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Unformatted text preview: CHAPTER 8 DISCUSSION QUESTIONS 1. The accounting for payroll-related liabilities is more complicated than for other current li- abilities because employers are required to withhold various taxes and other amounts from employees’ salaries and remit these amounts to the proper authorities. The ac- counting for all these withholdings requires recognizing several liability and expense ac- counts. 2. If the payroll period does not coincide with the last day of a company’s reporting year, the company must prepare an adjusting entry for salaries and wages expense and for the salaries and wages payable for the amount earned after the end of the last payroll period up to the close of the report- ing year. In other words, if employees were paid through Friday, December 26, but work on Monday, Tuesday, and Wednesday (December 29 through 31) without being paid until Friday, January 2, then the wage and salary expense and the wage and salary liability must be included in an adjust- ing entry on December 31 in order to have these amounts reflected in the company’s financial statements for the calendar year ended December 31. 3. Certain fringe benefits that accrue over an employee's term of employment allowing the employee to take time off with pay are called compensated absences; included are vacation pay, sick pay, early retirement be- nefits, and compensated time off (i.e., in- stead of overtime pay, the employee is al- lowed to take additional vacation). 4. Such a bonus plan increases managers’ in- centive to manipulate reported earnings. 5. A company is able to save its cash when it issues options. In addition, when the op- tions are redeemed the company is actually going to receive cash (the price at which the stock can be purchased) instead of pay cash. From an employees perspective, the hope is that the options will increase in value and be worth much more in the future than if a salary had been received. 6. The market value of the company’s stock must exceed the price at which the options were granted. When that occurs, the holder of the options can then take advantage of the increase in value. 7. Expenses are recognized when incurred. The event that creates a severance benefit is the management decision to undertake the associated business restructuring. Al- though this item relates to future payouts, it is estimated and recognized as an expense in the current period. 8. In a defined contribution plan, the amount of money set aside to pay benefits is fixed, and the benefits that will be paid are uncertain. They depend on the earnings of the contri- butions, the age of retirement, and so forth. With a defined benefit plan, the pension be- nefits that will be paid are fixed, meaning re- tired workers will get a pension benefit that is based on factors such as the number of years worked....
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- Spring '08