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Current Liabilities Questions
Current Liabilities Questions
1. What are the three crucial factors included in the definition of a liability?
4. Explain how notes payable are accounted for, including the journal entries.
Answer
1. The three crucial factors included in the definition of a liability are: (1) a probable future payment of
assets or services, (2) resulting from past transactions or events, and (3) creating a present obligation.
2. Current liabilities are obligations expected to be settled within one year or the operating cycle,
whichever is longer, while long-term liabilities are obligations not expected to be settled within one year
or the operating cycle.
3. Examples of current liabilities include short-term notes payable, accounts payable, unearned revenue,
warranty and accrued liabilities (such as taxes, salaries and wages, and interest payable).
4. Notes payable are accounted for by recording obligations in the form of written promissory notes. The
journal entry includes debiting cash and crediting notes payable.
5. Interest for notes payable accrues over the life of the note and is recorded periodically. Adjusting
entries are made to recognize interest expense and interest payable.
6. The journal entry to record accounts payable includes debiting purchases/equipment/supplies (as
appropriate) and crediting accounts payable.
7. Sales taxes are collected separately at the time of sale and periodically remitted to the taxing
authority. The cash register readings are used to record sales and sales taxes payable.
8. Unearned revenue is accounted for by initially debiting cash and crediting a current liability account.
When the revenue is earned, the unearned revenue account is debited, and an earned revenue account
is credited.
9. The purpose of reporting current maturities of long-term debt is to identify the portion of long-term
debt that comes due in the current year, which helps in understanding the company's short-term
financial obligations.
10. Current liabilities are typically presented on a balance sheet as the first category under liabilities.
They are listed separately, and the terms of notes payable and other pertinent information are disclosed
in the notes to the financial statements. They may be listed by order of magnitude or by specific
obligations such as notes payable and accounts payable.
1. What does the term "payroll" encompass, and why is it significant for businesses?
2. Differentiate between salaries and wages, and explain why the terms are sometimes used
interchangeably.
4. Describe the process of preparing payroll, including the sources of input and the verification steps
involved.
5. Who is responsible for paying the payroll, and what are some internal control measures related to
payroll checks?
6. What are the components involved in calculating employees' earnings, and how are they determined?
7. Explain the concept of overtime earnings and the rules regarding payment for overtime work in
Ethiopia.
8. What are allowances, and provide examples of different types of allowances commonly provided to
employees?
9. Describe mandatory (required) deductions from employees' earnings and provide examples.
10. What are voluntary deductions, and why do employees authorize them?
11. How is employee income tax calculated in Ethiopia, and what exemptions exist?
12. Explain the concept of pension contributions for employees, including both employee and employer
contributions.
15. What records are typically maintained in a payroll accounting system, and why are they important?
16. How are payroll expenses and liabilities recognized, and how is payment of the payroll recorded?
17. What documents typically accompany payroll checks when they are distributed to employees?
Answer
1. Payroll encompasses all salaries and wages paid to employees and is significant for businesses
because it affects employee morale, is subject to government regulations, and constitutes a significant
portion of expenses.
2. Salaries are typically paid to managerial, administrative, and sales personnel, often on a monthly or
yearly basis, while wages are paid to store clerks, factory employees, and manual laborers based on an
hourly rate or piecework basis. The terms are sometimes used interchangeably.
3. Distinguishing between employees and independent contractors is important for payroll regulations
because different rules apply to each category, particularly regarding tax obligations and reporting
requirements.
4. Payroll is prepared based on personnel department authorizations and approved time cards. It
involves numerous calculations, verification steps, and approvals by payroll department employees and
supervisors.
5. The payroll is paid by the treasurer's department, typically through checks. Internal control measures
include renumbering checks, requiring signatures from designated individuals, and controlling the
distribution of checks to employees.
6. Employees' earnings are calculated by determining gross earnings, payroll deductions, and net pay.
Gross earnings include wages, salaries, bonuses, and allowances.
7. Overtime earnings are payments made to employees for work performed beyond regular working
hours. In Ethiopia, overtime work is subject to specific rules and rates based on the time of day and day
of the week.
8. Allowances are additional payments made to employees for specific reasons, such as position
allowances, house allowances, hardship allowances, and transportation allowances.
9. Mandatory deductions from employees' earnings include those required by the government, such as
income tax and pension contributions.
10. Employees authorize voluntary deductions for various purposes, such as charitable donations,
retirement savings, union dues, and insurance premiums.
11. Employee income tax in Ethiopia is calculated based on a progressive tax system, with higher rates
for higher earnings. Exemptions exist for certain types of income, such as medical costs, transportation
allowances, and pension contributions.
12. Pension contributions for employees in Ethiopia typically involve both employee and employer
contributions, with the total contribution amounting to a percentage of the employee's basic salary.
13. Net pay, also known as take-home pay, is calculated by subtracting payroll deductions from gross
earnings.
14. An example calculation of net pay for an employee in Ethiopia involves determining income tax,
pension contributions, and other deductions from the gross salary to arrive at the final net pay amount.
15. Records maintained in a payroll accounting system include a payroll register, individual employees'
earnings records, and paychecks.
16. Payroll expenses and liabilities are recognized by recording payroll costs and deductions in
accounting records. Payment of the payroll is recorded when checks are issued to employees.
17. Payroll checks are typically accompanied by detachable statements of earnings that show the
employee's gross earnings, deductions, and net pay.
Here are 10 multiple-choice questions based on the provided information about liabilities:
b) Debts expected to be settled within one year or the operating cycle, whichever is longer
c) Warranty liabilities
d) Bond payable
c) Listed alphabetically
10. Which of the following is an example of a current liability for XYZ Corp based on the balance sheet
provided?
c) Accounts receivable
d) Prepaid expenses
Multiple Questions
b) With bonuses
c) With fees
d) With wages
a) Salaries are based on a rate per hour, while wages are based on a monthly amount.
b) Salaries are typically paid to managerial personnel, while wages are paid to administrative staff.
c) Salaries are expressed in terms of a specified amount per month or per year, while wages are based
on a rate per hour or piecework.
d) Salaries are paid to independent contractors, while wages are paid to employees.
a) Income tax
b) Pension contribution
c) Union dues
11. Which of the following is NOT a type of allowance mentioned in the text?
a) Position allowance
b) House allowance
c) Transportation allowance
d) Overtime allowance
13. What percentage of basic salary is typically contributed to the pension fund by the employer?
a) 5%
b) 7%
c) 10%
d) 15%
a) Income tax
b) Pension contribution
c) Union dues
a) Payroll register
b) Paycheck stub
c) Time card
d) Tax return
17. Which Ethiopian proclamation specifies the income tax rates and deductions?
20. Which Ethiopian regulation specifies the rules for payment of overtime work?
a) Article 64/1975