109. Maryland Company offers a bonus plan to its employees equal to 3% of net income.
Maryland’s net income is expected to be $960,000. The amount of the employee bonus
expense is estimated to be:
A. $27,961
B. $28,800
C. $29,000
D. $29,691
E. $30,000
110. A payroll register includes:
A. Pay period dates.
B. Hours worked.
C. Gross pay and net pay.
D. Deductions.
E. All of the choices are correct.
111. The wage bracket withholding table is used to:
A. Compute social security withholding.
B. Compute Medicare withholding.
C. Compute federal income tax withholding.
D. Prepare the W-4.
E. All of the choices are correct.
112. A table that shows the amount of federal income tax to be withheld from an employee’s
pay is the:
A. Form 941.
B. Tax table.
C. Wage bracket withholding table.
D. W-2.
E. W-4.
113. A special bank account used solely for the purpose of paying employees, by depositing
in the account each pay period an amount equal to the total employees’ net pay and drawing
the employees’ payroll checks on the account, is a(n):
A. Federal depository bank account.
B. Employee’s Individual Earnings account.
C. Employees’ bank account.
D. Payroll register account.
E. Payroll bank account.
114. If a company uses a special payroll bank account:
A. The company does not need to issue paychecks.
B. The company draws one check for the entire payroll on the regular bank account and
deposits it in the payroll bank account.
C. The company must use a federal depository bank for the payroll bank account.
D. There is no need for a payroll register.
E. There is no need to issue W-2’s.
115. Harvel Company is required by law to collect and remit sales taxes to the state. If Havel
has $8,000 of cash sales that are subject to an 8% sales tax, what is the journal entry to record
the cash sales?
A. Debit Cash $8,000; credit Sales $7,360; credit Sales Taxes Payable $640.
B. Debit Sales Taxes Payable $640; debit Cash $7,360; credit Sales $8,000.
C. Debit Cash $8,000; credit Sales $8,000; and record the taxes when paid.
D. Debit Cash $8,640; credit Sales $8,000; credit Sales Taxes Payable $640.
E. Debit Accounts Receivable $8,640; credit Sales $8,000; credit Sales Taxes Payable $640.
116. All of the following statements regarding long-term liabilities are true except?
A. Liabilities not expected to be paid within the longer of one year or the company’s
operating cycle are reported as long-term liabilities.
B. Long-term liabilities include long-term notes payable, warranty liabilities, lease liabilities,
and bonds payable.
C. Liabilities that do not have a fixed due date, but are payable on demand, are reported as
long-term liabilities.
D. Long-term liabilities can be reported on the balance sheet in a single total or in multiple
categories.
E. A single long-term liability can be divided between current and noncurrent sections on the
balance sheet.
117. On March 17, Grady Company agrees to accept a 60-day, 10%, $4,500 note from Alert
Company to extend the due date on an overdue account. What is the journal entry needed to
record the transaction by Alert Company?
A. Debit Notes Payable $4,500; credit Accounts Payable $4,500.
B. Debit Accounts Payable $4,500; credit Notes Payable $4,500.
C. Debit Accounts Receivable $4,500; credit Notes Payable $4,500.
D. Debit Cash $4,500; credit Notes Payable $4,500.
E. Debit Sales $4,500; credit Notes Payable $4,500.
118. On March 17, Grady Company agrees to accept a 60-day, 10%, $4,500 note from Alert
Company to extend the due date on an overdue account. What is the journal entry needed to
record the payment of the note by Alert Company on the maturity date?
A. Debit Notes Payable $4,500; debit Interest Expense $75; credit Cash $4,575.
B. Debit Notes Payable $4,500; credit Interest Expense $75, credit Cash $4,425.
C. Debit Cash $4,575; credit Interest Revenue $75; credit Notes Payable $4,500.
D. Debit Notes Payable $4,500; debit Interest Expense $112; credit Cash $4,612.
E. Debit Cash $4,575; credit Interest Revenue $75; credit Notes Receivable $4,500.
119. An employee earns $5,500 per month working for an employer. The FICA tax rate for
Social Security is 6.2% and the FICA tax rate for Medicare is 1.45%. The current FUTA tax
rate is 0.8%, and the SUTA tax rate is 4.4%. Both unemployment taxes are applied to the first
$7,000 of an employee’s pay. The employee has $182 in federal income taxes withheld. The
employee has voluntary deductions for health insurance of $150 and contributes $75 to a
retirement plan each month. What is the amount of net pay for the employee for the month of
January?
A. $4,827.00
B. $4,672.25
C. $4,628.25
D. $4,386.25
E. $4,430.25
120. An employee earns $5,500 per month working for an employer. The FICA tax rate for
Social Security is 6.2% and the FICA tax rate for Medicare is 1.45%. The current FUTA tax
rate is 0.8%, and the SUTA tax rate is 4.4%. Both unemployment taxes are applied to the first
$7,000 of an employee’s pay. The employee has $182 in federal income taxes withheld. The
employee has voluntary deductions for health insurance of $150 and contributes $75 to a
retirement plan each month. What is the amount the employer should record as payroll taxes
expense for the employee for the month of January?
A. $420.75
B. $464.75
C. $662.75
D. $888.75
E. $706.75
121. All of the following statements regarding FICA taxes are true except:
A. FICA taxes are deducted from the employee.
B. Employers must pay withheld FICA taxes to the IRS.
C. The amount of FICA deducted from the employee is credited to a liability account.
D. A self-employed person is exempt from FICA taxes.
E. An employer must pay FICA taxes equal to the amount withheld from the employee.
122. Arena Company provides health insurance to its employees that costs $15,000 per
month. In addition, the company contributes 5% of the employees’ $150,000 gross salary to a
retirement program. The entry to record the accrued benefits for the month would include a:
A. Debit to Medical Insurance Payable $15,000.
B. Debit to Employee Retirement Program Payable $7,500.
C. Debit to Employee Benefits Expense $22,500.
D. Credit to Employee Benefits Expense $15,000.
E. Credit to Employee Benefits Expense $22,500.
123. Arena Company’s salaried employees earn two weeks of vacation per year. It pays
$858,000 in total employee salaries for 52 weeks but its employees work only 50. Record
Arena Company’s weekly journal entry to record the vacation expense:
A. Debit Vacation Benefits Expense $16,500; credit Vacation Benefits Payable $16,500.
B. Debit Vacation Benefits Expense $17,160; credit Vacation Benefits Payable $17,160.
C. Debit Vacation Benefits Expense $17,875; credit Vacation Benefits Payable $17,875.
D. Debit Vacation Benefits Payable $17,160; credit Vacation Benefits Expense $17,160.
E. Debit Vacation Benefits Payable $16,500; credit Vacation Benefits Expense $16,500.
124. All of the following statements related to current liabilities for U.S. GAAP and IFRS are
true except:
A. The definitions and characteristics of current liabilities are broadly similar for both U.S.
GAAP and IFRS.
B. Provision is typically used under IRFS to refer to liability under U.S. GAAP.
C. Because tax regulatory systems of countries are different, the approach to recording taxes
is totally different.
D. When there is little uncertainty surrounding current liabilities, both require companies to
record them in a similar manner.
E. When there is a known current obligation that involves an uncertain amount, but one that
can be reasonable estimated, both require similar treatment.
125. All of the following statements related to recording warranty expense are true except:
A. Recording estimated warranty expense complies with the full disclosure principle.
B. Warranty expense should be recorded in the period when the warranty service is
performed.
C. Recording estimated warranty expense complies with the matching principle.
D. The seller reports a warranty obligation as a liability.
E. Warranty costs are probable and the amount can be estimated.
126. During August, Arena Company sells $356,000 in product that has a one year warranty.
Experience shows that warranty expenses average about 5% of the selling price. The warranty
liability account has a balance of $12,800 before adjustment. Customers returned product for
warranty repairs during the month that used $9,400 in parts for repairs. The entry to record the
estimated warranty expense for the month is:
A. Debit Warranty Expense $17,800; credit Estimated Warranty Liability $17,800.
B. Debit Warranty Expense $5,000; credit Estimated Warranty Liability $5,000.
C. Debit Warranty Expense $14,400; credit Estimated Warranty Liability $14,400.
D. Debit Estimated Warranty Liability $9,400; credit Warranty Expense $9,400.
E. Debit Estimated Warranty Liability $17,800; credit Warranty Expense $17,800.
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127. During August, Arena Company sells $356,000 in product that has a one year warranty.
Experience shows that warranty expenses average about 5% of the selling price. The warranty
liability account has a balance of $12,800 before adjustment. Customers returned product for
warranty repairs during the month that used $9,400 in parts for repairs. The entry to record the
customer warranty repairs is:
A. Debit Warranty Expense $17,800; credit Estimated Warranty Liability $17,800.
B. Debit Warranty Expense $9,400; credit Estimated Warranty Liability $9,400.
C. Debit Warranty Expense $14,400; credit Estimated Warranty Liability $14,400.
D. Debit Estimated Warranty Liability $9,400; credit Parts Inventory $9,400.
E. Debit Estimated Warranty Liability $17,800; credit Parts Inventory $17,800.
128. Match each of the following terms with the appropriate definitions.
a. Employee benefits
b. Short-term note payable
c. Payroll bank account
d. Federal depository bank
e. Payroll register
f. Gross pay
g. Times interest earned
h. Warranty
i. Deferred income tax liability
j. Current liabilities
_____ 1. A record for a pay period that shows the pay period dates, regular and overtime
hours worked, gross pay, net pay and deductions.
_____ 2. Obligations due within one year or the company’s operating cycle, whichever is
longer.
_____ 3. A special bank account used solely for paying employees; each pay period an
amount equal to the total employees’ net pay is deposited and the employees’ payroll checks
are drawn on that account.
_____ 4. A seller’s obligation to repair or replace a product or service that fails to perform as
expected within a specified period.
_____ 5. Total compensation earned by an employee.
_____ 6. Additional compensation paid to or on behalf of employees, such as premiums for
medical insurance and contributions to pension plans.
_____ 7. Payments of income taxes that are deferred until future years because of temporary
differences between GAAP and tax accounting rules.
_____ 8. A bank authorized to accept deposits of amounts payable to the federal government,
including payroll taxes.
_____ 9. Income before interest expense and income taxes divided by interest expense.
_____10. A written promise to pay a specified amount on a definite future date within one
year or the company’s operating cycle, whichever is longer.
129. Match each of the following terms a through j with the appropriate definitions1 through
10.
a. FUTA taxes
b. Contingent liability
c. Merit rating
d. Long-term liability
e. Estimated liability
f. Net pay
g. Wage bracket withholding table
h. Warranty
i. Withholding allowance
j. FICA taxes
_____ 1. A measure that reflects a company’s stability in employing workers.
_____ 2. Taxes assessed on both employer and employees under the Federal Insurance
Contributions Act. These taxes fund Social Security and Medicare.
_____ 3. Known obligations of an uncertain amount that can be reasonably estimated.
_____ 4. Obligations of a company not requiring payment within one year or the operating
cycle, whichever is longer.
_____ 5. Gross pay less all deductions.
_____ 6. A table of amounts of income tax to be withheld from employees’ wages.
_____ 7. A potential obligation that depends on a future event arising from a past transaction.
_____ 8. A seller’s obligation to repair or replace a product or service that fails to perform as
expected within a specified period.
_____ 9. A number that is used to reduce the amount of federal income tax withheld from an
employee’s pay.
_____10. Payroll taxes on employers assessed by the federal government to support the
federal unemployment insurance program.
130. Classify each of the following items as either:
a. Current liability
b. Long-term liability
c. Not a liability
1. 30-day promissory note
2. Payment of a 4-year term loan due this year
3. Salaries payable
4. Debt guarantees
5. FICA taxes payable
6. Income taxes payable
7. Payment of a 30-year term loan due this year
8. Payment of a 30-year term loan due next year. (The company’s operating cycle is 2
months.)
9. Warranty work completed this year
10. Accounts payable
131. Classify each of the following items as either:
a. Estimated liability
b. Contingent liability
c. Current liability that is neither a nor b
1. Lawsuit against the company
2. Warranty on products sold this year
3. Accounts payable
4. Income taxes payable
5. Vacation benefits
6. Accrued wages payable
7. Debt guarantees
8. Property taxes payable
9. Payroll taxes payable
10. Unearned revenues
132. Define liabilities and explain the difference between current and long-term liabilities.
133. What are known current liabilities? Cite at least two examples of known current
liabilities.
134. Describe how to account for and report on contingent liabilities.
135. Describe employer responsibilities for reporting payroll taxes. (To the extent possible,
reference the form to be filed for each tax.)
136. Matt and Bryan Walls of SnorgTees stress the importance of managing liabilities. What
are some of the liabilities that the brothers discovered they would have to manage to be
successful?
137. Explain how to calculate times interest earned. Explain how it is used to analyze a
company’s risk.
138. What is a short-term note payable? Explain the accounting issues related to notes
payable.
139. Explain the responsibilities of and the accounting by employers for employee payroll
deductions.
140. Identify and explain the types of employer payroll taxes.
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141. What are estimated liabilities? Cite at least two examples and explain why they are
classified as estimated liabilities.
142. Identify and discuss the factors involved in computing federal income taxes for
employees.
Answer: The amount of federal income tax withheld for each employee depends on (1) an
employee’s earnings level and (2) the number of withholding allowances claimed by the
employee. This amount can be determined by using a wage bracket withholding table.
Bloom’s: Understand
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
Difficulty: 2 Medium
Learning Objective: 11-P2
Topic: Employee Payroll Concepts
Problems
143. A company had income before interest expense and income taxes of $176,000, and its
interest expense is $55,000. Calculate the company’s times interest earned ratio.
144. A company’s income before interest expense and income taxes is $302,400, and its
interest expense is $72,000. Calculate the company’s times interest earned ratio.
145. A company’s income before interest expense and income taxes in 2010 and 2011 is
$225,000 and $200,000, respectively. Its interest expense was $45,000 for both years.
Calculate the company’s times interest earned ratio, and comment on its level of risk.
146. A company’s income before interest expense and income taxes in 2010 and 2011 is
$395,000 and $427,000, respectively. Its fixed interest expense was $125,000 for both years.
Calculate the company’s times interest earned ratio, and comment on its level of risk.