Which entry should be made to close the outstanding liabilities with the federal government?

The correct entry to close the outstanding liabilities with the federal government involves recognizing that the liabilities owed must be removed from the accounts. In this scenario, the credit to the 'Due to Federal Government' account indicates that the liability is being settled or eliminated.

When closing liabilities, such as the 'Wages Payable' and 'Due to Federal Government,' which represent amounts the government is owed, the correct accounting treatment would involve crediting these liability accounts to decrease their balance to zero.

By crediting 'Wages Payable' for $2,581,000, it shows that this obligation has been fulfilled and therefore needs to be eliminated from the books. Similarly, crediting 'Due to Federal Government' for $686,000 reflects settling this specific outstanding liability.

This closing entry effectively demonstrates the reduction of liabilities on the balance sheet, moving towards a clear state of accounts where outstanding obligations no longer exist, which is essential for accurate financial reporting and compliance with governmental accounting standards.