Accounting treatment for contigencies
Analyze the following independent situations.
Determine how each contingency should be treated.
a) Do not disclose.
b) Disclose the situation in the footnotes to the financial statements.
c) Expense and liability should be recorded based on estimated amounts.
It is a possible liablity for a business that depends on a upcoming circumstance. It is the outcome for an forseen circumstance. A future event must take place to pay a contingent responsibility. The possibility of an incident occuring in the future is considered while registering a contingent obligation.
Accounting treatment: Do not disclose.
If the obligation is related to an issolated occurence, the Company is not required to record it or disclose it in the financial statement's notes. Since the liability in this instance relates to an isolated incident, it is not necessary to disclose it.
Accounting treatment: Disclose the situtaion in the footnotes to the financial statements.
An obligation should be declared in the notes to the financial statements if it is probably contingent and cannot detemine the expense amount. Here, the scenario is likely, and the corporation hasn't calculated the cost of the harm. As a reult, a remark should be addee to the financial statements to explain the situation.
Accounting treatment: Expense and liability should be recorded based on estimated amounts.
If a cost anticipated and an obligation falls beneath a likely possibility, the cost and liability should be detailed utilizing the projected sum. The corporation has calculated the damage (cost) in this case to be $75,000; then should document the expense of $75,000.
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 “independent contractors” 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’s share of FICA taxes. The IRS has a “20-factor test” 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 “self-employment” taxes, by which they bear the brunt of both the employee’s and the employer’s shares of FICA taxes.
If a business takes an aggressive position—that is, interprets the law in a very slanted way—is there an ethical issue involved? Who is hurt?
Samuel Industries has three employees. Each employee earns two vacation days a month. Samuel pays each employee a weekly salary of $1,250 for a five-day workweek. Requirements
1. Determine the amount of vacation expense for one month.
2. Journalize the entry to accrue the vacation expense for the month.
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