Fundamental Payroll Certification Fundamental Payroll Payroll Accounting Principles 3 — Questions and Answers
Question 1: Under the accrual basis of accounting, when are wages recognized as an expense?
- When they are earned by the employee (Correct answer)
- When the paycheck is issued
- When cash leaves the bank account
- When the W-2 is filed
Correct answer: When they are earned by the employee
Accrual accounting requires expenses to be recognized in the period they are incurred, which is when the employee earns the wages.
Question 2: A company uses cost centers to allocate payroll. If an employee works 60% in sales and 40% in administration, how should their wages be split in the journal entry?
- 60% to Sales Wages Expense and 40% to Admin Wages Expense (Correct answer)
- 100% to the department where they spend most of their time
- 50/50 between Sales and Admin regardless of actual time
- Recorded entirely in a single clearing account
Correct answer: 60% to Sales Wages Expense and 40% to Admin Wages Expense
Payroll costs should be allocated to expense accounts based on the actual percentage of time worked in each department.
Question 3: Which of the following would cause a payroll bank account reconciliation to show an outstanding item?
- An employee's paycheck that has not yet been cashed (Correct answer)
- A direct deposit credited the same day as payroll
- An employer FICA deposit made via EFTPS
- A voided paycheck recorded in the same period
Correct answer: An employee's paycheck that has not yet been cashed
An uncashed paycheck creates an outstanding check that appears on the bank reconciliation until the employee cashes it.
Question 4: Workers' compensation insurance premiums paid in advance are initially recorded as a:
- Prepaid expense (asset) (Correct answer)
- Workers' Compensation Expense
- Current liability
- Accrued liability
Correct answer: Prepaid expense (asset)
Premiums paid before the coverage period begins are prepaid expenses and are expensed ratably over the coverage period.
Question 5: Reversing entries related to payroll accruals are typically made on:
- The first day of the new accounting period (Correct answer)
- The last day of the current accounting period
- The date payroll is processed
- The date federal tax deposits are due
Correct answer: The first day of the new accounting period
Reversing entries are posted on the first day of the new period to automatically cancel the prior accrual once actual payroll is recorded.
Question 6: What does a debit balance in the Payroll Tax Expense account indicate?
- The company has incurred payroll tax costs that are expensed (Correct answer)
- The company has overpaid its payroll taxes
- Payroll taxes have been remitted to the IRS
- There is an error in the payroll ledger
Correct answer: The company has incurred payroll tax costs that are expensed
Payroll Tax Expense is an expense account with a normal debit balance, indicating costs the company has recognized for employer-side taxes.
Question 7: An employee receives a cash advance of $500 against future wages. How is this initially recorded?
- Debit to Employee Advances Receivable and credit to Cash (Correct answer)
- Debit to Wages Expense and credit to Cash
- Debit to Cash and credit to Wages Payable
- Debit to Prepaid Wages and credit to Wages Expense
Correct answer: Debit to Employee Advances Receivable and credit to Cash
A wage advance is a receivable from the employee until it is recovered through future payroll deductions.
Fundamental Payroll Certification Fundamental Payroll Payroll Accounting Principles 3
Under the accrual basis of accounting, when are wages recognized as an expense?