CPM Payroll Accounting and Reporting 3 — Questions and Answers
Question 1: Which financial statement line item is most directly affected when payroll liabilities remain unpaid at period-end?
- Retained earnings on the equity statement
- Accrued liabilities on the balance sheet (Correct answer)
- Revenue on the income statement
- Depreciation on the cash flow statement
Correct answer: Accrued liabilities on the balance sheet
Unpaid payroll obligations are recorded as accrued liabilities (a current liability) on the balance sheet until disbursed.
Question 2: Which of the following is an example of a voluntary payroll deduction?
- Federal income tax withholding
- State income tax withholding
- Employee contribution to a health insurance premium (Correct answer)
- Employee share of Social Security tax
Correct answer: Employee contribution to a health insurance premium
Health insurance premium contributions are voluntary deductions elected by employees, unlike mandatory tax withholdings required by law.
Question 3: What is the effect on the general ledger when an employer remits withheld federal income taxes and FICA taxes to the IRS?
- Debit Payroll Tax Expense; Credit Cash
- Debit FICA Taxes Payable and Federal Income Tax Payable; Credit Cash (Correct answer)
- Debit Cash; Credit Withholding Tax Expense
- Debit Salaries Payable; Credit FICA Taxes Payable
Correct answer: Debit FICA Taxes Payable and Federal Income Tax Payable; Credit Cash
Remitting tax deposits eliminates the liability accounts (debit) and reduces cash (credit), reflecting the payment of previously accrued obligations.
Question 4: Under the deposit rules for Form 941, a monthly depositor must remit taxes by which deadline?
- The last day of the month in which wages were paid
- The 15th of the following month (Correct answer)
- Within 3 business days of payday
- The quarterly due date of Form 941
Correct answer: The 15th of the following month
Monthly depositors must deposit employment taxes accumulated in a calendar month by the 15th day of the following month.
Question 5: A company incorrectly classifies a worker as an independent contractor. What is the primary accounting consequence when the error is discovered?
- The company must restate prior year revenue
- The company must record back payroll taxes, penalties, and interest as a liability (Correct answer)
- The worker must repay all previously received compensation
- The company issues a corrected Form 1099-NEC with no other adjustments
Correct answer: The company must record back payroll taxes, penalties, and interest as a liability
Misclassification requires the employer to accrue unpaid payroll taxes, employer FICA, FUTA, and potential IRS penalties and interest as liabilities.
Question 6: Which payroll tax is reported annually rather than quarterly?
- Federal income tax withholding
- Employee Social Security tax
- Federal Unemployment Tax (FUTA) on Form 940 (Correct answer)
- Employee Medicare tax
Correct answer: Federal Unemployment Tax (FUTA) on Form 940
FUTA tax is reported annually on Form 940, although deposits may be required quarterly if the liability exceeds $500.
Question 7: When reconciling year-end payroll records, Box 1 wages on Form W-2 typically differ from Box 3 Social Security wages because:
- Social Security wages are always higher than taxable wages
- Pre-tax 401(k) deferrals reduce Box 1 but not Box 3 Social Security wages (Correct answer)
- Federal income tax withholding reduces Social Security wages
- Medicare wages are excluded from Box 3
Correct answer: Pre-tax 401(k) deferrals reduce Box 1 but not Box 3 Social Security wages
Pre-tax 401(k) elective deferrals reduce federal taxable wages in Box 1 but are still subject to Social Security and Medicare taxes, so Box 3 remains higher.
CPM Payroll Accounting and Reporting 3
Which financial statement line item is most directly affected when payroll liabilities remain unpaid at period-end?