Current Liabilities (Notes, Sales Tax, & Payroll Taxes)

Authored by Susan M. Moncada, Ph.D., CPA, Indiana State University
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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

Summary

hourglass This problem-based learning activity helps students practice analyzing economic events associated with the following current liabilities: short-term borrowing (notes payable), sales tax liabilities, and payroll. The note payable problem has students accrue interest expense at year end and repay the note early during the subsequent year. Sometimes companies include the sales tax in the selling price of merchandise instead of ringing it up separately. The sales tax problem illustrates this scenario. The payroll problem illustrates how a company accounts for employees' gross wages, withholdings from employee's paychecks, net pay (the resulting cash employees receive), as well as the employer's payroll tax liabilities.

Learning Goals


As a result of completing this worksheet, students should be able to:
  • Explain and record transactions to account for notes payable and accruing interest expense.
  • Compute the amount of sales tax to be remitted to the state when the sales tax is included in the selling price of the merchandise and record the required journal entry.
  • Record elementary payroll and payroll tax transactions.
  • Apply percentages to determine social security taxes withheld.
  • Classify various taxes as applying to the employee, employer, or both.

Higher order Thinking Skills: Comprehension, application, and analysis.

Context for Use


cashregister This worksheet is designed to be used by instructors who favor the traditional approach for teaching principles of financial accounting . It coincides with content associated with reporting and analyzing current liabilities typically covered in a principles of financial accounting course as follows:
        • Short term notes and interest payable/expense transactions.
        • Sales and sales tax payable when the sales price has been grossed up to include the sales tax.
        • Payroll transactions that include the company's payroll tax liabilities for the employee and employer shares of taxes.
While the concepts covered in this worksheet may be considered minor in terms of importance, students usually can relate personally to the sales tax and payroll scenarios. The sales tax problem demonstrates how algebra is applied to a real world circumstance. The notes payable and payroll problems requires computations that apply percentages.


notespayable Prerequisite Students Knowledge:
  • Converting a word problem into an algebraic equation and then simplifying the equation to determine the solution.
  • Applying percentages to determine an amount.
  • Recording journal entries.
  • Concepts and terms associated with short-term notes, sales tax liabilities, as well as wages and resulting payroll taxes.
Implementation options. The worksheet can be used in a variety of ways:
  1. As an in-class activity with each major section of the worksheet completed by students after the applicable concepts have been covered in class.
  2. As a culminating in-class activity after the required concepts have been covered in class.
  3. As a homework assignment completed outside of class for homework points.

Description and Teaching Materials

  • Current Liabilities (Notes, Sales Tax, & Payroll Taxes) Student WorksheetCurrent Liabilities Student Handout (Microsoft Word 42kB Aug15 10)
  • Current Liabilities (Notes, Sales Tax, & Payroll Taxes) Transactions Solution. Includes the algebraic equation to solve a word problem as well as the simplification steps that prove the short-cut formula introduced. Current Liabilities Solution for Instructors (Microsoft Word 45kB Aug15 10)

Teaching Notes and Tips


  • Instructors might suggest students circle key words that provide clues as to how each situation is resolved.
  • Prior to covering the sales tax scenario, instructors might want to review how to create the algebraic equation for a similar word problem. Spending a little time reviewing the required mathematics connects theory to a practical application and helps students understand why the formula used to solve these types of problems if valid.
  • For implementation options 1 and 2, the instructor should circulate among the students, acting as a coach, confirming correct responses, and providing hints for incorrect responses.
  • Students enrolled in principles of accounting courses also need to build self-confidence in their ability to grasp the concepts being learned. Implementation options 1 and 2 help achieve this goal by providing immediate feedback to students.
  • To encourage student participation, bonus points could be assigned.

Assessment


This sales and purchase transactions activity worksheet acts as a formative assessment allowing students to test their understanding of concepts recently covered.

References and Resources


Kimmel, P. D., Weygandt, J. J. & Kieso, D. E. (2009). Accounting Tools for Business Decision Making, 3rd edition, John Wiley & Sons, Inc.