Chapter 10—Current Liabilities and Payroll Key
1. Receiving payment prior to delivering goods or services causes a current liability to be incurred.
2. For a current liability to exist, the following two tests must be met. The liability must be due usually within
a year and must be paid out of current assets.
3. All long-term liabilities eventually become current liabilities.
4. The borrower is the one who issues a note payable to a creditor.
5. Notes payable may be issued to creditors to satisfy accounts payable created earlier.
6. Interest expense is reported in the operating expense section of the income statement.
7. A loan in which the lender deducts interest from the amount borrowed before the money is advanced to the
borrower is called an interest bearing note.
8. For an interest bearing note payable, the amount borrowed is equal to the face amount of the note.
9. The amount of money a borrower receives from the lender is called discount rate.
10. The proceeds of a discounted note are equal to the face value of the note.
11. The discount on a note payable is charged to an account that has a normal credit balance.
12. The proceeds from discounting a $20,000, 60-day, note payable at 6% is $20,200.
13. Amounts withheld from each employee for Social Security and Medicare varies by state.
14. Form W-4 is a form authorizing employers to withhold a portion of employee earnings for payment of an
employee’s federal income taxes.
15. Form W-2 is called the Wage and Tax Statement.
16. If, prior to the last weekly payroll period of the calendar year, the cumulative earnings for an employee are
$98,800, earnings subject to social security tax are $100,000, and the tax rate is 6.0%, the employer’s social
security tax on the $2,000 gross earnings paid on the last day of the year is $120.
17. An employee’s take home pay is equal to gross pay less all voluntary deductions.
18. Taxes deducted from an employee’s earnings to finance social security and Medicare benefits are called
FICA taxes.
19. Generally, all deductions made from an employee’s gross pay are required by law.
20. Payroll taxes are based on the employee’s net pay.
21. Most employers are required to withhold federal unemployment taxes from employee earnings.
22. FICA tax is a payroll tax that is paid only by employers.
23. Medicare taxes are withheld from an employee’s pay only until the employee has earned a specific amount
each year.
24. Medicare taxes are paid by both the employee and the employer.
25. Federal unemployment taxes are paid by the employer and the employee.
26. Federal unemployment compensation taxes that are collected by the federal government are not paid
directly to the unemployed but are allocated among the states for use in state programs.
27. Like many taxes deducted from employee earnings, federal income taxes are subject to a maximum amount
per employee per year.
28. Federal unemployment compensation tax becomes an employer’s liability at the time the employee is paid.
29. FICA tax becomes a liability to the federal government at the time an employee’s payroll is prepared.
30. Payroll taxes only include social security taxes and federal unemployment and state unemployment taxes.
31. Federal income taxes withheld increase the employer’s payroll tax expense.
32. The use of a separate payroll bank account is not an advantageous control, because it creates more
complexity in reconciliation functions for a company and invites theft.
33. Employers are required to compute and report payroll taxes on a calendar-year basis, even if a different
fiscal year is used for financial reporting and income tax purposes.
34. Payroll taxes levied against employers become an employer liability at the time the employee wages are
incurred.
35. For paying their payroll, most employers use payroll checks drawn on a special bank account.
36. The payroll register is a multicolumn form used to assemble the data related for all employees.
37. The total net pay for a period is determined from the payroll register.
38. Internal controls for cash payments also apply to payrolls.
39. While separation of duties may play a strong role in the internal control of inventory, it is not significant in
controlling payroll.
40. For proper matching of revenues and expenses, the estimated cost of fringe benefits must be recognized as
an expense of the period during which the employee earns the benefits.
41. Depending upon when an unfunded pension liability is to be paid, it will be classified on the balance sheet
as either a long-term or a current liability.
42. During the first year of operations, employees earned vacation pay of $35,000. The vacations will be taken
during the second year. The vacation pay expense should be recorded in the second year as the vacations are
taken by the employees.
43. One of the more popular defined contribution plans is the 401k plan.
44. A defined contribution plan promises employees a fixed annual pension benefit.
45. In a defined benefits plan, the employer bears the investment risks in funding a future retirement income
benefit.
46. The accounting for defined benefit plans is usually very easy and straight forward.
47. During the first year of operations, a company granted warranties on its products. The estimated cost of the
product warranty liability at the end of the year is $8,500. The product warranty expense of $8,500 should be
recorded in the years of the expenditures to repair the products covered by the warranty payments.
48. Obligations that depend on past events and that are based on future possible events are contingent
liabilities.
49. In order to be a recorded contingent liability, the liability must be possible and easily estimated.
50. The journal entry to record the cost of warranty repairs that were incurred during the current period, but
related to sales made in prior years, includes a debit to Warranty Expense.
51. Current liabilities are
52. Notes may be issued
53. On June 8, Alton Co. issued an $95,000, 6%, 120-day note payable to Seller Co. What is the due date of
the note?
54. On June 8, Alton Co. issued an $90,000, 6%, 120-day note payable to Seller Co. Assuming a 360-day year
for your calculations, what is the maturity value of the note?
55. On July 8, Alton Co. issued an $80,000, 6%, 120-day note payable to Seller Co. Assume that the fiscal year
of Alton Co. ends July 31. Using the 360-day year in your calculations, what is the amount of interest expense
recognized by Alton in the current fiscal year?
56. On June 8, Alton Co. issued an $80,000, 6%, 120-day note payable to Seller Co. Assume that the fiscal
year of Seller Co. ends June 30. Using the 360-day year in your calculations, what is the amount of interest
revenue recognized by Seller in the following year?
57. On June 8, Alton Co. issued an $80,000, 6%, 120-day note payable on an overdue account payable to Seller
Co. Assume that the fiscal year of Alton Co. ends June 30. Which of the following relationships is true?
58. A business borrowed $40,000 on March 1 of the current year by signing a 60-day, 9% interest bearing
note. Assuming a 360-day year, when the note is paid on April 30, the entry to record the payment should
include a
59. When a borrower receives the face amount of a discounted note less discount, this amount is known as:
60. Assuming a 360-day year, the interest charged by the bank, at the rate of 9%, on a 90-day, discounted note
payable of $100,000 is
61. Assuming a 360-day year, when a $40,000, 90-day, 9% interest-bearing note payable matures, total payment
will amount to:
62. Assuming a 360-day year, proceeds of $48,750 were received from discounting a $50,000, 90-day note at a
bank. The discount rate used by the bank in computing the proceeds was
63. Mobile Co. issued a $45,000, 60-day, discounted note to Guarantee Bank. The discount rate is 6%. At
maturity, assuming a 360-day year, the borrower will pay:
64. Chang Co. issued a $50,000, 120-day, discounted note to Guarantee Bank. The discount rate is
6%. Assuming a 360-day year, the cash proceeds to Chang Co. are
65. The journal entry a company uses to record the issuance of a note for the purpose of converting an existing
account payable would be
67. The journal entry a company uses to record the issuance of a discounted note for the purpose of borrowing
funds for the business is
68. The journal entry a company uses to record the payment of a discounted note is
69. The journal entry a company uses to record the payment of an interest-bearing note is
70. A current liability is a debt that is reasonably expected to be paid
71. Grayson Bank agrees to lend the Trust Company $120,000 on January 1. Trust Company signs a $120,000,
8%, 9-month note. The entry made by Trust Company on January 1 to record the proceeds and issuance of the
note is:
72. The journal entry to record the conversion of an $4,700 accounts payable to a notes payable would be:
73. Current liabilities are:
74. Which of the following would most likely be classified as a current liability?
75. Assuming a 360-day year, when a $30,000, 90-day, 5% interest-bearing note payable matures, total payment
will amount to:
76. The current portion of long-term debt should
77. On January 5, 2014, Garrett Company, a calendar-year company, issued $1,000,000 of notes payable, of
which $200,000 is due on January 1 for each of the next five years. The proper balance sheet presentation on
December 31, 2014, is
78. On October 30, Seba Salon, Inc. issued a 90-day note with a face amount of $60,000 to Reyes Products, Inc.
for merchandise inventory. Assuming a 360-day year, determine the proceeds of the note assuming the note is
discounted at 8%.
79. Proper payroll accounting methods are important for a business for all the reasons below except
80. The amount of federal income taxes withheld from an employee’s gross pay is recorded as a(n)
81. Which statement below is not a determinate in calculating the amount of federal income taxes withheld
from an individuals pay?
82. Which of the following would be used to compute the federal income taxes to be withheld from an
employee’s earnings?
83. Which of the following taxes would be deducted in determining an employee’s net pay?
84. For which of the following taxes is there no ceiling on the amount of employee annual earnings subject to
the tax?
85. Most employers are required to withhold from employees which of the following employment taxes?
86. An employee receives an hourly rate of $40, with time and a half for all hours worked in excess of 40 during
a week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $350;
cumulative earnings for year prior to current week, $99,700; social security tax rate, 6.0% on maximum of
$100,000; and Medicare tax rate, 1.5% on all earnings. What is the gross pay for the employee?
87. An employee receives an hourly rate of $27, with time and a half for all hours worked in excess of 40 during
a week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $350;
cumulative earnings for year prior to current week, $99,700; social security tax rate, 6.0% on maximum of
$100,000; and Medicare tax rate, 1.5% on all earnings. What is the net amount to be paid to the employee?
88. Prior to the last weekly payroll period of the calendar year, the cumulative earnings of employees A and B
are $99,350 and $91,000 respectively. Their earnings for the last completed payroll period of the year are $850
each. The maximum amount of earnings subject to social security tax at 6% is $100,000. All earnings are
subject to Medicare tax of 1.5%. Assuming that the payroll will be paid on December 29, what will be the
employer’s total FICA tax for this payroll period on the two salary amounts of $850 each?
89. The total earnings of an employee for a payroll period is referred to as
90. An employee receives an hourly rate of $30, with time and a half for all hours worked in excess of 40 during
a week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $300;
cumulative earnings for year prior to current week, $90,700; social security tax rate, 6.0% on maximum of
$100,000; and Medicare tax rate, 1.5% on all earnings. What is the net amount to be paid to the employee?
91. Payroll taxes levied against employees become liabilities
92. The following totals for the month of June were taken from the payroll register of Arcon Company:
Salaries expense
$14,000
Social security and Medicare Taxes withheld
1,050
Income Taxes withheld
2,600
Retirement Savings
1,000
The entry to record the payment of net pay would include a
93. Which of the following will have no effect on an employee’s take-home pay?
94. Which of the following are included in the employer’s payroll taxes?
95. Which of the following is required to be withheld from employee’s gross pay?
96. Each year there is a ceiling for the amount that is subject to all of the following except
97. Assuming no employees are subject to ceilings for their earnings, Moore Company has the following
information for the pay period of December 15 – 31, 20xx.
$16,000
Federal income tax withheld
$4,000
6%
Federal unemployment tax rate
.8%
1.5%
State unemployment tax rate
5.4%
Salaries Payable would be recorded for
98. Most employers are levied a tax on payrolls for
99. Payroll entries are made with data from the
100. Which of the following forms is typically given to employees at the end of the calendar year so that
employees can file their individual income tax forms?
101. The employee earnings record would contain which column that the payroll register would probably not
contain?
102. The detailed record indicating the data for each employee for each payroll period and the cumulative total
earnings for each employee is called the
103. An employee receives an hourly rate of $15, with time and a half for all hours worked in excess of 40
during the week. Payroll data for the current week are as follows: hours worked, 48; federal income tax
withheld, $120; cumulative earnings for the year prior to this week, $24,500; Social security tax rate, 6% on
maximum of $100,000; and Medicare tax rate, 1.5% on all earnings; state unemployment compensation tax,
3.4% on the first $7,000; federal unemployment compensation tax, .8% on the first $7,000. What is the net
amount to be paid to the employee?
104. Use the following information to answer the following questions.
The following totals for the month of April were taken from the payroll register of Magnum Company.
Salaries
$12,000
FICA taxes withheld
900
Income taxes withheld
2,500
Medical insurance deductions
450
Federal Unemployment Taxes
32
State Unemployment Taxes
216
The journal entry to record the monthly payroll on April 30 would include a
105. Use the following information to answer the following questions.
The following totals for the month of April were taken from the payroll register of Magnum Company.
Salaries
$12,000
FICA taxes withheld
900
Income taxes withheld
2,500
Medical insurance deductions
450
Federal Unemployment Taxes
32
State Unemployment Taxes
216
The entry to record accrual of employer’s payroll taxes would include a
106. The following totals for the month of April were taken from the payroll register of Magnum Company.
Salaries
$10,000
FICA taxes withheld
750
Income taxes withheld
2,000
Medical insurance deductions
450
Unemployment Taxes
420
The entry to record accrual of employer’s payroll taxes would include a
107. An employee receives an hourly rate of $15, with time and a half for all hours worked in excess of 40
during the week. Payroll data for the current week are as follows: hours worked, 46; federal income tax
withheld, $110; cumulative earnings for the year prior to this week, $24,500; Social security tax rate, 6% on
maximum of $100,000; and Medicare tax rate, 1.5% on all earnings; state unemployment compensation tax,
3.4% on the first $7,000; federal unemployment compensation tax, .8% on the first $7,000. What is the net
amount to be paid to the employee?
108. The following totals for the month of June were taken from the payroll register of Young Company:
Salaries expense
$15,000
Social security and
Medicare Taxes
withheld
1,125
Income Taxes
withheld
3,000
Retirement Savings
500
Salaries subject to
federal and state
unemployment taxes of 6.2 percent
4,000
The entry to record the accrual of employer’s payroll taxes would include a
109. Use the following information to answer the following questions.
Assuming no employees are subject to ceilings for their earnings, Jensen Company has the following
information for the pay period of January 15 – 31, 20xx.
Gross payroll
$10,000
Federal income tax withheld
$1,800
Social security rate
6%
Federal unemployment tax rate
.8%
Medicare rate
1.5%
State unemployment tax rate
5.4%
Salaries Payable would be recorded in the amount of:
110. Use the following information to answer the following questions.
Assuming no employees are subject to ceilings for their earnings, Jensen Company has the following
information for the pay period of January 15 – 31, 20xx.
Gross payroll
$10,000
Federal income tax withheld
$1,800
Social security rate
6%
Federal unemployment tax rate
.8%
Medicare rate
1.5%
State unemployment tax rate
5.4%
Assuming that all wages are subject to federal and state unemployment taxes, the Payroll Taxes Expense would be recorded as:
111. Assume that social security taxes are payable at a 6% rate on the first $100,000 of earnings and Medicare
taxes are payable at a 1.5% rate with no maximum earnings, and that federal and state unemployment
compensation taxes total 4.6% on the first $7,000 of earnings. If an employee, George Jones, earns $2,500 for
the current week and Jones’ year-to-date earnings before this week were $6,800, what is the total payroll taxes
related to the current week?
112. Which of the following is an example of a variable component of a payroll system?
113. An aid in internal control over payrolls that indicates employee attendance is