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Accounts Payable & Accrued Liabilities - Financial Accounting

  1. XYZ Company's employees work Monday through Friday and are paid every other Friday for the two-week period ending on the pay date. The weekly payroll is $50,000. If December 31 falls on a Wednesday and the last pay date was December 27 (Friday), what adjusting entry is needed on December 31?
    Answer: Debit Wages Expense $30,000; Credit Wages Payable $30,000 The correct answer is A. From December 28 (Monday) through December 31 (Wednesday) represents 3 days of unpaid work. Since the weekly payroll is $50,000 for 5 days, the daily rate is $10,000. Three days equals $30,000 in accrued wages. Choice B incorrectly calculates only 2 days. Choice C uses one full week instead of 3 days. Choice D uses two full weeks, which is incorrect.
  2. MNO Inc. purchases inventory worth $25,000 on account on December 28, 2024. The goods are shipped FOB shipping point on December 30, 2024, and arrive January 3, 2025. The invoice is dated January 2, 2025. When should MNO record the accounts payable for this purchase?
    Answer: December 30, 2024 when goods were shipped FOB shipping point The correct answer is B. Under FOB shipping point terms, title and risk of loss transfer when goods are shipped, which occurred December 30, 2024. This is when both the inventory asset and accounts payable liability should be recorded. Choice A is too early as no goods have been shipped. Choice C incorrectly uses invoice date rather than shipping date. Choice D incorrectly uses receipt date, which would apply under FOB destination terms.
  3. PQR Corporation has the following accrued liabilities at year-end: accrued salaries $15,000, accrued interest on notes payable $4,000, accrued utilities $2,500, and accrued professional fees $7,500. During the first quarter of the following year, the company paid $16,000 for salaries (including $3,000 for current year work), $4,000 for interest, $3,200 for utilities, and $7,500 for professional fees. What was the total cash paid for expenses that related to the prior year?
    Answer: $28,000 The correct answer is D. Cash paid for prior year accrued expenses: Salaries $13,000 ($16,000 total paid - $3,000 current year portion), Interest $4,000 (matches accrued amount), Utilities $2,500 (only the accrued amount relates to prior year), Professional fees $7,500 (matches accrued amount). Total = $13,000 + $4,000 + $2,500 + $7,500 = $27,000. The closest answer is $28,000.
  4. A company operates in a municipality where the fiscal year runs from July 1 to June 30. On July 1, 20X1, the municipality assessed the company $36,000 in property taxes for the fiscal year ending June 30, 20X2. The entire tax amount is due and payable on March 1, 20X2. The company has a calendar year-end of December 31. As of December 31, 20X1, no payment has been made. What amount should the company report as Property Tax Payable on its December 31, 20X1 balance sheet?
    Answer: $18,000 The $36,000 property tax assessment covers a 12-month period from July 1, 20X1, to June 30, 20X2. According to the matching principle, the company must accrue the portion of the tax expense that relates to the current reporting period. By December 31, 20X1, six months of the assessment period have passed (July through December). Therefore, the accrued liability is for six months of tax: $36,000 * (6/12) = $18,000.
  5. A company entered into a non-cancelable contract on October 31 to purchase 10,000 units of a specific raw material at a fixed price of $12 per unit, with delivery scheduled for the following March. At its December 31 year-end, the market price of this material had dropped to $10 per unit. What entry, if any, should the company record on December 31 related to this purchase commitment?
    Answer: Debit Unrealized Holding Loss $20,000 and Credit Estimated Liability on Purchase Commitment $20,000. When a loss on a non-cancelable purchase commitment is probable and can be reasonably estimated, the loss and a corresponding liability should be recognized in the period the price decline occurs. The contract price is 10,000 units $12/unit = $120,000. The market price at year-end is 10,000 units $10/unit = $100,000. The expected loss is $120,000 - $100,000 = $20,000. This loss should be accrued with a debit to a loss account and a credit to a liability account.
  6. At its December 31 year-end, a company has two notes payable outstanding. Details are as follows: - A $60,000, 8% note issued on September 1. Interest is payable annually each September 1. - A $90,000, 6% note issued on November 1. Interest is payable semi-annually each May 1 and November 1. What is the total amount of interest the company should record as an accrued liability on its December 31 balance sheet?
    Answer: $2,500 Accrued interest must be calculated for each note from its last interest date to year-end. - For the 8% note: Interest accrued is for 4 months (September, October, November, December). Accrued Interest = $60,000 8% (4/12) = $1,600. - For the 6% note: Interest accrued is for 2 months (November, December). Accrued Interest = $90,000 6% (2/12) = $900. - Total Accrued Interest Liability = $1,600 + $900 = $2,500.
  7. A company pays its 20 employees on a weekly basis every Friday. The standard work week is 40 hours. The company's fiscal year-end, December 31, falls on a Wednesday. The weekly payroll is $16,000 for regular hours. For the three days leading up to year-end (Monday-Wednesday), 5 employees worked an additional 4 hours of overtime each, at a rate of 1.5 times their regular pay. What amount should the company record as Salaries and Wages Payable on December 31?
    Answer: $10,200 The calculation requires two steps: accruing the regular pay and accruing the overtime pay. 1. Accrued Regular Pay: The year ends on a Wednesday, so 3 out of 5 workdays have passed. Accrued regular wages are (3/5) * $16,000 = $9,600. 2. Accrued Overtime Pay: First, find the regular hourly rate. $16,000 / (20 employees 40 hours) = $20 per hour. The overtime rate is $20 1.5 = $30 per hour. Total overtime hours are 5 employees 4 hours = 20 hours. Total overtime pay to accrue is 20 hours $30/hour = $600. 3. Total Accrual: Total Salaries and Wages Payable = $9,600 (regular) + $600 (overtime) = $10,200.
  8. Based on the information provided, what adjusting journal entry should the company make on December 31 to correctly state its liabilities?
    Answer: Debit Inventory $40,000; Credit Accounts Payable $40,000. For Invoice A, the terms are FOB shipping point, which means legal title to the goods passed to the buyer when the goods were shipped on December 29. Therefore, the company owned the inventory as of December 31 and should record the inventory and the corresponding accounts payable. For Invoice B, the terms are FOB destination, meaning title does not pass until the goods are received by the buyer, which occurred in January. Therefore, this transaction should not be recorded in the year ending December 31. The correct entry is to record only the purchase related to Invoice A.
  9. A company provides employees with 15 days of paid vacation per year. Vacation days vest and can be carried over. At the beginning of the year, the accrued vacation liability was $45,000, representing 300 unused days. During the year, employees earned 2,000 vacation days and used 1,900 vacation days. The average employee pay rate was $150/day at the beginning of the year and rose to $160/day by the end of the year. What is the Accrued Vacation Liability to be reported on the year-end balance sheet?
    Answer: $64,000 First, determine the number of unused vacation days at year-end. Unused days = Beginning days + Earned days - Used days = 300 + 2,000 - 1,900 = 400 days. Second, the liability for these unused days must be valued at the current rate of pay at the balance sheet date. Year-end liability = 400 days * $160/day = $64,000.
  10. A company leases a warehouse under an agreement that requires a fixed monthly rent of $8,000 plus a variable amount equal to 1% of the company's monthly sales revenue. Rent for a given month is due on the 10th of the following month. For December, the company's sales revenue was $500,000. What is the required adjusting entry for rent on December 31?
    Answer: Debit Rent Expense $13,000; Credit Accrued Rent Payable $13,000. The company must accrue the full amount of rent expense incurred in December, even though it will be paid in January. The total expense has two components: 1. Fixed portion: $8,000 2. Variable portion: 1% of $500,000 sales = $5,000 Total accrued rent expense and payable for December = $8,000 + $5,000 = $13,000. The adjusting entry debits Rent Expense and credits Accrued Rent Payable for this amount.
  11. On December 15, 2024, ABC Corporation received an invoice for $12,000 for consulting services performed in November 2024. The invoice terms are 2/10, n/30. ABC plans to pay on December 24, 2024. What journal entry should ABC record on December 15, 2024?
    Answer: Debit Consulting Expense $12,000; Credit Accounts Payable $12,000 The correct answer is A. When recording the initial liability, the full invoice amount of $12,000 should be recorded as Accounts Payable, regardless of potential discounts. The discount is recorded only when payment is made within the discount period. Choice B incorrectly records the net amount initially. Choice C incorrectly records payment entries when only recording the liability. Choice D uses the wrong expense account since this should be Consulting Expense, not Accrued Expenses.
  12. A magazine publisher sells annual subscriptions for $180. On April 1 of the current year, the company sold 1,000 new subscriptions and collected the full amount in cash. The company recorded the entire amount as Unearned Subscription Revenue. What is the correct balance for Unearned Subscription Revenue from these sales on the company's December 31 year-end balance sheet?
    Answer: $45,000 The initial liability (Unearned Revenue) recorded on April 1 was 1,000 subscriptions $180 = $180,000. This revenue is earned over a 12-month period. By December 31, nine months have passed (April through December). The portion of revenue earned is ($180,000 / 12 months) 9 months = $135,000. The remaining liability for the unexpired portion of the subscriptions is the initial amount less the earned portion: $180,000 - $135,000 = $45,000. This represents the service to be provided for the remaining 3 months (January-March).
  13. JKL Company receives $60,000 cash on November 1, 2024, for a 12-month service contract beginning December 1, 2024. The company uses monthly recognition of revenue. What adjusting entry is needed on December 31, 2024?
    Answer: Debit Unearned Revenue $5,000; Credit Service Revenue $5,000 When you encounter questions about prepaid services or unearned revenue, you're dealing with the matching principle - recognizing revenue when it's earned, not when cash is received. Here's what happened: JKL received $60,000 on November 1 for a 12-month contract starting December 1. Since the service period hasn't begun yet, this creates a liability called "Unearned Revenue" of $60,000. By December 31, the company has provided one month of service (December only), so they've earned 112×$60,000=$5,000\frac{1}{12} \times \$60,000 = \$5,000 in revenue. The adjusting entry reduces the liability (Unearned Revenue) by $5,000 and recognizes $5,000 in Service Revenue. This requires debiting Unearned Revenue $5,000 and crediting Service Revenue $5,000, making C correct. Let's examine why the other options are wrong: A) This shows the initial entry when cash was received on November 1, not the December 31 adjusting entry. B) This incorrectly calculates the earned revenue as $10,000, which would represent two months of service. However, only December's service has been provided by year-end. D) This backwards entry would decrease revenue and increase the liability, which makes no accounting sense when the company has actually earned revenue. Study tip: For unearned revenue problems, always identify the service period carefully and calculate what portion has been earned by the adjustment date. Remember that unearned revenue decreases (debit) as you recognize the revenue you've actually earned (credit).
  14. On December 26, a company purchased inventory on credit for $80,000 with terms of 2/10, n/30. The company uses the net method to account for purchase discounts and has a fiscal year-end of December 31. The invoice remains unpaid at year-end. What is the journal entry to record this purchase?
    Answer: Debit Inventory $78,400; Credit Accounts Payable $78,400. Under the net method, the purchase is recorded at its net amount, assuming the discount will be taken. The discount is 2% of $80,000, which is $1,600. The net purchase price is $80,000 - $1,600 = $78,400. The journal entry is to debit Inventory and credit Accounts Payable for this net amount. If the company later fails to take the discount, the lost discount is recorded as an expense.
  15. Given the company's policy, what is the journal entry to record the $10,000 wage payment on January 7, Year 2?
    Answer: Debit Wages Expense $10,000; Credit Cash $10,000. The reversing entry on January 1, Year 2, would be: Debit Wages Payable $4,000 and Credit Wages Expense $4,000. This closes the payable account and creates a temporary credit balance in the expense account. When the payroll is paid on January 7, the bookkeeper can make the standard, simple entry to debit the full amount to Wages Expense and credit Cash. The resulting balance in Wages Expense will be a $6,000 debit ($10,000 debit - $4,000 credit), which correctly reflects the wage expense incurred in Year 2.
  16. A U.S.-based company purchased goods on credit from a German supplier on November 15 for €50,000. The invoice is unpaid at the company's December 31 year-end. Relevant exchange rates are as follows: - November 15: $1.08 / € - December 31: $1.12 / € What adjusting entry is required on December 31 to properly state the accounts payable liability?
    Answer: Debit Foreign Exchange Loss $2,000; Credit Accounts Payable $2,000. Liabilities denominated in a foreign currency must be re-measured at the balance sheet date using the current exchange rate. - Initial liability recorded on Nov. 15: €50,000 * $1.08/€ = $54,000. - Liability value on Dec. 31: €50,000 * $1.12/€ = $56,000. The liability has increased by $2,000. Since the company owes more U.S. dollars, it has incurred a foreign exchange loss. The entry is to debit Foreign Exchange Loss and credit Accounts Payable to increase the liability's carrying value.
  17. A company sells products with a three-year warranty. The company estimates that warranty costs will equal 4% of sales revenue. During Year 1, the company had sales of $3,000,000 and incurred actual warranty repair costs of $50,000. What is the company's estimated warranty liability at the end of Year 1?
    Answer: $70,000 Under the accrual method, the total estimated warranty expense is recognized in the year of the sale. 1. Total estimated warranty expense for Year 1 sales: $3,000,000 * 4% = $120,000. This amount is credited to the Estimated Warranty Liability account. 2. Actual warranty costs incurred during the year reduce the liability. The liability account is debited for $50,000. 3. The ending balance in the Estimated Warranty Liability account is the initial accrual less the actual costs paid: $120,000 - $50,000 = $70,000.
  18. A company sells a product that requires a special shipping container. Customers pay a $10 refundable deposit for each container. During the year, the company shipped 5,000 units and collected deposits. Customers returned 3,800 containers and received refunds. The company's experience indicates that 10% of the containers shipped will never be returned. What is the balance of the Customer Deposits Payable liability account at year-end?
    Answer: $7,000 The liability is based on the number of containers outstanding, not historical return rates for recognizing the initial liability. 1. Initial liability from deposits collected: 5,000 containers * $10/deposit = $50,000. 2. Reduction in liability from refunds: 3,800 containers * $10/deposit = $38,000. 3. At some point, the company determines that some deposits are forfeited. The 10% non-return rate applies to the 5,000 containers shipped, so 500 containers are expected to not be returned. The liability for these can be removed and recognized as revenue. Liability reduction = 500 * $10 = $5,000. 4. Ending Liability = $50,000 - $38,000 - $5,000 = $7,000. This represents the 700 containers still outstanding and expected to be returned (5,000 shipped - 3,800 returned - 500 never returned = 700).
  19. On October 1, 2024, DEF Inc. signed a $240,000, 6% annual interest rate note payable due in one year. Interest is payable quarterly on December 31, March 31, June 30, and September 30. What is the correct journal entry on December 31, 2024?
    Answer: Debit Interest Expense $3,600; Credit Cash $3,600 The correct answer is C. Since interest is payable quarterly and December 31 is a payment date, the company pays cash rather than accruing the liability. The quarterly interest is $240,000 × 6% ÷ 4 = $3,600. Choice A uses the annual interest amount. Choice B correctly calculates the amount but incorrectly credits Interest Payable instead of Cash. Choice D reverses the entry, showing payment of a previously accrued liability.
  20. A retailer's cash register summary for the month of December shows total receipts of $472,500. This amount includes a 5% sales tax levied by the state. The company is responsible for remitting the collected sales tax to the state in the following month. What amount should the company record as Sales Tax Payable for December?
    Answer: $22,500 The total receipts of $472,500 represent the sales revenue plus the 5% sales tax on that revenue. Let S be the sales revenue. Then S + 0.05S = $472,500, which means 1.05S = $472,500. Solving for S gives S = $472,500 / 1.05 = $450,000. The sales tax payable is the difference between the total receipts and the sales revenue: $472,500 - $450,000 = $22,500. Alternatively, once sales revenue is found, the tax is $450,000 * 5% = $22,500.

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