Chapter 9: Q6DQ (page 428)
What is the current Medicare tax rate? This rate is applied to what maximum level of salary and wages?
The current Medicare tax rate is 1.45%. There is no maximum limit on salaries and wages for the Medicare tax rate.
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What is the difference between a current and a long-term liability?
Question Volvo Group reports the following information for its product warranty costs as of December 31, 2014,
along with provisions and utilizations of warranty liabilities for the year ended December 31, 2014 (SEK
in millions).
Provision for product warrantyWarranty provisions are estimated with consideration of historical claims
statistics, the warranty period, the average time-lag between faults occurring and claims to the company and
anticipated changes in quality indexes. Estimated costs for product warranties are recognized as cost of sales
when the products are sold . . . Differences between actual warranty claims and the estimated final claims
cost generally affect the recognized expense and provisions in future periods. Refunds from suppliers, that
decrease the Volvo Group’s warranty costs, are recognized to the extent these are considered to be certain.
Product warranty liabilities, December 31, 2013 SEK 9,881
Additional provisions to product warranty liabilities . 7,836
Utilizations and reductions of product warranty liabilities (7,134)
Product warranty liabilities, December 31, 2014 SEK 10,583
As of December 31, 2014 (2013), warranty cost provisions amount to 10,583 (9,881).
1. Prepare Volvo’s journal entry to record its estimated warranty liabilities (provisions) for 2014.
2. Prepare Volvo’s journal entry to record its costs (utilizations) related to its warranty program for 2014.
Assume those costs involve replacements taken out of inventory, with no cash involved.
3. How much warranty expense does Volvo report for 2014?
Which payroll taxes are the employee’s responsibility and which are the employer’s responsibility?
Assume that a company buys another business and pays for its goodwill. If the company plans to incur costs each year to maintain the value of the goodwill, must it also amortize this goodwill?
Question: Shown here are condensed income statements for two different companies (both are organized as LLCs and pay no income taxes).
Miller Company
Sales \(1,000,000
Variable expenses (80%) 800,000
Income before interest 200,000
Interest expense (fixed) 60,000
Net income \) 140,000
Weaver Company
Sales \(1,000,000
Variable expenses (60%) 600,000
Interest expense (fixed) 260,000
Net income \) 140,000
Required
1. Compute times interest earned for Miller Company.
2. Compute times interest earned for Weaver Company.
3. What happens to each company’s net income if sales increase by 30%?
4. What happens to each company’s net income if sales increase by 50%?
5. What happens to each company’s net income if sales increase by 80%?
6. What happens to each company’s net income if sales decrease by 10%?
7. What happens to each company’s net income if sales decrease by 20%?
8. What happens to each company’s net income if sales decrease by 40%?
Analysis Component
9. Comment on the results from parts 3 through 8 in relation to the fixed-cost strategies of the two companies and the ratio values you computed in parts 1 and 2.
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