CH 10

Chapter 10
Current Liabilities and Payroll

OBJECTIVES
Obj 1 Describe and illustrate current liabilities related to accounts payable, current portion
of long term debt, and notes payable.
Obj 2 Determine employer liabilities for payroll, including liabilities arising from
employee earnings and deductions from earnings
Obj 3 Describe payroll accounting systems that use a payroll register, employee earnings
record, and a general journal
Obj 4 Journalize entries for employee fringe benefits, including vacation pay and pensions
Obj 5 Describe the accounting treatment for contingent liabilities and journalize entries for
product warranties
QUESTION GRID
True/False
No. Objective Difficulty No. Objective Difficulty No. Objective Difficulty
1 10-01 Easy 18 10-02 Easy 35 10-03 Easy
2 10-01 Easy 19 10-02 Easy 36 10-03 Easy
3 10-01 Easy 20 10-02 Easy 37 10-03 Easy
4 10-01 Moderate 21 10-02 Easy 38 10-03 Easy
5 10-01 Easy 22 10-02 Easy 39 10-03 Easy
6 10-01 Easy 23 10-02 Easy 40 10-04 Easy
7 10-01 Easy 24 10-02 Easy 41 10-04 Easy
9 10-01 Easy 26 10-02 Easy 43 10-04 Easy
10 10-01 Easy 27 10-02 Easy 44 10-04 Easy
10 10-01 Easy 28 10-03 Easy 45 10-04 Easy
13 10-02 Easy 30 10-03 Easy 47 10-05 Easy
14 10-02 Easy 31 10-03 Easy 48 10-05 Easy
15 10-02 Easy 32 10-03 Easy 49 10-05 Easy
16 10-02 Moderate 33 10-03 Easy 50 10-05 Moderate
17 10-02 Easy 34 10-03 Easy
Multiple Choice
1 10-01 Easy 36 10-02 Easy 71 10-04 Easy
2 10-01 Easy 37 10-02 Easy 72 10-04 Easy
3 10-01 Easy 38 10-02 Easy 73 10-04 Easy
7 10-01 Easy 42 10-02 Moderate 77 10-04 Easy
492
493  Chapter 10/Current Liabilities and Payroll
8 10-01 Moderate 43 10-02 Moderate 78 10-04 Easy

9 10-01 Easy 44 10-02 Moderate 79 10-04 Easy
10 10-01 Easy 45 10-02 Easy 80 10-04 Easy
10 10-01 Easy 46 10-02 Moderate 81 10-04 Moderate
12 10-01 Easy 47 10-02 Easy 82 10-04 Moderate
13 10-01 Moderate 48 10-02 Moderate 83 10-04 Moderate
16 10-01 Easy 51 10-02 Easy 86 10-05 Easy
17 10-01 Easy 52 10-02 Easy 87 10-05 Easy
18 10-01 Easy 53 10-02 Moderate 88 10-05 Difficult
31 10-01 Moderate 66 10-03 Moderate
32 10-01 Easy 67 10-03 Moderate
33 10-01 Easy 68 10-03 Moderate
34 10-01 Easy 69 10-03 Moderate
35 10-02 Easy 70 10-04 Moderate
Exercise/Other
2 10-01 Difficult 8 10-02 Moderate 14 10-05 Moderate
Problem
2 10-02 Moderate 5 10-04 Moderate 8 10-04/05 Moderate
Chapter 10/Current Liabilities and Payroll  494
Chapter 10—Current Liabilities and Payroll
TRUE/FALSE
1. Receiving payment prior to delivering goods or services causes a current liability to be incurred.
ANS: T DIF: Easy OBJ: 10-01
NAT: AACSB Analytic | AICPA FN-Measurement
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.

ANS: T DIF: Moderate OBJ: 10-01
5. The payee of a note records it as a notes payable on its books.

ANS: F DIF: Easy OBJ: 10-01
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 value of the note.
ANS: T DIF: Moderate OBJ: 10-01
9. The amount of money a borrower receives from the lender is called maturity value.
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.
ANS: F DIF: Moderate OBJ: 10-01
13. A person who performs services for a business but is not subject to the control and direction of the
business is called an independent contractor.
NAT: AACSB Analytic | AICPA BB-Legal
14. Form W-4 is a form used by employers to determine the amount of federal taxes to withhold from
their employees.
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 $2000 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 is 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 Employer's Quarterly Federal Tax Return (941) filed with the Internal Revenue Service reports
social security contributions for both the employees' and employer, federal income taxes, and federal
unemployment compensation taxes.
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. An employee's earnings record is maintained for each employee and provides a record of payroll
taxes related to each employee's earnings.
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 the expenditures to repair the products covered by the
warranty will be paid.
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.
MULTIPLE CHOICE
1. Current liabilities are

a. due, but not receivable for more than one year
b. due, but not payable for more than one year
c. due and receivable within one year
d. due and payable within one year
ANS: D DIF: Easy OBJ: 10-01
2. Notes may be issued

a. when assets are purchased
b. to creditor's to temporarily satisfy an account payable created earlier
c. when borrowing money
d. all of the above
3. On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable to Still Co. What is the due date
of the note?
a. October 8
b. October 7
c. October 6
d. October 5
ANS: C DIF: Easy OBJ: 10-01
4. On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable to Still Co. What is the maturity
value of the note?
a. $80,100
b. $84,800
c. $81,600
d. $81,200
ANS: C DIF: Moderate OBJ: 10-01
5. On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable to Still Co. Assume that the
fiscal year of Acme Co. ends June 30. What is the amount of interest expense recognized by Acme in
the current fiscal year?
a. $293.33
b. $400.00
c. $391.10
d. $1,600.00
ANS: A DIF: Moderate OBJ: 10-01
6. On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable to Still Co. Assume that the
fiscal year of Still Co. ends June 30. What is the amount of interest revenue recognized by Still in the
following year?
a. $1,200.00
b. $1,208.89
c. $1,306.67
d. $1,600.00
7. On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable on an overdue account payable
to Still Co. Assume that the fiscal year of Acme Co. ends June 30. Which of the following
relationships is true?
a. Acme is the creditor and credits Accounts Receivable
b. Still is the creditor and debits Accounts Receivable
c. Still is the borrower and credits Accounts Payable
d. Acme is the borrower and debits Accounts Payable
8. A business borrowed $40,000 on March 1 of the current year by signing a 30 day, 6% interest
bearing note. When the note is paid on March 31, the entry to record the payment should include a
a. debit to Interest Payable $200
b. debit to Interest Expense $200
c. credit to Cash for $40,000
d. credit to Cash for $42400
ANS: B DIF: Moderate OBJ: 10-01
9. The interest deducted from the maturity value of a note is called

a. proceeds
b. discount
c. face value
d. maturity value
ANS: B DIF: Easy OBJ: 10-01
10. The maturity value of an interest-bearing note payable is the

a. face value plus the interest
b. face value minus the interest
c. interest
d. face value
ANS: A DIF: Easy OBJ: 10-01
11. The interest charged by the bank, at the rate of 6%, on a 90-day, discounted note payable for
$100,000 is
a. $6,000
b. $1,500
c. $500
d. $1,000
12. The maturity value of a $40,000, 90-day, 6% note payable is

a. $40,600
b. $42,400
c. $600
d. $2,400
13. 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
a. 6.25%
b. 10.00%
c. 10.26%
d. 9.75%
14. Miller Co. issued a $35,000, 60-day, discounted note to River City Bank. The discount rate is 6%.
What is the maturity value of the note?
a. $35,350
b. $37,100
c. $35,000
d. $34,650
15. Chu Co. issued a $50,000, 60-day, discounted note to River City Bank. The discount rate is 6%. The
cash proceeds to Chu Co. are
a. $50,500
b. $50,250
c. $49,500
d. $50,250
16. The journal entry a company uses to record the issuance of a note for the purpose of converting an
existing account payable would be
a. debit Cash; credit Accounts Payable
b. debit Accounts, Payable; credit Cash
c. debit Cash; credit Notes Payable
d. debit Accounts Payable; credit Notes Payable
17. The journal entry a company uses to record the issuance of a note for the purpose of borrowing funds
for the business is
a. debit Accounts Payable; credit Notes Payable
b. debit Cash; credit Notes Payable
c. debit Notes Payable; credit Cash
d. debit Cash and Interest Expense; credit Notes Payable
18. The journal entry a company uses to record the issuance of a discounted note for the purpose of
borrowing funds for the business is
a. debit Cash and Interest Expense; credit Notes Payable
b. debit Cash and Interest Payable; credit Notes Payable
c. debit Accounts Payable; credit Notes Payable
d. debit Notes Payable; credit Cash
19. The journal entry a company uses to record the payment of a discounted note is
a. debit Notes Payable and Interest Expense; credit Cash
b. debit Notes Payable; credit Cash
c. debit Cash; credit Notes Payable
d. debit Accounts Payable; credit Cash
20. The journal entry a company uses to record the payment of an ordinary note is
a. debit Cash; credit Notes Payable
b. debit Accounts Payable; credit Cash
c. debit Notes Payable and Interest Expense; credit Cash
d. debit Notes Payable and Interest Receivable; credit Cash
21. A current liability is a debt that can reasonably be expected to be paid

a. between 6 months and 18 months.
b. out of currently recognized revenues.
c. within one year.
d. out of cash currently on hand.
22. Current liabilities are due

a. and receivable within one year.
b. but not receivable for more than one year.
c. but not payable for more than one year.
d. and payable within one year.
23. Gray County Bank agrees to lend the Starkwood Building Company $100,000 on January 1.
Starkwood Building Company signs a $100,000, 9%, 9-month note. The entry made by Starkwood
Building Company on January 1 to record the proceeds and issuance of the note is
a. Interest Expense 9,000
Cash 91,000
Notes Payable 100,000
b. Cash 100,000
c. Cash 100,000
Interest Expense 9,000
d. Cash 100,000
Interest Payable 4,500
Starkwood Building Company signs a $100,000, 9%, 9-month note. What is the adjusting entry
required if Starkwood Building Company prepares financial statements on June 30?
b. Interest Expense 4,500
c. Interest Expense 6,750
d. Interest Payable 4,500
Starkwood Building Company signs a $100,000, 9%, 9-month note. What entry will Starkwood
Building Company make to pay off the note and interest at maturity assuming that interest has been
accrued to September 30?
a. Notes Payable 106,750
Cash 106,750
b. Notes Payable 100,000
Cash 106,750
c. Interest Expense 6,750
Cash 106,750
d. Interest Payable 9,000
Cash 109,000
26. As interest is recorded on an interest-bearing note, the Interest Expense account is

a. decreased; the Interest Payable account is increased.
b. increased; the Interest Payable account is increased.
c. increased; the Notes Payable account is decreased.
d. increased; the Notes Payable account is increased.
27. The journal entry to record the conversion of an $250 accounts payable to a notes payable would be:
a. Jan 31 Cash 250
Notes Payable 250
b. Jan 31 Notes Receivable 250
Notes Payable 250
c. Jan 31 Notes Payable 250
Cash 250
d. Jan 31 Accounts Payable 250
Notes Payable 250
28. On October 30, Santos Salon, Inc. issued a 90-day note with a face amount of $60,000 to Charah
Hair Products, Inc for merchandise inventory. Determine the adjusting entry for Santos on December
31 assuming the note carries an interest rate of 8%.
b. Interest Expense 800
Interest Payable 800
c. Interest Receivable 1,200
Interest Revenue 1,200
d. Interest Receivable 800
Interest Revenue 800
29. Current liabilities are:

a. due and receivable within one year.
b. due and to be paid out of current assets within one year.
c. due, but not payable for more than one year.
d. payable if a possible subsequent event occurs.
30. Which of the following would most likely be classified as a current liability?
a. Two-year notes payable.
b. Bonds Payable.
c. Mortgage payable.
d. Unearned Rent.
ANS: D DIF: Moderate OBJ: 10-01
31. The maturity value of a $15,000, 60-day, 5% note payable is:

a. $15,750
b. $750
c. $15,125
d. $125
32. The current portion of long-term debt should

a. be classified as a long-term liability.
b. not be separated from the long-term portion of debt.
c. be paid immediately.
d. be reclassified as a current liability.
33. On January 1, 2007, Gannon 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, 2007, is
a. Current Liabilities, $400,000.
b. Current Liabilities, $100,000; Long-term Debt, $300,000.
c. Long-term Debt, $400,000
d. Current Liabilities, $200,000; Long-term Debt, $200,000.
34. On October 30, Santos Salon, Inc. issued a 90-day note with a face amount of $60,000 to Charah
Hair Products, Inc. for merchandise inventory. Determine the proceeds of the note assuming the note
is discounted at 8%.
a. $55,200
b. $64,800
c. $58,800
d. $61,200
35. The total payroll of a business is usually significant for all the reasons below except
a. employees are sensitive to payroll errors and irregularities
b. payroll is subject to various federal and state regulations
c. businesses find it difficult to develop and maintain good internal controls on the payroll system
d. payroll and related payroll taxes have a significant effect on the net income of most businesses
36. The amount of federal income taxes withheld from an employee's gross pay is recorded as a(n)
a. payroll expense
b. contra account
c. asset
d. liability
37. Which statement below is not a determinate in calculating the amount of federal income taxes
withheld from an individuals pay?
a. filing status
b. types of earnings
c. gross pay
d. number of exemptions
38. Which of the following would be used to compute the federal income taxes to be withheld from an
employee's earnings?
a. FICA tax rate
b. wage and tax statement
c. FUTA tax rate
d. wage bracket and withholding table
39. Which of the following taxes would be deducted in determining an employee's net pay?
a. FUTA taxes
b. SUTA taxes
c. FICA taxes
d. all of the above
40. For which of the following taxes is there no ceiling on the amount of employee annual earnings
subject to the tax?
a. only Social Security tax
b. only Medicare tax
c. only unemployment compensation tax
d. none of the above
41. Most employers are required to withhold from employees which of the following employment taxes?
a. FICA tax
b. FICA tax, state and federal unemployment compensation tax
c. only state unemployment compensation tax
d. only federal unemployment compensation tax
42. An employee receives an hourly rate of $25, 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?
a. $775.00
b. $752.50
c. $1,225.00
d. $1,102.50
40 during a week. Payroll data for the current week are as follows: hours worked, 46 federal income
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 the employee?
a. $875.00
b. $838.62
c. $857.00
d. $1133.14
44. 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 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?
a. $127.50
b. $115.50
c. $112.50
d. $0
45. The total earnings of an employee for a payroll period is referred to as

a. take-home pay
b. pay net of taxes
c. net pay
d. gross pay
40 during a week. Payroll data for the current week are as follows: hours worked, 46; federal income
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 the employee?
a. $1,470
b. $1,059.75
c. $1,381.80
d. $1,249.50
47. Payroll taxes levied against employees become liabilities

a. the first of the following month
b. at the time the payroll is paid
c. when earned by the employee
d. at the end of an accounting period
48. The following totals for the month of June were taken from the payroll register of ABC Company:
Salaries expense $13,000

Social security and Medicare Taxes withheld 975
Income Taxes withheld 2,600
Retirement Savings 500
The entry to record the payment of net pay would include a

a. debit to Salaries Payable for $13,000
b. Debit to Salaries Payable for $8,925
c. Credit to Salaries Expense for $8,925
d. Credit to Salaries Payable for $8,925
49. Which of the following will have no effect on an employee’s take-home pay?
a. Social security tax
b. Unemployment tax
c. Marital status
d. Number of exemptions claimed
50. Which of the following are included in the employer's payroll taxes?
a. SUTA taxes
b. FUTA taxes
c. FICA taxes
d. all of the above
51. Most employers are required to withhold from employees for

a. both federal and state unemployment compensation
b. only federal unemployment compensation tax
c. only federal income tax
d. only state unemployment compensation tax
52. Each year there is a ceiling for the amount that is subject to all of the following except
a. Social security tax
b. Federal income tax
c. federal unemployment tax
d. state unemployment tax
53. Manning Company has the following information for the pay period of December 15 - 31, 20xx.
Gross payroll $15,000 Federal income tax withheld $3,000
Social security rate 6% Federal unemployment tax rate .8%
Medicare rate 1.5% State unemployment tax rate 5.4%
Salaries Payable would be recorded for

a. $15,000
b. $11,100
c. $10,875
d. $9,945
54. Most employers are levied a tax on payrolls for

a. sales tax
b. medical insurance premiums
c. federal unemployment compensation tax
d. union dues
55. Payroll entries are made with data from the

a. wage and tax statement
b. employee's earning record
c. employer's quarterly federal tax return
d. payroll register
56. The required form that is filed with the Internal Revenue Service showing the amount due for
Federal income taxes withheld and FICA taxes is the
a. Employment Withholding Allowance Certificate (Form 941)
b. Wage and Tax Statement (Form W-2)
c. Employer's Quarterly Federal Tax Return (Form 941)
d. Corporate Income Tax Return (Form 1120)
57. The employee earnings record would contain which column that the payroll register would probably
not contain?
a. deductions
b. payment
c. earnings
d. cumulative earnings
58. The detailed record indicating the data for each employee for each payroll period and the cumulative
total earnings for each employee is called the
a. payroll register
b. payroll check
c. employee's earnings record
d. employer's earnings record
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.
59. What is the net amount to be paid the employee?

a. $568.74
b. $601.50
c. $660.00
d. $574.90
60. What is the employer's payroll tax expense?

a. $152.76
b. $91.26
c. $58.50
d. $178.50
61. The following totals for the month of June were taken from the payroll register of ABC Company:

Social security and Medicare Taxes withheld 975
Salaries subject to federal and state unemployment 4,000

taxes of 6.2 percent
The entry to record the accrual of employer’s payroll taxes would include a
a. debit to Payroll Taxes Expense for $1,223
b. credit to Social Security and Medicare Tax Payable for $1,950
c. debit to Payroll Taxes Expense for $248
d. Debit to Payroll Tax Expense for $975
The following totals for the month of April were taken from the payroll register of Main Company.
Salaries $12,000
FICA taxes withheld 550
Income taxes withheld 2,500
Medical insurance deductions 450
Federal Unemployment Taxes 32
State Unemployment Taxes 216
62. The journal entry to record the monthly payroll on April 30 would include a
a. credit to Salaries Payable for $8,500.
b. debit to Salaries Expense for $8,500.
c. debit to Salaries Payable for $8,500.
d. debit to Salaries Payable for $8,252.
63. The entry to record accrual of employer’s payroll taxes would include a
a. debit to Payroll Tax Expense for $248.
b. credit to FICA Taxes Payable for $1,100.
c. credit to Payroll Tax Expense for $248.
d. debit to Payroll Tax Expense for $798.
64. The following totals for the month of April were taken from the payroll register of Main Company.
Salaries $10,000
FICA taxes withheld 750
Income taxes withheld 2,000
Medical insurance deductions 450
Unemployment Taxes 320
The entry to record accrual of employer’s payroll taxes would include a

a. debit to Payroll Tax Expense for $1,070.
b. credit to FICA Taxes Payable for $1,500.
c. credit to Payroll Tax Expense for $320.
d. debit to Payroll Tax Expense for $1,820.
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 the employee?
a. $569.87
b. $539.00
c. $625.00
d. $544.88
40 during the week. Payroll data for the current week are as follows: hours worked, 46; federal
income tax withheld, $120; cumulative earnings for the year prior to this week, $5,500; 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 employer's payroll tax expense?
a. $55.13
b. $61.01
c. $86.00
d. $141.13
67. The following totals for the month of June were taken from the payroll register of XYZ Company:
Social security and Medicare Taxes withheld 1,125
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
a. debit to Payroll Taxes Expense for $2,498
b. credit to Social Security and Medicare Tax Payable for $2,250
c. debit to Payroll Taxes Expense for $1,373
d. Debit to Payroll Tax Expense for $1,125
Jenning Company has the following information for the pay period of January 15 - 31, 20xx.
Gross payroll $10,000 Federal income tax withheld $1,500

Social security rate 6% Federal unemployment tax rate .8%
Medicare rate 1.5% State unemployment tax rate 5.4%
68. Salaries Payable would be recorded for

a. $8,500
b. $7,130
c. $7,670
d. $7,750
69. All wages are subject to federal and state unemployment taxes.
Payroll Taxes Expense would be recorded for

a. $1,370
b. $750
c. $620
d. $2,870
70. 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?
a. $187.50
b. $196.70
c. $344.50
d. none of the above
71. Which of the following is an example of a variable component of a payroll system?

a. hours worked
b. Medicare tax rate
c. rate of pay
d. Social security tax rate
72. An aid in internal control over payrolls that indicates employee attendance is
a. "clock card"
b. voucher system
c. payroll register
d. employee's earnings record
73. Which of the following is not an internal control procedure for payroll?
a. employees observed clocking in and out
b. payroll depends on a fired employee's supervisor to notify them when an employee has been fired
c. payroll requires employees to show identification when picking up their paychecks
d. changes in pay rates on a computerized system must be tested by someone independent of payroll
74. A pension plan which requires the employer to make annual pension contributions, with no promise
to employees regarding future pension payments, is termed
a. funded
b. unfunded
c. defined benefit
d. defined contribution
75. During its first year of operations, a company granted employees vacation privileges and pension
rights estimated at a cost of $20,500 and $15,000. The vacations are expected to be taken in the next
year and the pension rights are expected to be paid in the future 5-30 years. What is the total cost of
vacation pay and pension rights to be recognized in the first year?
a. $29,500
b. $35,500
c. $23,500
d. $20,500
76. A pension plan which promises employees a fixed annual pension benefit, based on years of service
and compensation, is called a(n)
a. defined contribution plan
b. defined benefit plan
c. unfunded plan
d. funded plan
77. Vacation pay payable is reported on the balance sheet as

a. current liability or long-term liability, depending upon when the vacations will be taken by
employees
b. current liability
c. stockholders’equity
d. long-term liabilities
78. An unfunded pension liability is reported on the balance sheet as

a. current liability
b. stockholders’ equity
c. long-term liability
d. current liability or long-term liability, depending upon when the pension liability is to be paid
79. The journal entry a company uses to record accrued vacation privileges for its employees at the end
of the year is
a. debit Vacation Pay Expense; credit Vacation Pay Payable
b. debit Vacation Pay Payable; credit Vacation Pay Expense
c. debit Salary Expense; credit Cash
d. debit Salary Expense; credit Salaries Payable
80. The journal entry a company uses to record fully funded pension rights for its salaried employees at
the end of the year is
a. debit Salary Expense; credit Cash
b. debit Pension Expense; credit Unfunded Pension Liability
c. debit Pension Expense; credit Unfunded Pension Liability and Cash
d. debit Pension Expense; credit Cash
81. The journal entry a company uses to record partially funded pension rights for its salaried
employees, at the end of the year is
82. The journal entry a company uses to record pension rights that have not been funded for its salaried
employees, at the end of the year is
83. Zeno Company provides its employees with varying amount of vacation per year, depending on the
length of employment. The estimated amount of the current year’s vacation cost is $182,400. The
journal entry to record the adjusting entry required on December 31, the end of the current year, to
record the current month’s accrued vacation pay is
a. $182,400
b. $91,200
c. $0
d. $15,200
84. Geno Company provides its employees with varying amount of vacation per year, depending on the
length of employment. The estimated amount of the current year’s vacation cost is $190,000. The
journal entry to record the adjusting entry required on December 31, the end of the current year, to
record the current month’s accrued vacation pay is
a. $190,000
b. $20,000
c. $0
d. $15,200
85. Quick assets include

a. cash; cash equivalents, receivables, prepaid expenses, and inventory
b. cash; cash equivalents, receivables, and prepaid expenses
c. cash; cash equivalents, receivables, and inventory
d. cash; cash equivalents, and receivables
86. Which of the following is the most desirable quick ratio?

a. 1.20
b. 1.00
c. 0.95
d. 0.50
87. Another name for the quick ratio is

a. quick cash ratio
b. current ratio
c. working capital ratio
d. acid-test ratio
88. Based on the following data, what is the acid-test ratio, rounded to one decimal point?
Accounts payable $ 30,000
Accounts receivable 60,000
Accrued liabilities 5,000
Cash 30,000
Intangible assets 50,000
Inventory 69,000
Long-term investments 80,000
Long-term liabilities 100,000
Marketable securities 30,000
Fixed assets 670,000
Prepaid expenses 1,000
a. 3.4
b. 3.0
c. 2.2
d. 1.8
ANS: A DIF: Difficult OBJ: 10-05
89. Searches Company sells merchandise with a one year warranty. In 2007, sales consisted of 2,500
units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will
be made in 2007 and 70% in 2008. In the 2007 income statement, Searches should show warranty
expense of
a. $25,000
b. $7,500
c. $17,500
d. $0
90. During September, Eltronics sold 100 radios for $50 each. Each radio cost Eltronics $30 to purchase,
and carried a two-year warranty. If 5% typically need to be replaced over the warranty period and
one is actually replaced during September, for what amount in September would Eltronics debit
Product Warranty Expense?
a. $50
b. $150
c. $30
d. $120
91. The Buy-It-For-Yourself Company had the following assets and liabilities as of December 31, 2006:
ASSETS
Cash $25,000
Inventory 30,000
Equipment 50,000
LIABILITIES
Current portion of long-term debt 10,000
Accounts payable 2,000
Long-term debt 25,000
Determine the quick ration for the end of the year (rounded to one decimal point).
a. 5.8
b. 3.2
c. 3.3
d. 2.4
92. Elgor Company sells merchandise with a one year warranty. In 2007, sales consisted of 2,500 units.
It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be
made in 2007 and 70% in 2008. In the 2007 income statement, Elgor should show warranty expense
of
a. $7,500
b. $17,500
c. $25,000
d. $0
93. Elgor Company sells merchandise with a one year warranty. In 2007, sales consisted of 2,500 units.
It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be
made in 2007 and 70% in 2008. In the 2008 income statement, Elgor should show warranty expense
of
a. $7,500
b. $17,500
c. $25,000
d. $0
94. The cost of a product warranty should be included as an expense in the

a. period the cash is collected for a product sold on account
b. future period when the cost of repairing the product is paid
c. period of the sale of the product
d. future period when the product is repaired or replaced
95. Pilgrim Company sells merchandise with a one year warranty. In 2007, sales consisted of 1,500
units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will
be made in 2007 and 70% in 2008. In the 2007 income statement, Pilgrim should show warranty
expense of
a. $4,500
b. $10,500
c. $15,000
d. $0
96. During May, CircuitSound sold 500 portable CD players for $50 each. Each CD player cost
CircuitSound $25 to purchase and carried a one-year warranty. If 10 percent typically need to be
replaced over the warranty period, what amount should CircuitSound debit Product Warranty
Expense for in June?
a. $2,500
b. $1,250
c. $250
d. $1,000
97. During June, CircuitSound sold 800 portable CD players for $50 each. Each CD player cost
CircuitSound $25 to purchase and carried a one-year warranty. If 10 percent typically need to be
replaced over the warranty period, what amount should CircuitSound debit Product Warranty
Expense for in June?
a. $4,000
b. $400
c. $2,000
d. $1,000
98. Estimating and recording product warranty expense in the period of the sale best follows which of
the following accounting concepts?
a. Cost concept
b. Business entity concept
c. Matching Concept
d. Materiality concept
99. The Buy-It-For-Yourself Company had the following assets and liabilities as of December 31, 2007:
ASSETS
Cash $28,000
Inventory 20,000
Equipment 50,000
LIABILITIES
Current portion of long-term debt 10,000
Accounts payable 2,000
Long-term debt 25,000
Determine the quick ration for the end of the year (rounded to one decimal point).
a. 5.3
b. 3.6
c. 3.3
d. 2.3
100. The journal entry a company uses to record the estimated accrued product warranty liability is
a. debit Product Warranty Expense; credit Product Warranty Payable
b. debit Product Warranty Payable; credit Cash
c. debit Product Warranty Expense; credit Cash
d. debit Product Warranty Payable; credit Product Warranty Expense
EXERCISE/OTHER
1. On January 2nd Mega Sales borrows $12,500.00 cash on a note payable from Alley Lenders with
terms 90 days, 12%. Mega Sales and Alley Lenders uses a 360 day year for interest calculations.
Mega Sales makes adjusting entries at the end of each calendar quarter. Journalize the initiation of
the loan, the recognition of interest expense for the quarter and the payment of the note on its due
date.
ANS:
Jan 2nd Cash 12,500.00
Notes Payable - Alley Lenders 12,500.00
Mar 31st Interest Expense 375.00

Interest Payable 375.00
Apr 2nd Notes Payable 12,500.00

Interest Payable 375.00
Interest Expense 8.33
Cash 12,875.00
DIF: Moderate OBJ: 10-01

2. On July 1st Mega Sales borrows $20,000 cash 10%, 6 month note payable from Alley Lenders.
Mega Sales and Alley Lenders uses a 360 day year for interest calculations. Mega Sales makes
adjusting entries at the end of each calendar quarter. Journalize the initiation of the loan, the
recognition of interest expense for the quarters and the payment of the note on its due date.
ANS:
Jul 1st Cash 20,000
Notes Payable - Alley Lenders 20,000
Sep 30th Interest Expense 500

Interest for the second quarter $20,000  10%  (3/12) = $500
Dec 31st Notes Payable 20,000

Interest Expense 500
Cash 21,0000
Interest for the second quarter $20,000  10%  (3/12) = $500
DIF: Difficult OBJ: 10-01

3. On January 1st Mele Sales borrows $15,000 cash on a note payable from Senior Lenders with terms
90 days, 8%. Mele Sales and Senior Lenders uses a 360 day year for interest calculations. Mele Sales
makes adjusting entries at the end of each calendar quarter. Journalize the initiation of the loan, the
recognition of interest expense for the quarter and the payment of the note on its due date (round to
the even dollar).
ANS:
Jan 1st Cash 15,000
Notes Payable - Senior Lenders 15,000
Mar 31st Interest Expense 297

Apr 2nd Notes Payable 15000

Interest Expense 3
Cash 15,300

4. A business issued a 90-day, 6% note for $10,000 to a creditor on account. Journalize the entries to
record (a) the issuance of the note and (b) the payment of the note at maturity, including interest.
Ref Account Debit Credit
ANS:
Ref Account Debit Credit

(a) Accounts Payable 10,000
(b) Notes Payable 10,000
Interest Expense 150*
Cash 10,150
*$10,000  6%  90/360 = $150

5. On August 1, Bastion Company issued a 60-day note with a face amount of $80,000 to Jackson
Company for merchandise inventory.
(a) Determine the proceeds of the note assuming the note carries an interest rate of 6%.
(b) Determine the proceeds of the note assuming the note is discounted at 6%.
ANS:
(a) $80,000
(b) $79,200 $80,000 - ($80,000  6%  60/360)
DIF: Easy OBJ: 10-01

NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 10-1
6. Mega Sales has five sales employees which receive weekly paychecks. Each earns $10.25 per hour
and each has worked 40 hours in the pay period. Each employee pays 12% of gross in Federal
Income Tax, 3% in State Income Tax, 6% of gross in Social Security Tax, 1.5% of gross in Medicare
Tax, and 1/2% in State Disability Insurance. Journalize the recognition of the pay period ending
January 19th which will be paid to the employees January 26th.
ANS:
Jan 19
Sales Wages Expense 2,050.00 (5 employees  40
hours  10.25)
Sales Wages Payable 1,578.50 Net to get this amount
Employees Federal Income Tax 246.00 ($2,050.00  12%)
Payable
State Income Tax Payable 61.50 ($2,050.00  3%)
Social Security Tax Payable 123.00 ($2,050.00  6%)
Medicare Tax Payable 30.75 ($2,050.00  1.5%)
State Disability Insurance 10.25 ($2,050.00  0.5%)

7. Journalize the following:
Apr. 30 Issued a $100,000, 30-day, 6% note dated April 30 to Mitchell Co. on account.
May 30 Paid Mitchell Co. the amount owed on the note dated April 30.
ANS:
Apr. 30 Accounts Payable-Mitchell Co 100,000
May 30 Notes Payable 100,000

Cash 100,500

8. Mele Sales has five sales employees which receive weekly paychecks. Each earns $10.50 per hour
and each has worked 40 hours in the pay period. Each employee pays 12% of gross in Federal
Income Tax, 3% in State Income Tax, 6% of gross in Social Security Tax, 1.5% of gross in Medicare
Tax, and 1/2% in State Disability Insurance. Journalize the recognition the pay period ending
January 19th which will be paid to the employees January 26th.
ANS:
Jan 19
Sales Wages Expense 2,100.00 (5 employees  40 hours
 10.50)
Sales Wages Payable 1,617.00 Net to get this amount
Employees Federal Income Tax Payable 252.00 ($2,100.00  12%)
State Income Tax Payable 63.00 ($2,100.00  3%)
Social Security Tax Payable 126.00 ($2,100.00  6%)
Medicare Tax Payable 31.50 ($2,100.00  1.5%)
State Disability Insurance 10.50 ($2,100.00  0.5%)

9. Jonas Williams’ weekly gross earnings for the present week were $2,500. Williams has two
exemptions. Using $80 value for each exemption, what is Williams’ federal income tax withholding?
Single person (including head of household)

If amount of wages The amount of income tax
(after subtracting withholding is:
withholding allowance) is:
Not over $51 $0
Over-- But not over

$51 -$192...............10% -$51
$192 -$620.................$14.10 plus 15% -$192
$620 -$1,409..............$78.30 plus 25% -$620
$1,409 -$3,013..............$275.55 plus 28% -$1,409
$3,013 -$6,508..............$724.67 plus 33% -$3,013
$6,508 ..........................$1,878.02 plus 35%
ANS:
Total wage payment $2,500
Allowance per exemption $80
Multiplied by allowances claimed on W-4  2 $160
Amount subject to withholding $2,340
Base withholding from wage bracket above $275.55

Plus: 28% of excess over $1,409 260.68
Federal income tax withholding $536.23

10. Carina Ramirez’s weekly gross earnings for the week ending Dec. 7th were $2,500, and her federal
income tax withholding was $525. Prior to this week Ramirez had earned $98,000 for the year.
Assuming the social security rate is 6% on the first $100,000 of annual earnings and Medicare is
1.5% of all earnings, what is Ramirez’s net pay?
ANS:
Total wage payment $2,500.00
Less: Federal income tax withholding 525.00
Earnings subject to social security tax ($100,000 - $98,000) 2,000
Social security tax rate  6%
Social security tax 120.00
Medicare tax ($2,500  1.5%) 37.50
Net pay $1,817.50

11. The payroll register of Sosa Architecture Company indicates $870 of Social Security and $217 of
Medicare tax withheld on total salaries of $14,500 for the period. Federal withholding for the period
totaled $3,045. Provide the journal entry for the period’s payroll.
ANS:
Salary Expense 14,500
Social Security Taxes Payable 870
Medicare Taxes Payable 217
Federal Withholding Taxes Payable 3,045
Salaries Payable 10,368

12. The payroll register of Sosa Architecture Company indicates $870 of Social Security and $217 of
Medicare tax withheld on total salaries of $14,500 for the period. Assume earnings subject to state
and federal unemployment compensation taxes are $5,250. at the federal rate of 0.8% and state rate
of 5.4%. Provide the journal entry to record the payroll tax expense for the period.
ANS:
Payroll Tax Expense 1,412.50
Social Security Taxes Payable 870.00
Medicare Taxes Payable 217.00
State Unemployment Tax Payable 283.50*
Federal Unemployment Tax Payable 42.00**
* $5,250  5.4% **$5,250  0.8%

13. Mayfield Services Company provides their employees vacation benefits and a defined contribution
pension plan. Employees earned vacation pay of $50,000 for the period. The pension plan requires a
contribution to the plan administrator equal to 8% of employee salaries. Salaries were $500,000
during the period. Provide the journal entry for (a.) the vacation pay and (b.) the pension benefit.
ANS:
(a)
Vacation Pay Expense 50,000
Vacation Pay Payable 50,000
(b)
Pension Expense 40,000
Cash 40,000

14. Electronics Company sold $150,000 of kitchen appliances during September under a 6 month
warranty. The cost to repair defects under the warranty is estimated at 6% of the sales price. On
October 15 a customer required a $200 part replacement, plus $85 labor under the warranty.
Provide the journal entry for (a.) the estimated expense on September 30 and (b.) the October 15
warranty work.
ANS:
(a)
Product Warranty Expense 9,000*
Product Warranty Payable 9,000
*$150,000  6%
(b)
Product Warranty Payable 285
Supplies 200
Wages Payable 85

15. List five internal controls that relate directly to payroll.

ANS:
All of the cash payment controls.
Proper written authorization of additions and deletions of employees.
Proper written authorization of payroll rate changes.
Independent testing of changes in computerized payrolls.
Control of employee attendance records.
Verification that employees are correctly recording their time and attendance.
Blank payroll checks controlled and accounted for.
Controlled access to check signing machine.
Separate payroll bank account.
16. The payroll summary for December 31 for Wick Co. revealed total earnings of $80,000. Earnings
subject to 6% social security tax were $50,000; earnings subject to 1.5% Medicare tax were $80,000;
and earnings of $3,000 were subject to 4.3% state and 0.8% federal unemployment compensation
tax. Journalize the entry to record the accrual of payroll taxes.
ANS:
Payroll Tax Expense 4,353
Social Security Tax Payable 3,000*
Medicare Tax Payable 1,200**
State Unemployment Compensation Tax Payable 129
Federal Unemployment Compensation Tax Payable 24
*6%  $50,000
**1.5%  $80,000

17. Jackson Hole Construction installs swimming pools. They calculate that warranty obligations are 3%
of gross sales. For the year just ending Jackson Hole’s gross sales were $1,450,000.00. Due to
previous quarter recognitions, the Warranty Liability account has a credit balance of $28,700.00.
Determine the year’s total warranty liability and journalize any necessary value to establish the
year’s liability at December 31st.
ANS:
Due to sales, $1,450,000.00, warranty liability is ($1,450,000.00  3%) $43,500. Since $28,700.00 has
already been recognized, ($43,500.00 - $28,700.00) $14,800.00 must still be recognized.
Dec 31st Warranty Expense 14,800.00

Warranty Payable 14,800.00

18. Jason Construction installs swimming pools. They calculate that warranty obligations are 5% of
gross sales. For the year just ending Jason’s gross sales were $1,500,000. Due to previous quarter
recognitions, the Warranty Liability account has a credit balance of $48,700. Determine the year’s
total warranty liability and journalize any necessary value to establish the year’s liability at
December 31st.
ANS:
Due to sales, $1,500,000, warranty liability is ($1,500,000  5%) $75,000. Since $48,700 has already
been recognized, ($75,000 - $48,700) $26,300 must still be recognized.
Dec 31st Warranty Expense 26,300

Warranty Payable 26,300

PROBLEM
1. On October 1, Reynolds Co. signed a $90,000, 60-day discounted note at the bank. The discount rate
was 6%, and the note was paid on November 30.
(a) Journalize the entries for October 1 and November 30.

(b) Assume that Reynolds Co. signed a 6% note. Journalize the entries for October 1 and
November 30.
(c) Which of the two options is more favorable and why?
ANS:
(a) Oct. 1 Cash 89,100
Nov. 30 Notes Payable 90,000

Cash 90,000
(b) Oct. 1 Cash 90,000

Nov. 30 Notes Payable 90,000

Cash 90,900
(c) Option (b) is more favorable. The effective interest rate for option (a) is greater than 6%.
(900  (360/60) = 5400/89,100 = 6.06%)

2. Journalize the following entries on the books of the borrower and creditor. Label accordingly.
Jun. 1 Roberts Co. purchased merchandise on account from Wright Co., $60,000, terms
n/30.
Jun. 30 Roberts Co. issued a 60-day, 5% note for $60,000 on account.
Aug. 29 Roberts Co. paid the amount due.
ANS:
Roberts Co. (Borrower)
June 1 Merchandise Inventory 60,000

Accounts Payable 60,000
30 Accounts Payable 60,000

Aug. 29 Notes Payable 60,000

Cash 60,500
Wright Co. (Creditor)
June 1 Accounts Receivable 60,000

Sales 60,000
30 Notes Receivable 60,000

Accounts Receivable 60,000
Aug. 29 Cash 60,500

Notes Receivable 60,000
Interest Revenue 500

3. Journalize the following entries on the books of Wells Co. for November 1, December 1, December
31, and March 1.
Nov. 1 Wells Co. purchased merchandise for $30,000 on account from Burke Co., terms
n/30.
Dec. 1 Wells Co. issued a 90-day, 5% note for $30,000 on account.
31 Accrued interest on the note.
Mar. 1 Wells Co. paid the amount due.
ANS:
Nov. 1 Merchandise Inventory 30,000
Accounts Payable 30,000
Dec. 1 Accounts Payable 30,000

31 Interest Expense 125

Mar. 1 Notes Payable 30,000

Cash 30,375

4. On June 30, Royal Co. bought equipment for $230,000, paying $50,000 cash and issuing a 5% note
for the balance. The note is to be paid in five semiannual installments of $36,000 on the principal,
with interest accruing from the date of the preceding payment. Journalize the entry to record (a) the
transaction on June 30, (b) the payment of the first installment on December 31, and (c) the payment
of the second installment the following June 30.
ANS:
(a)
Jun. 30 Equipment 230,000
Cash 50,000
(b)
Dec. 31 Notes Payable 36,000
Cash 40,500
(c)
Jun. 30 Notes Payable 36,000
Cash 39,600

5. The following information is for employee Robert Ellis for the week ended March 15.
Total hours worked: 48

Rate: $15 per hour, with double time for all hours in excess of 40
Federal income tax withheld: $200
United Fund deduction: $50
Cumulative earnings prior to current week: $6,400
Tax rates:
Social security: 6% on maximum earnings of $100,000. Medicare tax:
1.5% on all earnings; on both employer and employee
State unemployment: 3.4% on maximum earnings of $7,000; on employer
Federal unemployment: 0.8% on maximum earnings of $7,000; on employer
(a) Determine (1) total earnings, (2) total deductions, and (3) cash paid.
(b) Determine each of the employer's payroll taxes related to the earnings of Robert Ellis for
the week ended March 15.
ANS:
(a)
(1) 40 hours at $15 $600.00
8 hours at $30 240.00 $840.00
(2) Deductions:
Income tax $200.00
United Fund deduction 50.00
Social Security tax, 6% of $840 50.40
Medicare tax, 1.5% of $840 12.60 313.00

(3) Cash paid $527.00
(b)
Social security and Medicare taxes, 7.5% of $840 $63.00
State unemployment tax, 3.4%  $600 20.40
Federal unemployment tax, 0.8%  $600 4.80
Total $88.20

6. The summary of the payroll for the monthly pay period ending July 15 indicated the following:
Sales salaries $125,000

Federal income tax withheld 32,300
Office salaries 30,000
Medical insurance withheld 7,370
Social security tax withheld 10,200
Medicare tax withheld 2,550
Journalize the entries to record (a) the payroll and (b) the employer's payroll tax expense for the
month. The state unemployment tax rate is 3.1%, and the federal unemployment tax rate is 0.8%.
Only $30,000 of salaries are subject to unemployment taxes.
ANS:
(a)
Sales Salaries Expense 125,000
Office Salaries Expense 30,000
Social Security Tax Payable 10,200
Medicare Tax Payable 2,550
Employees Federal Income Tax Payable 32,300
Medical Insurance Payable 7,370
Salaries Payable 102,580
(b)
Payroll Taxes Expense 13,920
State Unemployment Tax Payable 930
Federal Unemployment Tax Payable 240

7. Marvel Products Inc. pays its employees semimonthly. The summary of the payroll for December 31
indicated the following:
Salary expense $120,000

Federal income tax withheld 20,000
Of the payroll, $40,000 is subject to social security tax of 6%; $120,000 is subject to Medicare tax of
1.5%; $10,000 is subject to state unemployment tax of 4.3% and federal unemployment tax of 0.8%.
Present the journal entries for payroll tax expense if the employees are paid (a) December 31 of the
current year, (b) January 2 of the following year.
ANS:
(a)
Social Security Tax, 6% on $40,000 $2,400
Medicare Tax, 1.5% on $120,000 1,800
State Unemployment, 4.3% on $10,000 430
Federal Unemployment, .8% on $10,000 80
Total Payroll Tax Expense $4,710

State Unemployment Tax Payable 430
(b)
Social Security Tax, 6% on $120,000 $ 7,200
Medicare Tax, 1.5% on $120,000 1,800
State Unemployment Tax, 4.3% on $120,000 5,160
Federal Unemployment Tax, .8% on $120,000 960
Total Payroll Tax Expense $15,120
State Unemployment Tax Payable 5,160

8. Journalize the following transactions:
Dec. 31 The accrued product warranty for the year is estimated to be 1.5% of net sales. Sales
for the year totaled $8,000,000, and sales returns and allowances were $120,000.
31 The accrued vacation pay for the year is estimated to be $60,000.
31 Paid Way Best Insurance Co. $85,000 as fund trustee for the pension plan. The
annual pension cost is $99,000.
ANS:
Dec. 31 Product Warranty Expense 118,200
Product Warranty Payable 118,200*
*$7,880,000  .015 = $118,200
31 Vacation Pay Expense 60,000

Vacation Pay Payable 60,000
31 Pension Expense 99,000

Cash 85,000
Unfunded Pension Liability 14,000
DIF: Moderate OBJ: 10-04 | 10-05

9. For Company A and Company B:
(a) Calculate the quick ratio for each company.

(b) Comment on which one is more able to meet current liabilities.
Company A Company B
Account Dr Cr Dr Cr
Cash $20 $ 20

Cash Equivalents 8 10
Notes Receivable 7 6
Accounts Receivable 6 7
Prepaid Expenses 5 5
Merchandise Inventory 15 13
Fixed Assets 20 55
Accumulated Depreciation-
Fixed Assets $ 5 $ 25
Accounts Payable 26 8

Accrued Liabilities 13 19
Mortgage Payable 17 24
Capital 20 40

Total $81 $81 $116 $116
ANS:
(a) Company A Quick ratio: $41 ÷ $39 = 1.05
Company B Quick ratio: $43 ÷ $27 = 1.59
(b) Company B would be more liquid.


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CH 10

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Chapter 10

Current Liabilities and Payroll

8 10-01 Moderate 43 10-02 Moderate 78 10-04 Easy

Chapter 10—Current Liabilities and Payroll

3. All long-term liabilities eventually become current liabilities.

4. The borrower is the one who issues a note payable to a creditor.

5. The payee of a note records it as a notes payable on its books.

15. Form W-2 is called the Wage and Tax Statement.

20. Payroll taxes are based on the employee's net pay.

22. FICA tax is a payroll tax that is paid only by employers.

38. Internal controls for cash payments also apply to payrolls.

1. Current liabilities are

2. Notes may be issued

9. The interest deducted from the maturity value of a note is called

10. The maturity value of an interest-bearing note payable is the

12. The maturity value of a $40,000, 90-day, 6% note payable is

21. A current liability is a debt that can reasonably be expected to be paid

22. Current liabilities are due

26. As interest is recorded on an interest-bearing note, the Interest Expense account is

29. Current liabilities are:

31. The maturity value of a $15,000, 60-day, 5% note payable is:

32. The current portion of long-term debt should

45. The total earnings of an employee for a payroll period is referred to as

47. Payroll taxes levied against employees become liabilities

Salaries expense $13,000

The entry to record the payment of net pay would include a

51. Most employers are required to withhold from employees for

Salaries Payable would be recorded for

54. Most employers are levied a tax on payrolls for

55. Payroll entries are made with data from the

59. What is the net amount to be paid the employee?

60. What is the employer's payroll tax expense?

Salaries expense $13,000

Salaries subject to federal and state unemployment 4,000

The entry to record accrual of employer’s payroll taxes would include a

Salaries subject to federal and state

Gross payroll $10,000 Federal income tax withheld $1,500

68. Salaries Payable would be recorded for

Payroll Taxes Expense would be recorded for

71. Which of the following is an example of a variable component of a payroll system?

77. Vacation pay payable is reported on the balance sheet as

78. An unfunded pension liability is reported on the balance sheet as

85. Quick assets include

86. Which of the following is the most desirable quick ratio?

87. Another name for the quick ratio is

94. The cost of a product warranty should be included as an expense in the

Mar 31st Interest Expense 375.00

Apr 2nd Notes Payable 12,500.00

DIF: Moderate OBJ: 10-01

Sep 30th Interest Expense 500

Dec 31st Notes Payable 20,000

DIF: Difficult OBJ: 10-01

Mar 31st Interest Expense 297

Apr 2nd Notes Payable 15000

DIF: Moderate OBJ: 10-01

Ref Account Debit Credit

Ref Account Debit Credit

*$10,000  6%  90/360 = $150

DIF: Easy OBJ: 10-01

DIF: Moderate OBJ: 10-02

7. Journalize the following:

May 30 Notes Payable 100,000

DIF: Easy OBJ: 10-02