1. FICA PAYROLL TAXES:

The FICA payroll tax is involuntary, meaning you have no say in whether it comes out of your paycheck or how much comes out. The original act was enacted in 1937 to fund Social Security so that workers would have retirement in their older age. Thirty years later, they added an additional tax to fund Medicare, designed to cover workers medical costs in their retirement.

The original FICA tax rate was 2% (half paid by employees and the other half paid by employers). The FICA rate has steadily increased since that time. For most of the 2000's, the tax rate has been 15.3%, half paid by the employees (7.65%) and another 7.65% that is matched by the employers. Given FICAs original purpose and our current Social Security and Medicare system, does this increase since 1937 seem reasonable or is it not enough? Explain. (6pts)

2. CONTINGENT LIABILITIES:

Recently, a class action lawsuit was filed against General Motors (GM) accusing GM of using inferior materials and a faulty manufacturing process that resulted in poor quality wheels on its 20152019 Chevrolet Corvette sport cars.

The 18 parties who filed the lawsuit state that wheels on their Corvettes have bent or cracked even though their cars have low mileage. Complaints have also been filed with the National Highway Traffic Safety Administration (NHTSA) and the Better Business Bureau (BBB.)

The lawsuit alleges that the Corvettes wheels are prone to deforming and cracking, without impact damage. The lawsuit also alleges that the wheels were made with materials that are cast, rather than forged, and are of insufficient strength, and in an insufficient quantity, to withstand the torque and power input from the drivetrain. Car and Driver magazines review of the 2017 Corvette Grand Sport was also mentioned in the lawsuit filing. Car and Driver reported that it had to replace or repair six damaged wheels during the 40,000-mile test period that the car was used in its review.

GM has responded that there are no safety recalls on the vehicles and that the problems with the wheels are due to normal wear and tear. GM alleges that damage can occur from a car wheel hitting a pothole and or other road hazard even though there may not be visible damage to the tire itself. (3pts each)

1. What are the three ways that a contingent liability can be treated in the financial statements? Include the name and accounting treatment for each. [Note: internet sources are not consistent with our textbook, so beware!]
2. What conditions would need to exist for GM to NOT report this lawsuit as a contingent liability? (Include the appropriate likelihood category in your response.)
3. How do you think GM should treat this lawsuit in its financial statements? (Go beyond just the likelihood category and explain your reasoning. This is truly just your opinion, but you should be able to support your answer.)