Payables and accrued liabilities
Most accrued liabilities CPA exam FAR items are a rate times a base times a fraction of a year. The ones that are not — and they are the ones the exam picks — are self-referential: a bonus computed on income after deducting the bonus is an equation, not a multiplication. Applying the percentage to the pre-bonus figure gives a number that is too high by exactly the bonus on the bonus.
| Blueprint group | FAR-II-G |
| Area weight | 30–40% |
| Approx. share of the exam | 3.9% |
What the Blueprint asks for here
At this group the Blueprint expects a candidate to determine the carrying amount of payables and accrued liabilities at a reporting date, including accruals for compensation, interest and similar obligations, and to prepare the journal entries that record them.
This is our paraphrase, not the Blueprint’s wording. verbatim quote pending The authoritative representative-task text is in the AICPA Blueprints, which are published free — download them and read the group directly. We will not print a quotation we have not taken from the source document.
Accrued liabilities CPA exam FAR items: the ones with a formula inside
Why this group is worth its weight
Payables and accrued liabilities is a small, low-glamour group that appears in more questions than its weight suggests, because an accrual is the natural way to make a question about something else — a bonus, a warranty, a payroll — require a second calculation. Candidates who have not practised the group tend to lose those items on the accrual half, having got the interesting half right.
The routine accruals, and what makes them go wrong
Interest accrues at the stated rate on the principal for the elapsed portion of the period, and the error is almost always the fraction of the year rather than the rate. Payroll accruals separate what is withheld from employees — income tax, the employee share of payroll taxes — from what the employer owes on top, and both are liabilities but only the second is additional employer expense. Property taxes, utilities and rent accrue on elapsed time regardless of billing dates.
The accrual that is an equation
A bonus expressed as a percentage of income after deducting the bonus cannot be computed by multiplication, because the base depends on the answer. Write it out: if the bonus rate is r and pre-bonus income is I, then B = r(I − B), so B(1 + r) = rI and B = rI / (1 + r). At a 10% rate the divisor is 1.1, not 0.9, and candidates who reach for 0.9 are solving the equation for income rather than for the bonus. When the formula also deducts income tax, read carefully whether tax is computed before or after the bonus, because the two orderings give different answers and the fact pattern always says which.
Warranties and the other estimated accruals
A warranty obligation is accrued when the product is sold, at the estimated cost of satisfying it, and the liability is drawn down as claims are settled — a rollforward with the same shape as the allowance for doubtful accounts. The exam pairs it with a multi-year fact pattern so that the opening balance is doing real work, and a candidate who computes the year’s accrual and reports that as the closing liability has answered half the question.
The standard this group is examined on is published by the standard setter: FASB Accounting Standards Codification. The Blueprint coordinates and weight ranges above come from the AICPA Blueprints. What is ours, and labelled as ours, is the reading, the practice item and the misconception tags.
A practice item
our own practice item Written by us against the public Blueprint. It is not an AICPA question and it is not taken from any review course.
A company’s incentive plan pays its chief executive a bonus of 10% of income after deducting the bonus but before deducting income tax. For the current year, income before the bonus and before income tax is $550,000.
What amount of bonus should the company accrue?
| A | $55,000 | |
| B | $50,000 | correct |
| C | $61,111 | |
| D | $44,000 |
The rule
When a bonus is defined as a percentage of income after deducting the bonus, the bonus and the base are mutually dependent and the amount must be solved rather than computed directly. Writing the bonus as B and pre-bonus income as I at a rate r gives B = r(I − B), so B = rI / (1 + r). Where the plan also deducts income tax, the order of the two deductions is given by the plan and changes the result.
The arithmetic
B = 0.10 × ($550,000 − B), so 1.1B = $55,000 and B = $50,000. Check it against the plan wording: income after the bonus is $550,000 − $50,000 = $500,000, and 10% of $500,000 is $50,000. Applying the rate to the pre-bonus figure gives $55,000, which is too high by $5,000 — the bonus on the bonus.
What we would ask you first
This is the part of the product that is hard to show without an account, so here it is directly: for each wrong option above, the opening question our tutor asks — before any explanation — targeting the specific mistake that option represents. Choosing A ($55,000) and choosing D ($44,000) are different errors and deserve different first questions.
If you chose A — rate_applied_to_pre_bonus_income
“You applied 10% to the income figure you were given. The plan says the base is income after the bonus is deducted — is $550,000 before or after that deduction?”
If you chose C — divided_by_one_minus_rate
“You solved an equation, and you solved the right kind of equation with the wrong divisor. Write B = 0.10 × (550,000 − B) out in full and collect the B terms — what do they add up to?”
If you chose D — tax_deducted_first
“You reduced the base by a tax charge before applying the rate. Read the plan wording again: which of the two deductions does it say comes first?”
To be precise about what happens next: the exchange is a rate limit, not a gate. Answering well gets you to the full worked explanation in three or four exchanges; answering badly still gets you there. And if you would rather skip it, asking three times gets you the walkthrough.
Common questions
How do you calculate a bonus based on income after the bonus?
Solve rather than multiply. With a rate r and pre-bonus income I, the bonus B satisfies B = r(I − B), which rearranges to B = rI / (1 + r). At a 10% rate on $550,000 of pre-bonus income the bonus is $55,000 / 1.1 = $50,000, not $55,000.
Are payroll taxes withheld from employees an employer expense?
No. Amounts withheld from employees — income tax and the employee share of payroll taxes — are part of the gross wages already recognised as expense; withholding just splits the payment between the employee and the taxing authority. The employer's own share of payroll taxes is additional expense as well as an additional liability.
Misconception tags in this group
These are the labels our diagnosis attaches when a wrong answer matches a known pattern. They are worth reading even if you never use the product — naming your own error is most of the work.
rate_applied_to_pre_bonus_income— Multiplying the rate by income before the bonus when the plan defines the base as income after it.divided_by_one_minus_rate— Dividing by one minus the rate instead of one plus the rate.tax_deducted_first— Applying income tax before the bonus when the plan specifies the opposite order.closing_liability_equals_annual_accrual— Reporting the year's accrual as the closing liability on a rollforward such as a warranty.interest_period_fraction— Accruing a full year of interest on a note outstanding for part of the year.