Gross pay minus all deductions Which of the following is NOT one of the factors used to determine withheld income tax? Select one: a. The number of exemptions for the employee b. The filing status of the employee c. The FUTA withholding rate d. The gross pay of the employee In which of the following periods should the expense for warranty costs be recorded? Select one
The correct answer and explanation is:
Question 1: Which of the following is NOT one of the factors used to determine withheld income tax?
Correct Answer: c. The FUTA withholding rate
Explanation:
Withheld income tax from an employee’s paycheck is based on several key factors, which include:
- a. The number of exemptions for the employee: This affects how much of the employee’s income is subject to withholding. More exemptions typically mean less tax withheld.
- b. The filing status of the employee: Filing status (e.g., single, married, head of household) influences the tax rate applied.
- d. The gross pay of the employee: Gross pay is the total income before deductions, and it is the primary base for calculating income tax withholding.
However, option c, “The FUTA withholding rate,” is NOT used to determine withheld income tax.
The Federal Unemployment Tax Act (FUTA) is an employer-paid tax. Employees do not have this tax withheld from their paychecks. Employers pay FUTA taxes to fund unemployment compensation programs. Therefore, it does not influence how much income tax is withheld from an employee’s wages.
Question 2: In which of the following periods should the expense for warranty costs be recorded?
Correct Answer: The period in which the sale occurs (i.e., when the product is sold)
Explanation:
According to the matching principle in accounting, expenses should be recorded in the same period as the revenues they help generate. This principle ensures that a company’s financial statements reflect a realistic view of its profitability.
Warranty costs are considered contingent liabilities, but if they are probable and can be reasonably estimated, they must be recognized in the same period as the related product sale.
So, if a company sells a product with a warranty, the estimated warranty expense should be recorded at the time of sale, even if the actual cost (e.g., repairs or replacements) occurs in a future period. This aligns expenses with the revenue earned, providing a more accurate financial picture.