Here are exam-focused notes from Chapter 11: Current Liabilities and Payroll (organized by learning
objectives for easy revision):
📘 Chapter 11: Current Liabilities and Payroll
1️⃣ Current Liabilities
✅ Definition
Current Liabilities: Debts due within one year and paid from current assets.
Long-term Liabilities: Debts due after one year.
Key Types:
1. Accounts Payable
o Purchases on account
o Usually largest current liability
2. Current Portion of Long-Term Debt
o Installments due within 1 year → Current
o Remaining → Long-term
3. Short-Term Notes Payable
o Written promise to pay
o Can be:
Interest-bearing note
Discounted note
📝 Interest on Notes Formula
[
Interest = Face Value × Rate × Time
]
(Time = Days ÷ 360)
🔹 Discounted Note
Interest deducted upfront
Proceeds = Face Value − Discount
Borrower repays full face value
[
Discount = Face Value × Rate × Time
]
2️⃣ Payroll Basics
Payroll = Total earnings paid to employees
Types of Earnings:
Salary → Monthly or yearly
Wages → Hourly or weekly
⏰ Overtime Rule (FLSA)
Over 40 hours/week
Paid at 1.5 × regular rate
3️⃣ Gross Pay vs Net Pay
Gross Pay = Total earnings
Net Pay = Gross Pay − Deductions
Common Deductions:
Federal income tax
State tax
FICA tax
Medical insurance
Pension contributions
4️⃣ Federal Income Tax Withholding
Based on:
o Gross pay
o W-4 allowances
Each allowance reduces taxable income.
5️⃣ FICA Tax
Under Federal Insurance Contributions Act (FICA):
Employee Pays:
Social Security → 6%
Medicare → 1.5%
Employer Must:
Match employee’s FICA amount
6️⃣ Employer Payroll Taxes
Employer pays:
1. FICA (matching)
2. FUTA (Federal Unemployment)
3. SUTA (State Unemployment)
These are recorded as Payroll Tax Expense
7️⃣ Payroll Accounting System
Important Records:
Payroll register
Employee earnings record
Payroll checks
Journal Entry for Payroll:
Salaries Expense XXX
Social Security Payable
Medicare Payable
Income Tax Payable
Cash (Net Pay)
Journal Entry for Payroll Taxes:
Payroll Tax Expense XXX
Social Security Payable
Medicare Payable
FUTA Payable
SUTA Payable
8️⃣ Fringe Benefits
Extra benefits given to employees:
Examples:
Vacation pay
Medical benefits
Pensions
🏖 Vacation Pay
Accrued at year-end
If used within 1 year → Current liability
If carried forward → Long-term liability
9️⃣ Pension Plans
1. Defined Contribution Plan
Employer contributes fixed %
Example: 401K
Employer records:
Pension Expense
Cash
2. Defined Benefit Plan
Fixed pension after retirement
If underfunded:
Pension Expense
Cash
Unfunded Pension Liability
🔟 Contingent Liabilities
Potential obligations depending on future events.
Classified as:
Probable
Reasonably possible
Remote
If Probable + Estimable:
Record it.
Example: Warranty
Warranty Expense
Warranty Payable
When repair happens:
Warranty Payable
Cash / Supplies
1️⃣1️⃣Financial Analysis
Working Capital
[
Current Assets − Current Liabilities
]
Current Ratio
[
Current Assets ÷ Current Liabilities
]
Quick Ratio (Very Important for Exams ⭐)
[
Quick Assets ÷ Current Liabilities
]
Quick Assets = Cash + Marketable Securities + Accounts Receivable
⚠️Inventory NOT included
If Quick Ratio < 1 → Weak short-term position
🎯 Important Exam Focus Areas
✔ Interest & Discount calculations
✔ Payroll journal entries
✔ FICA calculation
✔ Employer tax entries
✔ Warranty entries
✔ Quick ratio calculation
✔ Difference between defined contribution & defined benefit plans
Here are theoretical MCQs from Chapter 11 (Current Liabilities & Payroll) for exam practice:
📘 MCQs – Current Liabilities & Payroll (Theory)
1️⃣ Which of the following is a current liability?
A) Bonds payable due in 10 years
B) Accounts payable
C) Owner’s capital
D) Equipment
Answer: B
2️⃣ The portion of long-term debt due within one year is classified as:
A) Long-term liability
B) Owner’s equity
C) Current liability
D) Asset
Answer: C
3️⃣ A discounted note differs from an interest-bearing note because:
A) Interest is paid monthly
B) Interest is deducted in advance
C) No interest is charged
D) It cannot be issued to a bank
Answer: B
4️⃣ Gross pay refers to:
A) Earnings after deductions
B) Earnings before deductions
C) Salary after tax
D) Net take-home pay
Answer: B
5️⃣ Net pay is calculated as:
A) Gross pay + deductions
B) Gross pay − deductions
C) Gross pay − overtime
D) Basic salary only
Answer: B
6️⃣ Under the Fair Labor Standards Act (FLSA), overtime is paid at:
A) Regular rate
B) Double rate
C) 1.5 times regular rate
D) Half rate
Answer: C
7️⃣ The Federal Insurance Contributions Act (FICA) tax funds:
A) Unemployment benefits only
B) Social Security and Medicare
C) State income tax
D) Corporate pensions
Answer: B
8️⃣ Employers are required to:
A) Pay only FUTA
B) Match employee FICA contributions
C) Pay only income tax
D) Deduct nothing from payroll
Answer: B
9️⃣ FUTA and SUTA taxes are related to:
A) Retirement benefits
B) Medical insurance
C) Unemployment compensation
D) Social security
Answer: C
🔟 A payroll register is used to:
A) Record fixed assets
B) Summarize payroll data for a period
C) Record inventory purchases
D) Record long-term loans
Answer: B
1️⃣1️⃣An employee’s earnings record is important for:
A) Determining sales revenue
B) Calculating depreciation
C) Tracking cumulative earnings and taxes
D) Recording assets
Answer: C
1️⃣2️⃣Vacation pay that will be used within one year is reported as:
A) Long-term liability
B) Current liability
C) Asset
D) Expense only
Answer: B
1️⃣3️⃣In a defined contribution plan:
A) Pension amount is fixed
B) Employer guarantees specific retirement payment
C) Employer contributes a fixed percentage
D) No contributions are made
Answer: C
1️⃣4️⃣In a defined benefit plan:
A) Employee chooses investment
B) Pension amount depends only on employee contribution
C) Employer promises fixed retirement benefit
D) No long-term obligation exists
Answer: C
1️⃣5️⃣A contingent liability is recorded when it is:
A) Remote
B) Reasonably possible only
C) Probable and estimable
D) Impossible to estimate
Answer: C
1️⃣6️⃣Product warranties are an example of:
A) Fixed assets
B) Current assets
C) Contingent liabilities
D) Revenue
Answer: C
1️⃣7️⃣The quick ratio measures a company’s:
A) Profitability
B) Long-term solvency
C) Instant debt-paying ability
D) Inventory turnover
Answer: C
1️⃣8️⃣Which of the following is NOT included in quick assets?
A) Cash
B) Accounts receivable
C) Marketable securities
D) Inventory
Answer: D
1️⃣9️⃣If the quick ratio is below 1, it indicates:
A) Strong liquidity
B) High profitability
C) Weak short-term liquidity
D) Excess inventory
Answer: C
2️⃣0️⃣Which of the following is an example of a fringe benefit?
A) Overtime pay
B) Regular wages
C) Vacation pay
D) Sales revenue
Answer: C
If you want, I can now:
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