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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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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 鈥渋ndependent contractors鈥� 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鈥檚 share of FICA taxes. The IRS has a 鈥�20-factor test鈥� 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 鈥渟elf-employment鈥� taxes, by which they bear the brunt of both the employee鈥檚 and the employer鈥檚 shares of FICA taxes.
Requirements
If a business takes an aggressive position鈥攖hat is, interprets the law in a very slanted way鈥攊s there an ethical issue involved? Who is hurt?
What is contingent liability? Provide some examples of contingencies.
The following transactions of Belkin Howe occurred during 2018:
Apr. 30 Howe is party to a patent infringement lawsuit of \(230,000. Howe鈥檚 attorney is certain it is remote that Howe will lose this lawsuit.
Jun. 30 Estimated warranty expense at 3% of sales of \)390,000.
Jul. 28 Warranty claims paid in the amount of \(6,300.
Sep. 30 Howe is party to a lawsuit for copyright violation of \)90,000. Howe鈥檚 attorney advises that it is probable Howe will lose this lawsuit. The attorney estimates the loss at \(90,000.
Dec. 31 Howe estimated warranty expense on sales for the second half of the year of \)520,000 at 3%.
Requirements
1. Journalize required transactions, if any, in Howe鈥檚 general journal. Explanations are not required.
2. What is the balance in Estimated Warranty Payable assuming a beginning balance of $0?
On January 1, Irving Company purchased equipment of \(280,000 with a long-term note payable. The debt is payable in annual installments of \)56,000 due on December 31 of each year. At the date of purchase, how will Irving Company report the note payable?
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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