Exercises: 8-2; 8-5; 8-11 only E8-1 Current liabilities Objs|2, 7 ? Total current liabilities, \$892,000 Carabiner Co.

September 28, 2018

Exercises:
8-2; 8-5; 8-11 only

E8-1

Current liabilities
Objs|2, 7

? Total current liabilities, \$892,000

Carabiner Co. sold 28,000 annual magazine subscriptions for \$40 during
December 2012. These new subscribers will receive monthly issues, beginning in
the first calendar quarter of 2013. The federal tax rate is 40%. A quarterly
tax payment will be made on April 15, 2013.

Prepare the Current Liabilities section of the balance sheet for
Carabiner Co. on March 31, 2013
E8-2
Notes payable
Obj|2

30-day, 7% note for \$36,000 to a creditor on account. Illustrate the effects on
the accounts and financial statements of recording (a) the issuance of the note
and (b) the payment of the note at maturity, including interest.
E8-3

Recording income taxes
Illustrate the effects on the accounts and
financial statements of recording the following selected transactions of Sid’s
Leather Co.
Apr.
15.

Paid the first installment of the estimated income tax for the current
fiscal year ending December 31, \$29,000. No entry had been made to record the
liability.

a.

Calculate the employer’s payroll taxes, using the following rates: state
unemployment, 4.3%; federal unemployment, 0.8%.

b.

Illustrate the effects on the accounts and financial statements of
recording the accrual of payroll taxes.
E8-4
Deferred
income taxes
Obj|2
Warehouse System Inc. recognized
service revenue of \$960,000 on its financial statements in 2011. Assume,
however, that the tax code requires this amount to be recognized for tax
purposes in 2012. The taxable income for 2011 and 2012 is \$7,100,000 and
\$8,900,000, respectively. Assume a tax rate of 40%.
Illustrate the
effects on the accounts and financial statements of the tax expense, deferred
taxes, and taxes payable for 2011 and 2012, respectively.
E8-5
Accrued
product warranty
Fungus Audio Works Inc. warrants its products for one year.
The estimated product warranty is 3% of sales. Assume that sales were \$680,000
for January. In February, a customer received warranty repairs requiring \$4,200
of parts.

a.
Determine the warranty liability at January 31, the end of the first month
of the current year.
b.
What accounts are decreased for the warranty work provided in February?

E8-6
Accrued
product warranty
Obj|2
Ford Motor
Company disclosed the following estimated
product warranty payable for two recent years.

Dec. 31.

Recorded the estimated income tax liability for the year just ended and
the deferred income tax liability, based on the April 15 transaction and the
following data
Fungus Audio Works Inc. warrants its
products for one year. The estimated product warranty is 3% of sales. Assume
that sales were \$680,000 for January. In February, a customer received warranty
repairs requiring \$4,200 of parts

a.

Determine the warranty liability at January 31, the end of the first
month of the current year.

b.

What accounts are decreased for the warranty work provided in February?

E8-6

Accrued product warranty

Obj|2

Ford Motor Company disclosed the following estimated product warranty
payable for two recent years.

December 31

Year 2

Year 1

(in millions)

Product warranty payable

\$2,643

\$3,147

Ford’s sales were \$128,954 million in Year 2 and \$116,283 million in
Year 1. Assume that the total paid on warranty claims during Year 2 was \$2,176
million.

a.

Illustrate the effects on the accounts and financial statements for the
Year 2 product warranty expense.

b.

Assuming \$2,176 million in warranty claims paid during Year 2, explain
the \$501 (\$3,147 ? \$2,646) million decrease in the total warranty liability
from Year 1 to Year 2

E8-7

Contingent liabilities
Several months ago, Maltese Chemical
Company experienced a hazardous materials spill at one of its plants. As a
result, the Environmental Protection Agency (EPA) fined the company \$750,000.
The company is contesting the fine. In addition, an employee is seeking
\$300,000 damages related to the spill. Lastly, a homeowner has sued the company
for \$180,000. The homeowner lives 15 miles from the plant, but believes that
the incident has reduced the home’s resale value by \$180,000.

Maltese’s legal counsel believes that it is probable that the EPA fine
will stand. In addition, counsel indicates that an out-of-court settlement of
\$90,000 has recently been reached with the employee. The final papers will be
signed next week. Counsel believes that the homeowner’s case is much weaker and
will be decided in favor of Maltese. Other litigation related to the spill is
possible, but the damage amounts are uncertain.

a.

Illustrate the effects of the contingent liabilities associated with the
hazardous materials spill on the accounts and financial statements.

b.

Prepare a note disclosure relating to this incident

E8-8

Contingent liabilities
The following note accompanied
recent financial statements for Goodyear Tire and Rubber Company:
We are a defendant in numerous
lawsuits alleging various asbestos-related personal injuries purported to
result from alleged exposure to certain asbestos products manufactured by us or
present in certain of our facilities. Typically, these lawsuits have been
brought against multiple defendants in state and federal courts. To date, we
have disposed of approximately 90,700 claims by defending and obtaining the dismissal
thereof or by entering into a settlement. The sum of our accrued
asbestos-related liability, … including legal costs totaled approximately \$365
million through December 31, 2010. …

a. Illustrate the effects on
the accounts and financial statements of recording the contingent
liability of \$365,000,000.
b. Why was the contingent
liability recorded?

E8-9
Calculate
payroll
b. Net pay, \$1,749.75
An
employee earns \$35 per hour and 1.5 times that rate for all hours in excess of
40 hours per week. Assume that the employee worked 52 hours during the week,
and that the gross pay prior to the current week totaled \$62,000. Assume
further that the social security tax rate was 6.0% (on earnings up to
\$100,000), the Medicare tax rate was 1.5%, and federal income tax to be
withheld was \$128.

a.

Determine the gross pay for the week.

b.

Determine the net pay for the week.

E8-10

Summary payroll data

Obj|2

? (3) Total
earnings, \$314,400

In the following summary of data for a payroll period, some amounts have
been intentionally omitted:

Earnings:

1. At
regular rate

?

2. At
overtime rate

\$ 45,200

3. Total
earnings

?

Deductions:

4. FICA
tax

21,750

5.
Income tax withheld

57,900

6.
Medical insurance

29,150

7. Union
dues

?

8. Total
deductions

117,900

9. Net
amount paid

196,500

Accounts
increased:

10.
Factory Wages

220,600

11.
Sales Salaries

?

12.
Office Salaries

40,000

Calculate the
amounts omitted in lines (1), (3), (7), and (11).
E8-11
Recording
payroll taxes
Obj|2

According to a summary of the payroll of Apline Publishing
Co., \$460,000 was subject to the 7.5% FICA tax. Also, \$39,000 was subject to
state and federal unemployment taxes.
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a.
Calculate the employer’s payroll taxes,
using the following rates: state unemployment, 4.3%; federal unemployment,
0.8%.

b.
Illustrate the effects on the accounts
and financial statements of recording the accrual of payroll taxes.

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