TRUE-FALSE STATEMENTS
1. A current liability must be paid out of current earnings.
2. Current liabilities are expected to be paid within one year or the operating cycle,
whichever is longer.
3. The relationship between current liabilities and current assets is important in evaluating a
company's ability to pay off its long-term debt.
4. A company whose current liabilities exceed its current assets may have a liquidity
problem.
5. Notes payable usually require the borrower to pay interest.
6. Notes payable are often used instead of accounts payable.
7. A note payable must always be paid before an account payable.
8. A $30,000, 8%, 9-month note payable requires an interest payment of $1,800 at maturity.
9. Most notes are not interest bearing.
10. With an interest-bearing note, the amount of cash received upon issuance of the note
generally exceeds the note's face value.
11. Interest expense on a note payable is only recorded at maturity.
12. Interest expense is reported under Other Expenses and Losses in the income statement.
13. Unearned revenues should be classified as Other Revenues and Gains on the Income
Statement.
14. The higher the sales tax rate, the more profit a retailer can earn.
15. Metropolitan Symphony sells 200 season tickets for $60,000 that represents a five concertseason. The amount of Unearned Ticket Revenue after the second concert is $24,000.
16. During the month, a company sells goods for a total of $108,000, which includes sales
taxes of $8,000; therefore, the company should recognize $100,000 in Sales Revenues
and $8,000 in Sales Tax Expense.
17. Current maturities of long-term debt refers to the amount of interest on a note payable thatmust be paid in the current year.
18. The current ratio permits analysts to compare the liquidity of different sized companies.
19. Working capital is current assets divided by current liabilities.
20. Contingent liabilities should be recorded in the accounts if there is a remote possibility thatthe contingency will actually occur.
21. A contingent liability is a liability that may occur if some future event takes place.
22. In concept, the estimating of Warranty Expense when products are sold under warranty issimilar to the estimating of Bad Debts Expense based on credit sales.
23. FICA taxes and federal income taxes are levied on employees' earnings without limit.
24. FICA taxes withheld and federal income taxes withheld are mandatory payroll deductions.
25. The employer incurs a payroll tax expense equal to the amount withheld from the
employees' wages for federal income taxes.
26. Internal control over payroll is not necessary because employees will complain if they do
not receive the correct amount on their payroll checks.
27. The timekeeping function includes supervisors monitoring hours worked through time
cards and time reports.
28. The human resources department documents and authorizes employment of new
employees.
29. Payroll activities involve three functions: hiring employees, preparing the payroll, and
paying the payroll.
a30. Post-retirement benefits consist of payments by employers to retired employees for health
care, life insurance, and pensions.
31. A debt that is expected to be paid within one year through the creation of long-term debt isa current liability.
32. Notes payable usually are issued to meet long-term financing needs.
33. Current maturities of long-term debt are often identified as long-term debt due within one
year on the balance sheet.
34. In a given year, total warranty expense is the sum of actual warranty costs incurred on
units sold plus the estimated cost of servicing those units in the future.
35. FICA taxes are a voluntary deduction from employee earnings.
36. FICA taxes are a deduction from employee earnings and are also imposed upon
employers as an expense.
37. The objectives of internal accounting control for payrolls are (a) to safeguard company
assets from unauthorized payments of payrolls and (b) to assure accuracy and reliability
of the accounting records pertaining to payroll.
a38. When a company gives employees rights to receive compensation for absences and the
payment for such absences is probable and the amount can be reasonably estimated, the
company should accrue a liability.
MULTIPLE CHOICE QUESTIONS
39. All of the following are reported as current liabilities except
a. accounts payable.
b. bonds payable.
c. notes payable.
d. unearned revenues.
40. The relationship between current liabilities and current assets is
a. useful in determining income.
b. useful in evaluating a company's liquidity.
c. called the matching principle.
d. useful in determining the amount of a company's long-term debt.
41. Most companies pay current liabilities
a. out of current assets.
b. by issuing interest-bearing notes payable.
c. by issuing stock.
d. by creating long-term liabilities.
42. A current liability is a debt that can reasonably be expected to be paid
a. within one year.
b. between 6 months and 18 months.
c. out of currently recognized revenues.
d. out of cash currently on hand.
.
43. Liabilities are classified on the balance sheet as current or
a. deferred.
b. unearned.
c. long-term.
d. accrued.
44. From a liquidity standpoint, it is more desirable for a company to have current
a. assets equal current liabilities.
b. liabilities exceed current assets.
c. assets exceed current liabilities.
d. liabilities exceed long-term liabilities.
45. The relationship of current assets to current liabilities is used in evaluating a company's
a. operating cycle.
b. revenue-producing ability.
c. short-term debt paying ability.
d. long-range solvency.
46. Which of the following is usually not an accrued liability?
a. Interest payable
b. Wages payable
c. Taxes payable
d. Notes payable
47. In most companies, current liabilities are paid within
a. one year through the creation of other current liabilities.
b. the operating cycle through the creation of other current liabilities.
c. one year out of current assets.
d. the operating cycle out of current assets.
48. The entry to record the issuance of an interest-bearing note credits Notes Payable for the
note's
a. maturity value.
b. market value.
c. face value.
d. cash realizable value.
49. With an interest-bearing note, the amount of assets received upon issuance of the note is
generally
a. equal to the note's face value.
b. greater than the note's face value.
c. less than the note's face value.
d. equal to the note's maturity value.
50. A note payable is in the form of
a. a contingency that is reasonably likely to occur.
b. a written promissory note.
c. an oral agreement.
d. a standing agreement.
51. The entry to record the proceeds upon issuing an interest-bearing note is
a. Interest Expense
Cash
Notes Payable
b. Cash
Notes Payable
c. Notes Payable
Cash
d. Cash
Notes Payable
Interest Payable
52. Admire County Bank agrees to lend Givens Brick Company $200,000 on January 1.
Givens Brick Company signs a $200,000, 8%, 9-month note. The entry made by Givens
Brick Company on January 1 to record the proceeds and issuance of the note is
a. Interest Expense................................................................. 12,000
Cash. .................................................................................. 188,000
Notes Payable............................................................ 200,000
b. Cash ................................................................................... 200,000
Notes Payable............................................................ 200,000
c. Cash ................................................................................... 200,000
Interest Expense................................................................. 12,000
Notes Payable............................................................ 212,000
d. Cash ................................................................................... 200,000
Interest Expense................................................................. 12,000
Notes Payable............................................................ 200,000
Interest Payable ......................................................... 12,000
53. Admire County Bank agrees to lend Givens Brick Company $200,000 on January 1.
Givens Brick Company signs a $200,000, 8%, 9-month note. What is the adjusting entry
required if Givens Brick Company prepares financial statements on June 30?
a. Interest Expense................................................................. 8,000
Interest Payable ......................................................... 8,000
b. Interest Expense................................................................. 8,000
Cash........................................................................... 8,000
c. Interest Payable .................................................................. 8,000
Cash........................................................................... 8,000
d. Interest Payable .................................................................. 8,000
Interest Expense ........................................................ 8,000
54. Admire County Bank agrees to lend Givens Brick Company $200,000 on January 1.
Givens Brick Company signs a $200,000, 8%, 9-month note. What entry will Givens Brick
Company make to pay off the note and interest at maturity assuming that interest has
been accrued to September 30?
a. Notes Payable .................................................................... 212,000
Cash .......................................................................... 212,000
b. Notes Payable .................................................................... 200,000
Interest Payable.................................................................. 12,000
Cash .......................................................................... 212,000
c. Interest Expense................................................................. 12,000
Notes Payable .................................................................... 200,000
Cash .......................................................................... 212,000
d. Interest Payable.................................................................. 8,000
Notes Payable .................................................................... 200,000
Interest Expense................................................................. 4,000
Cash .......................................................................... 212,000
55. As interest is recorded on an interest-bearing note, the Interest Expense account is
a. increased; the Notes Payable account is increased.
b. increased; the Notes Payable account is decreased.
c. increased; the Interest Payable account is increased.
d. decreased; the Interest Payable account is increased.
56. When an interest-bearing note matures, the balance in the Notes Payable account is
a. less than the total amount repaid by the borrower.
b. the difference between the maturity value of the note and the face value of the note.
c. equal to the total amount repaid by the borrower.
d. greater than the total amount repaid by the borrower.
57. On October 1, Steve's Carpet Service borrows $250,000 from First National Bank on a 3-
month, $250,000, 8% note. What entry must Steve's Carpet Service make on December
31 before financial statements are prepared?
a. Interest Payable.................................................................. 5,000
Interest Expense........................................................ 5,000
b. Interest Expense................................................................. 20,000
Interest Payable ......................................................... 20,000
c. Interest Expense................................................................. 5,000
Interest Payable ......................................................... 5,000
d. Interest Expense................................................................. 5,000
Notes Payable............................................................ 5,000
58. On October 1, Steve's Carpet Service borrows $250,000 from First National Bank on a 3-
month, $250,000, 8% note. The entry by Steve's Carpet Service to record payment of the
note and accrued interest on January 1 is
a. Notes Payable..................................................................... 255,000
Cash........................................................................... 255,000
b. Notes Payable..................................................................... 250,000
Interest Payable .................................................................. 5,000
Cash........................................................................... 255,000
c. Notes Payable..................................................................... 250,000
Interest Payable .................................................................. 20,000
Cash........................................................................... 270,000
d. Notes Payable..................................................................... 250,000
Interest Expense................................................................. 5,000
Cash........................................................................... 255,000
59. Interest expense on an interest-bearing note is
a. always equal to zero.
b. accrued over the life of the note.
c. only recorded at the time the note is issued.
d. only recorded at maturity when the note is paid.
60. The entry to record the payment of an interest-bearing note at maturity after all interest
expense has been recognized is
a. Notes Payable
Interest Payable
Cash
b. Notes Payable
Interest Expense
Cash
c. Notes Payable
Cash
d. Notes Payable
Cash
Interest Payable
61. Sales taxes collected by a retailer are recorded by
a. crediting Sales Taxes Revenue.
b. debiting Sales Taxes Expense.
c. crediting Sales Taxes Payable.
d. debiting Sales Taxes Payable.
62. Unearned Rental Revenue is
a. a contra account to Rental Revenue.
b. a revenue account.
c. reported as a current liability.
d. debited when rent is received in advance.
63. Sales taxes collected by the retailer are recorded as a(n)
a. revenue.
b. liability.
c. expense.
d. asset.
64. On September 1, Joe's Painting Service borrows $50,000 from National Bank on a 4-
month, $50,000, 6% note. What entry must Joe's Painting Service make on December 31
before financial statements are prepared?
a. Interest Payable.................................................................. 1,000
Interest Expense........................................................ 1,000
b. Interest Expense................................................................. 3,000
Interest Payable ......................................................... 3,000
c. Interest Expense................................................................. 1,000
Interest Payable ......................................................... 1,000
d. Interest Expense................................................................. 1,000
Notes Payable............................................................ 1,000
65. On September 1, Joe's Painting Service borrows $50,000 from National Bank on a 4-
month, $50,000, 6% note. The entry by Joe's Painting Service to record payment of the
note and accrued interest on January 1 is
a. Notes Payable .................................................................... 51,000
Cash .......................................................................... 51,000
b. Notes Payable .................................................................... 50,000
Interest Payable.................................................................. 1,000
Cash .......................................................................... 51,000
c. Notes Payable .................................................................... 50,000
Interest Payable.................................................................. 3,000
Cash .......................................................................... 53,000
d. Notes Payable .................................................................... 50,000
Interest Expense................................................................. 1,000
Cash .......................................................................... 51,000
66. The interest charged on a $100,000 note payable, at the rate of 8%, on a 90-day note
would be
a. $8,000.
b. $4,444.
c. $2,000.
d. $667.
67. The interest charged on a $100,000 note payable, at the rate of 6%, on a 60-day note
would be
a. $6,000.
b. $3,333.
c. $1,500.
d. $1,000.
68. The interest charged on a $50,000 note payable, at the rate of 8%, on a 3-month note
would be
a. $4,000.
b. $2,000.
c. $1,000.
d. $667.
69. The interest charged on a $50,000 note payable, at the rate of 6%, on a 2-month note
would be
a. $3,000.
b. $1,500.
c. $750.
d. $500.
70. On October 1, 2010, Pennington Company issued a $40,000, 10%, nine-month interestbearing
note. If the Pennington Company is preparing financial statements at December
31, 2010, the adjusting entry for accrued interest will include a:
a. credit to Notes Payable of $1,000.
b. debit to Interest Expense of $1,000
c. credit to Interest Payable of $2,000.
d. debit to Interest Expense of $1,500.
71. On October 1, 2010, Pennington Company issued a $40,000, 10%, nine-month interestbearing
note. Assuming interest was accrued in June 30, 2011, the entry to record the
payment of the note on July 1, 2011, will include a:
a. debit to Interest Expense of $1,000.
b. credit to Cash of $40,000
c. debit to Interest Payable of $3,000.
d. debit to Notes Payable of $43,000.
72. Crawford Company has total proceeds (before segregation of sales taxes) from sales of
$4,770. If the sales tax is 6%, the amount to be credited to the account Sales is:
a. $4,770.
b. $4,484.
c. $5,056.
d. $4,500.
73. Reliable Insurance Company collected a premium of $15,000 for a 1-year insurance policy
on May 1. What amount should Reliable report as a current liability for Unearned
Insurance Premiums at December 31?
a. $0.
b. $5,000.
c. $10,000.
d. $15,000.
74. A company receives $132, of which $12 is for sales tax. The journal entry to record the
sale would include a
a. debit to Sales Tax Expense for $12.
b. credit to Sales Tax Payable for $12.
c. debit to Sales for $132.
d. debit to Cash for $120.
75. A company receives $174, of which $14 is for sales tax. The journal entry to record the
sale would include a
a debit to Sales Tax Expense for $14.
b. debit to Sales Tax Payable for $14.
c. debit to Sales for $174.
d. debit to Cash for $174.
76. A retail store credited the Sales account for the sales price and the amount of sales tax on
sales. If the sales tax rate is 5% and the balance in the Sales account amounted to
$315,000, what is the amount of the sales taxes owed to the taxing agency?
a. $300,000
b. $315,000
c. $15,750
d. $15,000
77. On January 1, 2010, Howard Company, a calendar-year company, issued $600,000 of
notes payable, of which $150,000 is due on January 1 for each of the next four years. The
proper balance sheet presentation on December 31, 2010, is
a. Current Liabilities, $600,000.
b. Long-term Debt, $600,000.
c. Current Liabilities, $300,000; Long-term Debt, $300,000.
d. Current Liabilities, $150,000; Long-term Debt, $450,000.
78. On January 1, 2010, Donahue Company, a calendar-year company, issued $400,000 of
notes payable, of which $100,000 is due on January 1 for each of the next four years. The
proper balance sheet presentation on December 31, 2010, is
a. Current Liabilities, $400,000.
b. Long-term Debt , $400,000.
c. Current Liabilities, $100,000; Long-term Debt, $300,000.
d. Current Liabilities, $300,000; Long-term Debt, $100,000.
79. A cash register tape shows cash sales of $1,500 and sales taxes of $120. The journal
entry to record this information is
a. Cash ................................................................................... 1,620
Sales.......................................................................... 1,620
b. Cash ................................................................................... 1,620
Sales Tax Payable ..................................................... 120
Sales.......................................................................... 1,500
c. Cash ................................................................................... 1,500
Sales Tax Expense ............................................................. 120
Sales.......................................................................... 1,620
d. Cash ................................................................................... 1,620
Sales.......................................................................... 1,500
Sales Taxes Revenue ................................................ 120
80. Ed’s Bookstore has collected $750 in sales taxes during April. If sales taxes must be
remitted to the state government monthly, what entry will Ed's Bookstore make to show
the April remittance?
a. Sales Taxes Payable .......................................................... 750
Cash .......................................................................... 750
b. Sales Tax Expense............................................................. 750
Cash .......................................................................... 750
c. Sales Tax Expense............................................................. 750
Sales Taxes Payable ................................................. 750
d. No entry required.
81. Layton Company does not ring up sales taxes separately on the cash register. Total
receipts for October amounted to $18,900. If the sales tax rate is 5%, what amount must
be remitted to the state for October's sales taxes?
a. $900
b. $945
c. $45
d. It cannot be determined.
82. Valerie's Salon has total receipts for the month of $16,430 including sales taxes. If the
sales tax rate is 6%, what are Valerie's sales for the month?
a. $15,444.20
b. $17,415.80
c. $15,500.00
d. It cannot be determined.
83. The amount of sales tax collected by a retail store when making sales is
a. a miscellaneous revenue for the store.
b. a current liability.
c. not recorded because it is a tax paid by the customer.
d. recorded as an operating expense.
84. A retail store credited the Sales account for the sales price and the amount of sales tax on
sales. If the sales tax rate is 5% and the balance in the Sales account amounted to
$189,000, what is the amount of the sales taxes owed to the taxing agency?
a. $180,000
b. $189,000
c. $9,450
d. $9,000
85. Advances from customers are classified as a(n)
a. revenue.
b. expense.
c. current asset.
d. current liability.
86. The current portion of long-term debt should
a. be paid immediately.
b. be reclassified as a current liability.
c. be classified as a long-term liability.
d. not be separated from the long-term portion of debt.
87. Sales taxes collected by a retailer are expenses
a. of the retailer.
b. of the customers.
c. of the government.
d. that are not recognized by the retailer until they are submitted to the government.
88. Sales taxes collected by a retailer are reported as
a. contingent liabilities.
b. revenues.
c. expenses.
d. current liabilities.
89. Julie's Boutique has total receipts for the month of $29,295 including sales taxes. If the
sales tax rate is 5%, what are Julie's sales for the month?
a. $27,831
b. $27,900
c. $29,295
d. It cannot be determined.
90. A cash register tape shows cash sales of $1,500 and sales taxes of $90. The journal entry
to record this information is
a. Cash................................................................................... 1,500
Sales.......................................................................... 1,500
b. Cash................................................................................... 1,590
Sales Tax Revenue.................................................... 90
Sales.......................................................................... 1,500
c. Cash................................................................................... 1,500
Sales Tax Expense............................................................. 90
Sales.......................................................................... 1,590
d. Cash................................................................................... 1,590
Sales.......................................................................... 1,500
Sales Taxes Payable ................................................. 90
91. Jim's Pharmacy has collected $600 in sales taxes during March. If sales taxes must be
remitted to the state government monthly, what entry will Jim's Pharmacy make to show
the March remittance?
a. Sales Tax Expense............................................................. 600
Cash .......................................................................... 600
b. Sales Taxes Payable .......................................................... 600
Cash .......................................................................... 600
c. Sales Tax Expense............................................................. 600
Sales Taxes Payable ................................................. 600
d. No entry required.
92. Oakley Company does not ring up sales taxes separately on the cash register. Total
receipts for February amounted to $28,600. If the sales tax rate is 4%, what amount must
be remitted to the state for February's sales taxes?
a. $1,144
b. $1,100
c. $1,716
d. It cannot be determined.
93. Any balance in an unearned revenue account is reported as a(n)
a. current liability.
b. long-term debt.
c. revenue.
d. unearned liability.
94. Pickett Company typically sells subscriptions on an annual basis, and publishes six times
a year. The magazine sells 60,000 subscriptions in January at $15 each. What entry is
made in January to record the sale of the subscriptions?
a. Subscriptions Receivable.................................................... 900,000
Subscription Revenue ................................................ 900,000
b. Cash ................................................................................... 900,000
Unearned Subscription Revenue................................ 900,000
c. Subscriptions Receivable.................................................... 150,000
Unearned Subscription Revenue................................ 150,000
d. Prepaid Subscriptions ......................................................... 900,000
Cash........................................................................... 900,000
95. Hilton Company issued a four-year interest-bearing note payable for $300,000 on January
1, 2009. Each January the company is required to pay $75,000 on the note. How will this
note be reported on the December 31, 2010 balance sheet?
a. Long-term debt, $300,000.
b. Long-term debt, $225,000.
c. Long-term debt, $150,000; Long-term debt due within one year, $75,000.
d. Long-term debt, $225,000; Long-term debt due within one year, $75,000.
96. Kelly Rice has a large consulting practice. New clients are required to pay one-half of the
consulting fees up front. The balance is paid at the conclusion of the consultation. How
does Rice account for the cash received at the end of the engagement?
a. Cash
Unearned Consulting Revenue
b. Cash
Earned Consulting Revenue
c. Prepaid Consulting Fees
Earned Consulting Revenue
d. No entry is required when the engagement is concluded.
97. Which one of the following is shown first under current liabilities by many companies as a
matter of custom?
a. Accrued expenses
b. Current maturities of long-term debt
c. Sales taxes payable
d. Notes payable and accounts payable
98. Working capital is
a. current assets plus current liabilities.
b. current assets minus current liabilities.
c. current assets divided by current liabilities.
d. current assets multiplied by current liabilities.
99. The current ratio is
a. current assets plus current liabilities.
b. current assets minus current liabilities.
c. current assets divided by current liabilities.
d. current assets multiplied by current liabilities.
100. Hardy Company has current assets of $90,000, current liabilities of $100,000, long-term,
assets of $180,000 and long-term liabilities of $80,000. Hardy Company's working capital
and its current ratio are:
a. $90,000 and .90:1.
b. -$10,000 and 1.50:1.
c. $10,000 and .90:1.
d. -10,000 and .90:1.
101. Madden Electric began operations in 2010 and provides a one year warranty on the
products it sells. They estimate that 10,000 of the 200,000 units sold in 2010 will be
returned for repairs and that these repairs will cost $6 per unit. The cost of repairing 8,000
units presented for service in 2010 was $48,000. Madden should report
a. warranty expense of $12,000 for 2010.
b. warranty expense of $60,000 for 2010.
c. estimated warranty liability of $60,000 on December 31, 2010.
d. no warranty obligation on December 31, 2010, since this is only a contingent liability.
102. Lincoln Company sells 600 units of a product that has a one-year warranty on parts. The
average cost of honoring one warranty contract is $50. During the year 30 contracts are
honored at a cost of $1,500. It is estimated that 60 contracts will be honored in the
following year. The adjusting entry at the end of the current year will include a
a. credit to Estimated Warranty Liability for $3,000.
b. credit to Estimated Warranty Liability for $4,500.
c. debit to Warranty Expense for $1,500.
d. debit to Warranty Expense for $4,500.
103. A contingent liability need only be disclosed in the financial statement notes when the
likelihood of the contingency is
a. reasonably possible.
b. probable.
c. remote.
d. unlikely.
104. If a contingent liability is reasonably estimable and it is reasonably possible that the
contingency will occur, the contingent liability
a. should be recorded in the accounts.
b. should be disclosed in the notes accompanying the financial statements.
c. should not be recorded or disclosed in the notes until the contingency actually
happens.
d. must be paid for the amount estimated.
106. If a liability is dependent on a future event, it is called a
a. potential liability.
b. hypothetical liability.
c. probabilistic liability.
d. contingent liability.
107. Current maturities of long-term debt
a. require an adjusting entry.
b. are optionally reported on the balance sheet.
c. can be properly classified during balance sheet preparation, with no adjusting entry
required.
d. are not considered to be current liabilities.
108. A contingency that is remote
a. should be disclosed in the financial statements.
b. must be accrued as a loss.
c. does not need to be disclosed.
d. is recorded as a contingent liability.
109. The accounting for warranty costs is based on the
a. going concern principle.
b. matching principle.
c. conservatism principle.
d. objectivity principle.
110. Warranty expenses are reported on the income statement as
a. administrative expenses.
b. part of cost of goods sold.
c. contra-revenues.
d. selling expenses.
111. Shaw Company sells 2,000 units of its product for $500 each. The selling price includes a
one-year warranty on parts. It is expected that 3% of the units will be defective and that
repair costs will average $50 per unit. In the year of sale, warranty contracts are honored
on 40 units for a total cost of $2,000. What amount should Shaw Company accrue on
December 31 for estimated warranty costs?
a. $3,000
b. $2,000
c. $1,000
d. $15,000
112. Shaw Company sells 2,000 units of its product for $500 each. The selling price includes a
one-year warranty on parts. It is expected that 3% of the units will be defective and that
repair costs will average $50 per unit. In the year of sale, warranty contracts are honored
on 40 units for a total cost of $2,000. What amount will be reported on Shaw Company's
balance sheet as Estimated Warranty Liability on December 31, 2010?
a. $2,000
b. $3,000
c. $1,000
d. It cannot be determined.
113. Which of the following items would not be identified if a contingent liability were disclosed
in a financial statement footnote?
a. The nature of the item
b. The expected outcome of the future event
c. A numerical probability of the expected loss
d. The amount of the contingency, if known
114. Disclosure of a contingent liability is usually made
a. parenthetically, in the body of the balance sheet.
b. parenthetically, in the body of the income statement.
c. in a note to the financial statements.
d. in the management discussion section of the financial statement.
115. Current liabilities generally appear
a. after long-term debt on the balance sheet.
b. in decreasing order of magnitude on the balance sheet.
c. in order of maturity on the balance sheet.
d. in increasing order of magnitude on the balance sheet.
116. Which of the following employees would likely receive a salary instead of wages?
a. Store clerk
b. Factory employee
c. Sales manager
d. Manual laborer
117. The total compensation earned by an employee is called
a. take-home pay.
b. net pay.
c. net earnings.
d. gross earnings.
118. Which one of the following payroll taxes does not result in a payroll tax expense for the
employer?
a. FICA tax
b. Federal income tax
c. Federal unemployment tax
d. State unemployment tax
119. Ann Ellis's regular rate of pay is $12 per hour with one and one-half times her regular rate
for any hours which exceed 40 hours per week. She worked 48 hours last week.
Therefore, her gross wages were
a. $576.
b. $480.
c. $624.
d. $864.
120. Assuming a FICA tax rate of 8% on the first $100,000 in wages, and a federal income tax
rate of 20% on all wages, what would be an employee's net pay for the year if he earned
$110,000 for the year?
a. $110,000
b. $79,200
c. $88,000
d. $80,000
121. Most companies involved in interstate commerce are required to compute overtime at
a. the worker's regular hourly wage.
b. 1.25 times the worker's regular hourly wage.
c. 1.5 times the worker's regular hourly wage.
d. 2.5 times the worker's regular hourly wage.
122. Jan Goll has worked 44 hours this week. She worked in excess of 8 hours each day. Her
regular hourly wage is $15 per hour. What are Jan's gross wages for the week? (The
company Jan works for is in compliance with the Fair Labor Standards Act.)
a. $660
b. $690
c. $990
d. $720
123. FICA taxes do not provide workers with
a. life insurance.
b. supplemental retirement.
c. employment disability.
d. medical benefits.
124. Employee payroll deductions include each of the following except
a. federal unemployment taxes.
b. federal income taxes.
c. FICA taxes.
d. insurance, pension plans, and union dues.
125. The journal entry to record the payroll for a period will include a credit to Wages and
Salaries Payable for the gross
a. amount less all payroll deductions.
b. amount of all paychecks issued.
c. pay less taxes payable.
d. pay less voluntary deductions.
126. The amount of income taxes withheld from employees is dependent on each of the
following except the
a. employee's gross earnings.
b. employee's net pay.
c. length of the pay period.
d. number of allowances claimed by the employee.
127. The following totals for the month of April were taken from the payroll register of Kirk
Company.
Salaries $24,000
FICA taxes withheld 1,100
Income taxes withheld 5,000
Medical insurance deductions 900
Federal unemployment taxes 64
State unemployment taxes 432
The journal entry to record the monthly payroll on April 30 would include a
a. debit to Salaries Expense for $24,000.
b. credit to Salaries Payable for $24,000.
c. debit to Salaries Payable for $24,000.
d. debit to Salaries Expense for $17,000.
128. The following totals for the month of April were taken from the payroll register of Kirk
Company.
Salaries $24,000
FICA taxes withheld 1,100
Income taxes withheld 5,000
Medical insurance deductions 900
Federal unemployment taxes 64
State unemployment taxes 432
The entry to record the payment of net payroll would include a
a. debit to Salaries Payable for $16,504.
b. debit to Salaries Payable for $17,000.
c. debit to Salaries Payable for $15,900.
d. credit to Cash for $18,100.
129. The following totals for the month of April were taken from the payroll register of Kirk
Company.
Salaries $24,000
FICA taxes withheld 1,100
Income taxes withheld 5,000
Medical insurance deductions 900
Federal unemployment taxes 64
State unemployment taxes 432
The entry to record accrual of Kirk Company’s payroll taxes would include a
a. debit to Payroll Tax Expense for $496.
b. debit to Payroll Tax Expense for $1,596.
c. credit to FICA Taxes Payable for $2,200.
d. credit to Payroll Tax Expense for $496.
130. The following totals for the month of April were taken from the payroll register of Kirk
Company.
Salaries $24,000
FICA taxes withheld 1,100
Income taxes withheld 5,000
Medical insurance deductions 900
Federal unemployment taxes 64
State unemployment taxes 432
The entry to record the accrual of federal unemployment taxes would include a
a. credit to Federal Unemployment Taxes Payable for $64.
b. debit to Federal Unemployment Taxes Expense for $64.
c. credit to Payroll Tax Expense for $64.
d. debit to Federal Unemployment Taxes Payable for $64
131. Julie Norman, earns $20 per hour for a 40 hour work week and $30 per hour for overtime
work. If Julie works 44 hours, her gross earnings are:
a. $880.
b. $920.
c. $1,045.
d. $1,320.
132. Gary Dittman, an employee of Hopkins Company, has gross earnings for the month of
October of $8,000. FICA taxes are 8% of gross earnings, federal income taxes amount to
$1,270 for the month, state income taxes are 2% of gross earnings, and authorizes
voluntary deductions of $20 per month to the United Way. What is the net pay for Gary?
a. $5,922.80.
b. $5,910.00.
c. $5,930.00.
d. $5,935.40.
133. FICA Taxes Payable was credited for $9,000 in the entry when Peltry Company recorded
payroll. When Peltry Company records employer's payroll taxes, FICA Taxes Payable
should be credited for:
a. $0.
b. $9,000.
c. $18,000.
d. some other amount.
134. The following totals for the month of June were taken from the payroll register of Ford
Company.
Salaries $20,000
FICA taxes withheld 1,533
Income taxes withheld 4,400
Medical insurance deductions 800
Federal unemployment taxes 160
State unemployment taxes 1,000
The journal entry to record the monthly payroll on June 30 would include a
a. debit to Salaries Expense for $20,000.
b. credit to Salaries Payable for $20,000.
c. debit to Salaries Payable for $20,000.
d. debit to Salaries Expense for $13,267
135. The following totals for the month of June were taken from the payroll register of Ford
Company.
Salaries $20,000
FICA taxes withheld 1,533
Income taxes withheld 4,400
Medical insurance deductions 800
Federal unemployment taxes 160
State unemployment taxes 1,000
The entry to record the payment of net payroll would include a
a. debit to Salaries Payable for $12,107.
b. debit to Salaries Payable for $13,267.
c. debit to Salaries Payable for $12,267.
d. credit to Cash for $12,267.
136. The following totals for the month of June were taken from the payroll register of Ford
Company.
Salaries $20,000
FICA taxes withheld 1,533
Income taxes withheld 4,400
Medical insurance deductions 800
Federal unemployment taxes 160
State unemployment taxes 1,000
The entry to record accrual of Ford Company’s payroll taxes would include a
a. debit to Payroll Tax Expense for $2,693
b. credit to Payroll Tax Expense for $2,693
c. credit to FICA Taxes Payable for $1,160.
d. credit to Payroll Tax Expense for $1,160.
137. The following totals for the month of June were taken from the payroll register of Ford
Company.
Salaries $20,000
FICA taxes withheld 1,533
Income taxes withheld 4,400
Medical insurance deductions 800
Federal unemployment taxes 160
State unemployment taxes 1,000
The entry to record the accrual of federal unemployment taxes would include a
a. credit to Federal Unemployment Taxes Payable for $160.
b. credit to Federal Unemployment Taxes Expense for $160.
c. credit to Payroll Tax Expense for $160.
d. debit to Federal Unemployment Taxes Payable for $160.
138. Which one of the following payroll taxes is not withheld from an employee's wages
because it is not levied on the employee?
a. Federal income tax
b. Federal unemployment tax
c. State income tax
d. FICA tax
139. By January 31 following the end of a calendar year, an employer is required to provide
each employee with a(n)
a. state unemployment tax form.
b. federal unemployment tax form 940.
c. wage and tax statement form W-2.
d. employee's withholding allowance certificate form W-4.
140. Which of the following payroll taxes are usually filed and remitted annually?
a. Federal unemployment taxes
b. FICA taxes
c. State unemployment taxes
d. Federal and state unemployment taxes
141. The tax that is paid equally by the employer and employee is the
a. federal income tax.
b. federal unemployment tax.
c. state unemployment tax.
d. FICA tax.
142. The effective federal unemployment tax rate is usually
a. 6.2%.
b. 0.8%.
c. 5.4%.
d. 8.0%.
143. The treasurer's department is responsible for
a. approving the payroll.
b. maintaining payroll records.
c. preparing payroll tax returns.
d. signing payroll checks.
144. The payroll is paid by the
a. personnel department.
b. payroll department.
c. cashier.
d. treasurer's department.
a145. Post-retirement benefits consist of payments by employers to retired employees for
a. health care and life insurance only.
b. health care and pensions only.
c. life insurance and pensions only.
d. health care, life insurance, and pensions.
,
a146. The paid absence that is most commonly accrued is
a. voting leave.
b. vacation time.
c. maternity leave.
d. disability leave.
a147. Flott Company has ten employees who each earn $160 per day. If they accumulate
vacation time at the rate of 1.5 vacation days for each month worked, the amount of
vacation benefits that should be accrued at the end of the month is
a. $160.
b. $1,600.
c. $2,400.
d. $240.
a148. An employer's estimated cost for post-retirement benefits for its employees should be
a. recognized as an expense when paid.
b. recognized as an expense during the employees' work years.
c. recognized as an expense during the employees' retirement years.
d. charged to the goodwill account because providing employees with benefits generates
employee goodwill.
149. A current liability is a debt the company reasonably expects to pay from existing current
assets within
a. one year.
b. the operating cycle.
c. one year or the operating cycle, whichever is longer.
d. one year or the operating cycle, whichever is shorter.
150. Which of the following statements concerning current liabilities is incorrect?
a. Current liabilities include unearned revenues.
b. A company that has more current liabilities than current assets is usually the subject of
some concern.
c. Current liabilities include prepaid expenses.
d. A current liability is a debt that can reasonably be expected to be paid out of existing
current assets or result in the creation of other current liabilities.
151. On August 1, 2010, a company borrowed cash and signed a one-year interest-bearing
note on which both the face value and interest are payable on August 1, 2011. How will
the note payable and the related interest be classified in the December 31, 2010, balance
sheet?
Note Payable Interest Payable
a. Current liability Noncurrent liability
b. Noncurrent liability Current liability
c. Current liability Current liability
d. Noncurrent liability Not shown
152. Companies report current liabilities on the balance sheet in
a. alphabetical order.
b. order of maturity.
c. random order.
d. order of magnitude.
153. A contingency need not be recorded nor disclosed when
a. it is probable the contingency will happen and the amount can be reasonably
estimated.
b. it is probable the contingency will happen but the amount cannot be reasonably
estimated.
c. it is reasonably possible the contingency will happen and the amount can be
reasonably estimated.
d. the possibility of the contingency happening is remote.
154. A contingent liability is recorded when the likelihood of the contingency is
a. remote.
b. reasonably possible.
c. probable.
d. nil or zero.
Ans: C
155. Nick Dent, an employee of Spottswood Company, has gross earnings for the month of
October of $6,000. FICA taxes are 8% of gross earnings, federal income taxes amount to
$952 for the month, state income taxes are 2% of gross earnings, and Nick authorizes
voluntary deductions of $15 per month to the United Fund. What is the net pay for Nick
Dent?
a. $4,442
b. $4,433
c. $4,448
d. $4,452
156. A payroll record that accumulates the gross earnings, deductions, and net pay by
employee for each pay period is the
a. withholding tax table.
b. employee earnings record.
c. payroll register.
d. Wage and Tax Statement.
157. The journal entry to record the payroll for Detwiler Company for the week ending January
8, would probably include a
a. credit to Office Salaries.
b. credit to Wages Expense.
c. debit to Federal Income Taxes Payable.
d. credit to FICA Taxes Payable.
158. Employer payroll taxes include all of the following except
a. FICA taxes.
b. federal unemployment taxes.
c. state unemployment taxes.
d. federal income taxes.
159. The record that provides a cumulative summary of each employee’s gross earnings,
payroll deductions, and net pay during the year and is required to be maintained to comply
with state and local federal law is the
a. register.
b. employee earnings record.
c. statement of earnings.
d. wage and tax statement.
a160. Post-retirement benefits include all of the following except
a. health care.
b. life insurance.
c. pensions.
d. vacation benefits.
BRIEF EXERCISES
BE 161
Kingery Sales Company has the following selected accounts after posting adjusting entries:
Accounts Payable $ 62,000
Notes Payable, 3-month 50,000
Accumulated Depreciation—Equipment 14,000
Notes Payable, 5-year, 6% 80,000
Payroll Tax Expense 4,000
Interest Payable 3,000
Mortgage Payable 120,000
Sales Tax Payable 38,000
Instructions
Prepare the current liability section of Kingery Sales Company's balance sheet, assuming
$20,000 of the mortgage is payable next year.
BE 162
Identify which of the following would be classified as current liabilities as of December 31, 2010:
1. Wages Payable
2. Bonds Payable, maturing in 2015
3. Interest Payable, due July 1, 2011
4. Taxes Payable
5. Notes Payable, due January 30, 2012
Ans: N/A,
Solution 162 (3 min.)
Current liabilities include: Wages Payable, Taxes Payable, and Interest Payable
BE 163
On December 1, Gilman Corporation borrowed $5,000 on a 90-day, 6% note. Prepare the entries
to record the issuance of the note, the accrual of interest at year end, and the payment of the
note.
BE 164
During December 2010, Markowitz Publishing sold 2,500 12-month annual magazine
subscriptions at a rate of $30 each. The first issues were mailed in February 2011. Prepare the
entries on Markowitz’s books to record the sale of the subscriptions and the mailing of the first
issues.
BE 165
Putman Company had cash sales of $54,250 (including taxes) for the month of June. Sales are
subject to 8.5% sales tax. Prepare the entry to record the sale.
BE 166
On December 1, Yung Company introduces a new product that includes a one-year warranty on
parts. In December, 500 units are sold. Management believes that 5% of the units will be
defective and that the average warranty costs will be $60 per unit. Prepare the adjusting entry at
December 31 to accrue the estimated warranty cost.
BE 167
Judy Reber’s regular hourly wage rate is $12, and she receives an hourly rate of $18 for work in
excess of 40 hours. During a March pay period, Judy works 47 hours. Judy’s federal income tax
withholding is $70, and she has no voluntary deductions. Compute Judy Reber’s gross earnings
and net pay for the pay period.
BE 168
Judy Reber’s regular hourly wage rate is $12, and she receives an hourly rate of $18 for work in
excess of 40 hours. During a March pay period, Judy works 47 hours. Judy’s federal income tax
withholding is $70, and she has no voluntary deductions. Prepare the journal entry to record
Judy’s pay for the period. Use March 15 for the end of the pay period.
BE 169
In February, gross earnings in Wine Company totaled $50,000. All earnings are subject to 8%
FICA taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes. Prepare the
entry to record January payroll tax expense.
*BE 170
Truman Company employees are entitled to one day’s vacation for each month worked. In
February, 60 employees worked the full month. Record the vacation pay liability for February
assuming the average daily pay for each employee is $90.
Ex. 176
Maddox Company sells televisions with a 2-year warranty. Past experience indicates that 2% of
the units sold will be returned during the warranty period for repairs. The average cost of repairs
under warranty is estimated to be $50 per unit. During 2010, 7,000 units were sold at an average
price of $400. During the year, repairs were made on 55 units at a cost of $2,400.
Instructions
Prepare journal entries to record the repairs made under warranty and estimated warranty
expense for the year.
Ex. 177
English Company billed its customers a total of $1,575,000 for the month of November. The total
includes a 5% state sales tax.
Instructions
(a) Determine the proper amount of revenue to report for the month.
(b) Prepare the general journal entry to record the revenue and related liabilities for the month.
Ex. 178
Hibbett Company does not segregate sales and sales taxes on its cash register. Its register total
for the month is $259,700, which includes a 6% sales tax.
Instructions
Compute sales taxes payable, and make the entry to record sales and sales taxes
payable.
Ex. 179
Kaiser Coat Company, which prepares annual financial statements, is preparing adjusting entries
on December 31. Analysis indicates the following:
1. The company is the defendant in an employee discrimination lawsuit involving $50,000 of
damages. Legal counsel believes it is unlikely that the company will have to pay any
damages.
2. December 31st is a Friday. The employees of the company have been paid on Monday,
December 27th for the previous week which ended on Friday, December 24th. The company
employs 30 people who earn $100 per day and 15 people who earn $150 per day. All
employees work 5-day weeks.
3. The company is a defendant in a $500,000 product liability lawsuit. Legal counsel believes the
company probably will have to pay the amount requested.
a4. Employees are entitled to one day's vacation for each month worked. All employees
described above in (2.) worked the month of December.
Instructions
Prepare any adjusting entries necessary at the end of the year.
Ex. 180
Based on the following information, compute the (1) current ratio and (2) working capital.
Current assets $240,000
Total assets 900,000
Current liabilities 80,000
Total liabilities 500,000
Ex. 181
Mehring's 2010 financial statements contained the following data (in millions).
Current assets $16,890 Accounts receivable $1,550
Total assets 42,430 Interest expense 980
Current liabilities 15,160 Income tax expense 1,270
Total liabilities 32,580 Net income 2,230
Cash 380
Instructions
Compute these values:
(a) Working capital. (b) Current ratio.
Ex. 182
Marx Company sells exercise machines for home use. The machines carry a 2-year warranty.
Past experience indicates that 6% of the units sold will be returned during the warranty period for
repairs. The average cost of repairs under warranty is $60 for labor and $90 for parts per unit.
During 2010, 2,500 exercise machines were sold at an average price of $800. During the year, 60
of the machines that were sold were repaired at the average price per unit.
Instructions
(a) Prepare the journal entry to record the repairs made under warranty.
(b) Prepare the journal entry to record the estimated warranty expense for the year.
Ex. 183
Golf Pro Publications publishes a golf magazine for women. The magazine sells for $3 a copy on
the newsstand. Yearly subscriptions to the magazine cost $24 per year (12 issues). During
December 2010, Golf Pro Publications sells 9,000 copies of the golf magazine at newsstands and
receives payment for 15,000 subscriptions for 2011. Financial statements are prepared monthly.
Instructions
(a) Prepare the December 2010 journal entries to record the newsstand sales and subscriptions
received.
(b) Prepare the necessary adjusting entry on January 31, 2011. The January 2011 issue has
been mailed to subscribers.
Ex. 184
Delaney Company sells a product that includes a one-year warranty on parts and labor. During
the year, 10,000 units are sold. Delaney expects that 3% of the units will be defective and that the
average warranty cost will be $50 per unit. Actual warranty costs incurred during the year were
$14,000.
Instructions
Prepare the journal entries to record (a) the estimated warranty costs and (b) the actual
costs incurred.
Ex. 185
Foster Company is preparing adjusting entries at December 31. An analysis reveals the following:
1. During December, Foster Company sold 2,000 units of a product that carries a 60-day
warranty. The sales for this product totaled $100,000. The company expects 4% of the units
to need repair under the warranty and it estimates that the average repair cost per unit will be
$15.
2. The company has been sued by a disgruntled employee. Legal counsel believes that it is
reasonably possible that the company will have to pay $200,000 in damages.
3. The company has been named as one of several defendants in a $400,000 damage suit.
Legal counsel believes it is unlikely that the company will have to pay any damages.
a4. Employees earn vacation pay at a rate of 1 day per month. During December, ten employees
qualify for vacation pay. Their average daily wage is $90 per employee.
Instructions
Prepare adjusting entries, if required, for each of the four items.
Ex. 186
Eve Trek's regular hourly wage is $14 an hour. She receives overtime pay at the rate of time and
a half. The FICA tax rate is 8%. Eve is paid every two weeks. For the first pay period in January,
Eve worked 86 hours of which 6 were overtime hours. Eve's federal income tax withholding is
$300 and her state income tax withholding is $100. Eve has authorized that $50 be withheld from
her check each pay period for savings bonds.
Instructions
Compute Eve Trek's gross earnings and net pay for the pay period showing each payroll
deduction in arriving at net pay.
Ex. 187
Cindy Morrow's regular hourly wage rate is $12, and she receives a wage of 1 1/2 times her
regular rate for work in excess of 40 hours. During a June pay period, Cindy worked 46 hours.
Cindy's federal income tax withholding is $58, and her only voluntary deduction is $25 for group
hospitalization insurance.
Instructions
Compute Cindy's (a) gross earnings and (b) net pay for the pay period.
Ex. 188
Employee earnings records for Shoemaker Company reveal the following gross earnings for four
employees through the pay period of December 15.
C. Glenn $95,500 M. Ramirez $ 97,000
K. Mintz $98,200 T. Tanner $102,000
For the pay period ending December 31, each employee's gross earnings is $3,800. The FICA
tax rate is 8% on gross earnings of $100,000.
Instructions
Compute the FICA withholdings that should be made for each employee for the December 31 pay
period. (Show computations.)
Ex. 189
Selected data from a February payroll register for Cheney Company are presented below. Some
amounts are intentionally omitted.
Gross earnings:
Regular $11,100 State income taxes $(3)
Overtime (1) Union dues 100
Total (2) Total deductions (4)
Deductions: Net pay $9,480
FICA taxes $1,000 Accounts debited:
Federal income taxes 1,420 Warehouse wages (5)
Store wages $5,000
FICA taxes are 8%. State income taxes are 4% of gross earnings.
Instructions
(a) Fill in the missing amounts.
(b) Journalize the February payroll and the payment of the payroll.
Ex. 190
Haney Company's payroll for the week ending January 15 amounted to $95,000 for Office
Salaries and $150,000 for Store Wages. None of the employees has reached the earnings limits
specified for federal or state employer payroll taxes. The following deductions were withheld from
employees' salaries and wages:
Federal Income Tax $50,000
State Income Tax 9,000
FICA Taxes 19,600
Union Dues 2,700
United Fund 1,800
Federal unemployment tax (FUTA) rate is 6.2% less a credit equal to the rate paid for state
unemployment taxes. The state unemployment tax (SUTA) rate is 5.4%.
Instructions
Prepare the journal entry to record the weekly payroll ending January 15 and also the employer’s
payroll tax expense on the payroll.
Ex. 191
Pam Norman had earned (accumulated) salary of $96,000 through November 30. Her December
salary amounted to $8,500. Sam Hall began employment on December 1 and will be paid his first
month's salary of $5,000 on December 31. Income tax withholding for December for each
employee is as follows:
Pam Norman Sam Hall
Federal Income Tax $2,180 $990
State Income Tax 390 180
The following payroll tax rates are applicable:
FICA tax on first $90,000 8%
FUTA tax on first $7,000 6.2%*
SUTA tax on first $7,000 5.4%
*Less a credit equal to the state unemployment contribution
Instructions
Record the payroll for the two employees at December 31 and record the employer's share of
payroll tax expense for the December 31 payroll.
Ex. 192
Assume that the payroll records of Darby Oil Company provided the following information for the
weekly payroll ended November 30, 2010.
Year-to-Date
Hourly Federal Earnings Through
Employee Hours Worked Pay Rate Income Tax Union Dues Previous Week
C. Brown 44 $45 $362 $9 $101,000
J. Polk 46 10 65 5 23,200
K. Glass 39 20 118 — 5,700
M. Raney 42 22 169 7 49,500
Additional information: All employees are paid overtime at time and a half for hours worked in
excess of 40 per week. The FICA tax rate is 8% for the first $100,000 of each employee's annual
earnings. The employer pays unemployment taxes of 6.2% (5.4% for state and .8% for federal)
on the first $7,000 of each employee's annual earnings.
Instructions
(a) Prepare the payroll register for the pay period.
(b) Prepare general journal entries to record the payroll and payroll taxes.
Ex. 193
Donna Grace earns a salary of $8,000 per month during the year. FICA taxes are 8% on the first
$100,000 of gross earnings. Federal unemployment insurance taxes are 6.2% of the first $7,000;
however, a credit is allowed equal to the state unemployment insurance taxes of 5.4% on the
$7,000. During the year, $27,300 was withheld for federal income taxes and $5,700 was withheld
for state income taxes.
Instructions
(a) Prepare a journal entry summarizing the payment of Grace’s total salary during the year.
(b) Prepare a journal entry summarizing the employer payroll tax expense on Grace’s salary for
the year.
(c) Determine the cost of employing Grace for the year.
Ex. 194
Hiatt Company had the following payroll data for the year:
Gross earnings of employees $640,000
Employee earnings not subject to FICA tax 140,000
Employee earnings not subject to FUTA or SUTA tax 490,000
Assuming the following:
FICA tax rate 8%
State Unemployment tax rate 5.4% (SUTA)
Federal Unemployment tax rate .8% (FUTA)
Instructions
Compute Hiatt's payroll tax expense for the year. Make a summary journal entry to record the
payroll tax expense.
Ex. 195
In March, gross earnings of Ransey Company totaled $150,000. All earnings are subject to FICA
taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes.
Instructions
(a) Compute the employer's payroll tax expense.
(b) Prepare the entry to record payroll taxes.
Ex. 196
The following payroll liability accounts are included in the ledger of Eckstrom Company on
January 1, 2010:
FICA Taxes Payable $1,750
Federal Income Taxes Payable 4,000
State Income Taxes Payable 665
Federal Unemployment Taxes Payable 175
State Unemployment Taxes Payable 1,190
Union Dues Payable 400
Health Insurance Premium Payable 5,000
Christmas Club Savings Payable 1,500
In January, the following transactions occurred:
Jan. 9 Sent a check for $5,000 to Blue Cross and Blue Shield.
11 Deposited a check for $5,750 in Federal Reserve Bank for FICA taxes and federal
income taxes withheld.
14 Sent a check for $400 to the union treasurer for union dues.
18 Paid state income taxes withheld from employees.
21 Paid state and federal unemployment taxes.
22 Sent a $1,500 check to a Savings and Loan for the Christmas Club withholdings.
Instructions
Journalize the January transactions
Ex. 197
Match the codes assigned to the following payroll functions to the procedures listed below:
H Hiring Employees
T Timekeeping
PRE Preparing the Payroll
PAY Paying the Payroll
____ 1. Distribution of checks by the treasurer
____ 2. Supervisor approves hours worked
____ 3. Documentation of employee hiring
____ 4. Maintenance of payroll records
____ 5. Verification of payroll calculations
____ 6. Screening and interviewing of job applicants
____ 7. Use of a time clock
____ 8. Signing prenumbered payroll checks
COMPLETION STATEMENTS
198. A current liability is a debt that can be expected to be paid within ______________ year or the ______________, whichever is longer.
199. Liabilities are classified on the balance sheet as being _______________ liabilities or
______________ liabilities.
.
200. Obligations in written form are called ______________ and usually require the borrower
to pay interest.
201. With an interest-bearing note, a borrower must pay the ________________ of the note
plus _________________ at maturity.
202. Sales taxes collected from customers are a ______________ of the business until they
are remitted to the taxing agency.
203. The current ratio is current assets divided by ______________.
204. A contingent liability should be recorded in the accounts if it is ______________ that the
contingency will occur and the amount is ______________.
205. Two federal taxes which are levied against employees' wages that must be deducted in
arriving at net pay are (1)______________ taxes and (2)______________ taxes.
206. The employer incurs a payroll tax expense equal to the amount contributed by each
employee for ______________ taxes.
207. A payroll tax expense which is borne entirely by the employer is the federal
_______________ tax.
MATCHING
208. Match the items below by entering the appropriate code letter in the space provided.
A. Current liability F. Federal income taxes
B. Notes Payable G. FICA taxes
C. Wage and Tax Statement H. Federal unemployment taxes
D. Current ratio aI. Post-retirement benefits
E. Contingent liabilities aJ. Pension plan
____ 1. Levied against employees' wages without limit.
____ 2. An obligation in the form of a written promissory note.
____ 3. An agreement whereby an employer provides benefits to employees after they retire.
____ 4. A payroll tax expense levied only against the employer based on employees' wages.
____ 5. A measure of a company’s liquidity.
____ 6. A debt than can reasonably be expected to be paid from current assets.
____ 7. A form showing gross earnings and income taxes withheld.
____ 8. Levied against employees' wages with a maximum limit.
____ 9. Payments by employers to retired employees.
____ 10. A potential liability that may become an actual liability in the future.
SHORT-ANSWER ESSAY QUESTIONS
S-A E 209
A company will incur product repair costs in the future if products that it sells currently under
warranty are brought in for repair during the warranty period. The company will also incur bad
debts expense in the future if customers who buy on credit currently are unable to pay their
accounts. Are the accounting procedures for these two contingent costs (warranty expense and
bad debt expense) related or guided by the same accounting principle? Briefly explain.
S-A E 210
What is a contingent liability? Give an example of a contingent liability that is usually recorded in
the accounts.
S-A E 211
An employee's net pay consists of gross pay less mandatory and voluntary payroll deductions.
Identify the mandatory payroll deductions and give two or three examples of common voluntary
deductions. Are these deductions recognized as payroll expenses by the employer? What type of
payroll expenses does the employer incur related to having a payroll?
S-A E 212
(a) Identify the three types of employer payroll taxes.
(b) How are tax liability accounts and payroll tax expense accounts classified in the financial
statements?
S-A E 213 (Ethics)
Hannah Company maintains two separate accounts payable computer systems. One is known to
all the users, and is used to process payments to vendors. Employees enter the vendor code, or
the name and address of new vendors, the amount, the account, and so on. The other system is
a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor is
not listed as approved, the payment process is halted. Internal audit employees seek to verify the
existence of a bona fide claim by the vendor. All inquiries are made at the top management level,
and very discreetly. No one but top management, the internal audit staff, and the Board of
Directors of the company is even aware of the second system.
Required:
Is it ethical for a company to have a secret system like the one described? Explain.
S-A E 214 (Communication)
El-Fab is a manufacturing company that makes various industrial components out of aluminum.
El-Fab is located in a large city in the northeastern United States. Various labor disputes have
occurred in the city, some with acrimonious public debate concerning the honesty of
management. During one of El-Fab's routine employee meetings, Gary Kuehn, a production
worker, brought up the issue of the cost of a worker as reported in the company's annual report.
The cost was given as $32,000 per year. Gary points out that the average wage rate of $12 per
hour is at most around $25,000 in gross wages. He asks whether the company is adding in
overtime, because if so, the figures are misleading because the employees are not allowed to
work overtime.
Required:
Prepare a note explaining to Mr. Kuehn how El-Fab might calculate a cost per employee that is
greater than gross wages. Explain in general terms only. Do not use any calculations.
