Question

Please examine the current liabilities on the Balance Sheet and identify those that are definitely determinable and those that are probably estimates. Does the corporation have any liabilities with respect to pensions, vacation pay, or warranties? Please see the notes to the financial statements for details with respect to these liabilities. Please let us know what a contingent liability is and if your company has any contingent liabilities.

Part 2

Employees are subject to taxes withheld from their paychecks. Please indicate the federal taxes that are withheld from most employee paychecks. Please let us know why deductions from employees earnings are classified as liabilities for the employer.

Responses to Instructor

Please check your thread for questions or comments from me and be sure to provide a comprehensive response, as requested.

Responses to Classmates

When responding to classmates this week, please select two of the taxes listed below and let them know whether those taxes generally apply to employees only, employers only, or both employees and employers:

Federal Income Tax

Medicare Tax

Social Security Tax

Federal Unemployment Compensation Tax

State Unemployment Compensation Tax

Answer 1

Two principal categories of current liabilities are definitely determinable liabilities and estimated liabilities. Although definitely determinable liabilities, such as accounts payable , notes payable, dividends payable , accrued liabilities and the current portion of long term debt , can be measured exactly the accountant must still be careful not to overlook existing liabilities in these categories. Estimated liabilities such as liabilities for income taxes, property taxes and product warranties definitely exist, but the amounts must be estimated and recorded properly.

Pension : As of the time of publication, U.S. law requires companies that fund pensions to list the pension's net value as an asset or liability on the balance sheet. If the business has an unfunded pension liability, it is listed as a net liability under "pensions" on the balance sheet.

Vacation-pay Liability : This liability arises when employees do not take their vacation during an accounting period. Even though they have not taken their vacation, they are still entitled to them, and the result is a future liability.

Warranties : When a company sells a product, it sometimes offers its customers a warranty of a certain number of years. To be consistent with the matching principle, companies, at the time of the sale, must estimate an amount that must be allocated to the costs associated with the warranties. Most companies will use a historical or industry average to estimate its warranty cost. The estimated warranty cost or liability will be allocated to the estimated warranty liability.

A contingent liability is a liability that may occur depending on the outcome of an uncertain future event. A contingent liability is recorded if the contingency is likely and the amount of the liability can be reasonably estimated. The liability may be disclosed in a footnote on the financial statements unless both conditions are not met.

Part 2

The Federal Insurance Contributions Act (FICA) is the federal law requiring to withhold three separate taxes from the wages paid to employees. FICA is comprised of the following taxes:

1. 6.2 percent Social Security tax;
2. 1.45 percent Medicare tax
3. Since 2013, a 0.9 percent Medicare surtax when the employee earns over $200,000.

The deductions from employee earnings are liabilities because the company must pay these amounts to the Government.

Responses to Classmates:

1. Medicare Tax : The Medicare tax rate is 1.45% of an employees wages. Medicare is an employee and employer tax. Employer must withhold 1.45% from employee's pay and must make a matching contribution of 1.45%.

2. Federal Unemployment Compensation Tax: is generally applicable to employers only. The Federal Unemployment Tax Act imposes a payroll tax on employers , based on the wages they pay to their employees. Employers do not withhold the Federal Unemployment Compensation Tax from an employees wages.