reasoning — read after attempting)
- Interest is 4,000 × 0.09 × 4⁄12 = $120, so the truck owes 4,000 + 120 = $4,120 at maturity. Debit Notes Payable 4,000 and Interest Expense 120; credit Cash 4,120. The 4⁄12 matters: a full year would be 4,000 × 0.09 = $360, three times as much.
- The tax is 750 × 0.06 = $45, and the store collects 750 + 45 = $795. Debit Cash 795; credit Sales Revenue 750 and Sales Taxes Payable 45. The $45 is owed to the state, so it is a liability, not revenue.
- Regular pay is 40 × 20 = $800. The overtime rate is 20 × 1.5 = $30, so 4 overtime hours pay 4 × 30 = $120. Gross pay is 800 + 120 = $920. Social Security is 920 × 0.062 = $57.04, and Medicare is 920 × 0.0145 = $13.34. The tutor is far below the wage base, so every dollar is taxed for both.
- It records nothing in its accounts, because the loss is not probable. It describes the claim in the notes, because a reasonably possible loss is disclosed. If the lawyer later judged the loss probable and the amount reasonably estimable, the service would record a loss and a liability.
Next up in this module: the Readings & Resources page, the lecture tutorial, the practice set, the quiz, the discussion, and the assignment; next week the straight-line method spreads a bond discount across the bond's life.
Built with The Course Maker · samples.thecoursemaker.com