Accrue wages payable and employer payroll taxes

Answer A. Salaries earned before year-end create a present obligation and must be accrued; employer payroll taxes tied to those wages are likewise liabilities attributable to the payroll period and should be accrued. Sales taxes collected from customers are held on behalf of the taxing authority and are liabilities until remitted. The formula-based bonus meets accrual criteria (obligation existed at year-end, amount is reasonably estimable), so it should be accrued; the dividend was declared after year-end and was not a liability on Dec 31.

Why not B: Tempting because dividends are payables once declared, but the dividend here was declared on Jan 10, Year 3 (after the balance sheet date), so no obligation existed at Dec 31 and it should not be accrued.

Why not C: Tempting because payroll taxes are remitted later and bonuses sometimes require approval, but this is incorrect: employer payroll taxes are obligations tied to the earned wages and must be accrued, and the bonus here is automatic and reasonably estimable so it meets accrual criteria rather than merely disclosure.

Why not D: Tempting because sales tax can be confused with deferred revenue and some think bonuses are only recognized on payment, but sales taxes collected are liabilities owed to the taxing authority (not deferred revenue), and the automatic, estimable bonus earned by employees should be accrued.

Answer D. Accrued liabilities are expenses incurred by the reporting date but not yet paid or billed. Salaries earned through December 31 meet that definition and are recognized with an adjusting entry at year-end even though cash will be paid in January.

Why not A: This is a current liability but is normally recorded as accounts payable once the vendor invoice exists; it's not the typical end-of-period accrued expense the question targets.

Why not B: A note payable due in two years is a long-term liability classified by maturity, not an accrued expense arising from services already provided or time elapsed by the reporting date.

Why not C: Customer prepayments are unearned revenue (a liability for future performance), not an accrued liability, because cash was received before the obligation was performed.

Answer B. Under accrual accounting, North should recognize a liability for services already performed by year-end even if cash is paid later. Employees have worked Monday, Tuesday, and Wednesday by December 31 (three days), and at $2,000 per day that totals $6,000. The remaining $4,000 for Thursday and Friday relates to the next reporting period and is not accrued.

Why not A: This answer arises from focusing on the payment date (Friday) rather than when services were rendered; accrual accounting requires recognizing wages earned through the reporting date.

Why not C: This option is tempting if a candidate counts only Monday and Tuesday and forgets that Wednesday's services were performed before year-end and should be included in the accrual.

Why not D: This choice incorrectly accrues the entire week's payroll; only the portion earned through December 31 (three days) is a liability at year-end, while Thursday and Friday relate to the next period.

Answer D. The adjusting entry is a debit to salaries expense and a credit to salaries payable for $64,000. The credit increases current liabilities while current assets remain unchanged, so working capital (current assets minus current liabilities) decreases by $64,000.

Why not A: This likely confuses the later cash payment with the year-end situation. At December 31 the adjusting entry creates a payable (increasing current liabilities), not decreasing them.

Why not B: This distractor wrongly assumes that because no cash has been paid yet, working capital can't change. Working capital depends on current liabilities too; increasing a current liability without changing current assets reduces working capital.

Why not C: This reflects recognizing the expense but failing to record the liability. Under accrual accounting, salaries earned but unpaid must be recorded as salaries payable, so current liabilities do change.

Answer D. Under accrual accounting, liabilities for wages are recognized as employees earn the wages, not when payroll is paid. By Dec. 31, Year 1, employees have worked two days of the Monday-Friday week, so Ridge should accrue 2 days × $8,000 = $16,000. The remaining three days are earned in Year 2 and should not be recorded as a liability at Year 1 year-end.

Why not A: This combines two errors: using the payment date as the recognition trigger and accruing the full week. Under accrual accounting, only wages earned by Dec. 31 are liabilities in Year 1.

Why not B: This distractor relies on the common mistake of tying liability recognition to the payment date. Wages payable should be accrued when services are rendered (by Dec. 31 for the two earned days), so waiting until Jan. 3 is incorrect.

Why not C: This choice incorrectly accrues the entire week's payroll at year-end. Only the portion earned through Dec. 31 (two days) should be accrued; the other three days relate to Year 2.

Answer D. Accrued liabilities are expenses that have been incurred by the balance sheet date but remain unpaid. Wages earned through Dec 31 are expenses incurred before year‑end that have not been paid and therefore are recorded as wages (salaries) payable and presented in the Accrued Liabilities line. The other items are classified differently (trade payables, unearned revenue, and current maturities of debt).

Why not A: This distractor tempts by invoking a near‑year‑end purchase, but because the supplier invoiced and the company recorded the invoice before year‑end, the obligation is a trade accounts payable recorded in the Accounts Payable line, not an accrued expense in Accrued Liabilities.

Why not B: This option is tempting because it is a current liability, but scheduled principal on long‑term borrowings that becomes due within the coming year is presented as the current maturities (current portion) of long‑term debt, not within Accrued Liabilities.

Why not C: This is tempting because it is a liability balance, but cash received before performance creates deferred (unearned) revenue, a liability reflecting obligations to customers, not an accrued expense incurred by the company.

Answer C. The formula-driven plan created a present obligation before year-end and the committee's ratification is routine, so the liability was probable and reasonably estimable at Dec 31. Employer payroll taxes (7.65% × $300,000 = $22,950) are incurred as compensation is earned and must be accrued with the related bonus. Therefore accrue $300,000 + $22,950 = $322,950 as a current accrued liability.

Why not A: Tempting because payroll taxes are paid later, but incorrect: the employer's share of payroll taxes is incurred as employees earn the bonus and should be recognized and accrued concurrently with the related compensation.

Why not B: Tempting because formal approval occurs after year-end, but incorrect here: when an established formula creates a binding obligation and the post‑period approval is perfunctory, the obligation exists at the balance sheet date and must be accrued rather than treated as a subsequent event.

Why not D: Tempting because cash payments occur after year-end, but incorrect: payments are due within one year (February Year 2), so the accrued obligation is current. Long‑term classification applies only to obligations not expected to be settled within 12 months or that have been successfully refinanced.

Answer D. Total payroll-related current liabilities include amounts payable to employees (net pay), employee withholdings payable to taxing authorities, and the employer's payroll taxes. Net pay plus withholdings equals gross wages ($37,200 + $10,800 = $48,000), and adding the employer payroll taxes ($3,700) yields $48,000 + $3,700 = $51,700. Therefore, Apex should report $51,700.

Why not A: This is the net pay to employees (gross wages minus employee withholdings). It is tempting because it is the cash Apex will pay employees, but it omits the withheld amounts owed to tax authorities and the employer payroll taxes.

Why not B: This choice reflects gross wages only and therefore omits the employer's payroll taxes. A candidate might stop at the wage accrual and forget that the employer payroll taxes are an additional accrued liability.

Why not C: This choice double-counts the employee withholdings by adding them to gross wages. The withholdings are part of the gross wages and should be recorded as separate liabilities (withholding payables), not added again; only the employer payroll taxes are added to reach the total payroll-related liability.