Chapter 11: Q12RQ (page 604)
When do businesses record warranty expenses, and why?
Warranty expense is recorded at the time of making sales. It is recorded at the time of sales due to the matching principle.
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The following transactions of Jasmine Reef occurred during 2018:
Apr. 30 Reef is party to a patent infringement lawsuit of \(190,000. Reef’sattorney is certain it is remote that Reef will lose this lawsuit.
Jun. 30 Estimated warranty expense at 2% of sales of \)350,000.
Jul. 28 Warranty claims paid in the amount of \(5,500.
Sep. 30 Reef is party to a lawsuit for copyright violation of \)80,000. Reef’sattorney advises that it is probable Reef will lose this lawsuit. Theattorney estimates the loss at \(80,000.
Dec. 31 Reef estimated warranty expense on sales for the second half of the yearof \)510,000 at 2%.
Requirements
1. Journalize required transactions, if any, in Reef ’s general journal. Explanations arenot required.
2. What is the balance in Estimated Warranty Payable assuming a beginning balanceof $0?
List the required employee payroll withholding deductions, and provide the tax rate for each.
Many small businesses have to squeeze down costs any way they can just to survive. One way many businesses do this is by hiring workers as “independent contractors” rather than as regular employees. Unlike rules for regular employees, a business does not have to pay Social Security (FICA) taxes and unemployment insurance payments for independent contractors. Similarly, it does not have to withhold federal, state, or local income taxes or the employee’s share of FICA taxes. The IRS has a “20-factor test” that determines whether a worker should be considered an employee or a contractor, but many businesses ignore those rules or interpret them loosely in their favor. When workers are treated as independent contractors, they do not get a W-2 form at tax time (they get a 1099 instead), they do not have any income taxes withheld, and they find themselves subject to “self-employment” taxes, by which they bear the brunt of both the employee’s and the employer’s shares of FICA taxes.
Requirements
If a business takes an aggressive position—that is, interprets the law in a very slanted way—is there an ethical issue involved? Who is hurt?
Curtis Company is facing a potential lawsuit. Curtis’s lawyers think that it is reasonably possible that it will lose the lawsuit. How should Curtis report this lawsuit?
Coltrane Company has a \(5,000 note payable that is paid in \)1,000 instalments over five years. How would the portion that must be paid within the next year be reported on the balance sheet?
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