Question

On whom is the FICA tax levied? What does the FICA tax finance? What are the advantages and disadvantages of issuing bonds rather than common stock? Contingent Liabilities The CEO of Smith & Sons, Inc., negotiated with its principal supplier of raw materials to purchase 10,000 units for a total price of $100,000. The units are to be delivered in 90 days. The CEO is uncertain whether she should record the purchase commitment on the company's balance sheet as a liability or not. She asks for your advice. What would you advise her?

Answer 1

Answering the above Questions (One by One );

The above Parts are subdivided into A, B & C.

     A

.The FICA (Federal Insurance Contributions Act) Tax is a U.s law that creates (Levied) a payroll tax deduction on payments to employees as Salaries (wages) and as well as employer also to fund in the form of Social Security and medical Programs.Total Tax of 15.3% (divided half of to Employee & Employer) from which Social security Tax payment is 6.2% & for Medical Program of 1.45% by both Employer and Employee.

The FICA tax finance does the Tax revenue(Social revenue) on that goes to fundig the US governments Social security Trusts for Employee benefits.Other Revenue (Medical Care),that goes into the medical Program which is the federal program that fund old American medical care costs and same way used to pay for hospital & Medical Care Costs incurred by Present medical beneficiaries.

     B.

The Issuing of bonds is much Cheaper than issuing of shares.when a Company issue new shares , the value of existing shares is diluted otherwise it will get tax benefits on issue of bonds.

Advantages;

1Retaining Earnings ;

Issuing bonds allows a company to access company much faster than If it had to earn and save profits.

2.Selling assets;

To selling of Assets ,first the company have assets willing to sell. Now-a -days,the growing companies might desire to borrow rather than to sell because in the process acquiring ,not to sell.

But when company sell assets ,the gain on that will taxed otherwise get benefit of tax of loss on sale.

3.Issuing Shares;

The Issuing of bonds is much Cheaper than issuing of shares.when a Company issue new shares , the value of existing shares is diluted .The Shareholders take high risk, so want higher return compared to interest on bonds .

4.Issuing Bonds;

Borrowing money compared to other above activities,reduce the amount of taxes the company owes.whatever interest paid to investors treated as expenses in the books of Company.

Disadvantages:

1.Normally ,when a company borrows money, has to pay interest on that to lenders on regular basis

2.For a Company Bonds can offer cheap but potentially risk to access capital.

C.

A Contingent Liability is a potential (Possible) liability that may occur depending on outcome of uncertain future event. The Contingent liability is recorded in the books of accounts if it is Probable and an Estimated amount is reasonable.

So,on the basis above ,the negotiation with supplier is not recorded(recognized) as liability because the units of goods are to be delivered in 90 days (it is an uncertain future event )

But, she(CEO) has to be shown the Negotiation with supplier as Foot Note under the Balancesheet.

THANK YOU!