Exercise 1:

Illustrate the effects on the accounts and financial statements of recording the following selected transactions of Sid's Leather Co.:

Part 1

Apr. 15.

Paid the first installment of the estimated income tax for the current fiscal year ending December 31, $29,000. No entry had been made to record the liability.

Part 2

Dec. 31.

Recorded the estimated income tax liability for the year just ended and the deferred income tax liability, based on the April 15 transaction and the following data:

Income tax rate                                     40%
Income before income tax                       $300,000
Taxable income according to tax return    $280,000

Assume that the June 15 and September 15 installments of $29,000 were also paid.

Exercise 2:

Fungus Audio Works Inc. warrants its products for one year. The estimated product warranty is 3% of sales. Assume that sales were $680,000 for January. In February, a customer received warranty repairs requiring $4,200 of parts.

a. Determine the warranty liability at January 31, the end of the first month of the current year.

b. What accounts are decreased for the warranty work provided in February?

Exercise 3:

According to a summary of the payroll of Apline Publishing Co., $460,000 was subject to the 7.5% FICA tax. Also, $39,000 was subject to state and federal unemployment taxes.

a. Calculate the employer's payroll taxes, using the following rates: state unemployment, 4.3%; federal unemployment, 0.8%.

b. Illustrate the effects on the accounts and financial statements of recording the accrual of payroll taxes.