Chapter 9 Solutions to Exercises and Problems

Chapter 9 Solutions to Exercises and Problems - Chapter 9...

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Chapter 9 Reporting and Analyzing Current Liabilities QUESTIONS 1. The three questions are: (1) Who must be paid? (2) When is payment due? (3) How much is to be paid? 2. A current liability is expected to be paid within one year or the company’s operating cycle, whichever is longer. Any liability that is not current is considered to be long term. 3. An estimated liability is an obligation to make a future payment, the exact amount of which is uncertain, but it is capable of being reasonably estimated. 4. The amount of the sale for the item only is $950 ($988/1.04). 5. The combined Social Security tax rate (assuming the maximum wage amount is not yet reached) is 12.4% (6.2% + 6.2%). The maximum level of earnings [wage base on which taxes are due] for 2006 is $94,200. 6. The Medicare tax rate is 1.45%. This rate is applied to all wages earned by an employee—no maximum limit exists. 7. An employee’s gross earnings along with the number of withholding allowances that an employee claims, as well as whether they are married or single, determine the amount deducted for federal income taxes. 8. The employee is responsible for federal income taxes, state income taxes, local income taxes (if any), and the employee portion of the FICA taxes. The employer is responsible for both federal and state unemployment taxes and the employer portion of the FICA taxes. 9. An unemployment merit rating is based on an evaluation of an employer’s experience in creating or avoiding unemployment with its employees. The merit rating affects the state unemployment taxes that the employer must pay. Merit ratings cause more of the cost of unemployment benefits to be paid by those who create more unemployment. 10. The obligation to correct or replace defective products (or services) is created when the products are sold with the warranties. Even though the seller does not know with certainty when the obligation will be paid, to whom it will be paid, or the amount to be paid, past experience shows that some amount will probably be paid. If the seller can reasonably estimate that amount, the warranty liability must be reported on the balance sheet.
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11. There are no conditions in which a probable loss tied to a future event can create a liability, regardless of its probability. A liability is an obligation created by a past event, not by a future event. If a disaster occurs, the company must report the loss in the period when it occurs. 12. A A wage bracket withholding table shows for a pay period of a given length (weekly, biweekly, semimonthly, monthly), the amounts of federal income taxes to be withheld from the pay of an employee, at varying amounts of gross pay and varying numbers of withholding allowances. 13. A Single employee earning $725 with two allowances has $76 taxes withheld. Single employee earning $625 with no allowances has $81 taxes withheld.
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