carabiner co sold 28 000 annual magazine subscriptions for 40 during december 2012 t 417730

Carabiner Co. sold 28,000 annual magazine subscriptions for $40 during December 2012. These new subscribers will receive monthly issues, beginning in January 2013. In addition, the business had taxable income of $130,000 during 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

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A business issued a 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

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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

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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

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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

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? (3) Total earnings, $314,400

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

Calculate the amounts omitted in lines (1), (3), (7), and (11).

E8 11

Recording payroll taxes

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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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