T- accounts and worksheet | Accounting 215

The Widget Company is a small company with only a few employees. Its line of business is to purchase several items from a line of widgets and resale them to other companies. The Company owns one small shop with two rooms, one for sales and office work, and one for product receiving and shipping. The company is owned by a group of investors and it is organized as a corporation.

Widget Company uses a straight-forward financial accounting information system. Of course, accrual accounting is used. Other generally accepted accounting principles used are the $-Value LIFO of valuing product inventory, FIFO for valuing supplies, the straight-line depreciation method for matching the cost of long-term assets to periods of use (half year of depreciation in year of acquisition and disposition), and earnings per share. Widget’s fiscal year extends from January 1 through December 31.

Additional information:

Accounts receivable is recorded at gross. The Allowance for doubtful accounts is computed at 2% of ending accounts receivable. The Office supplies inventory is valued according to FIFO.

The Product inventory balance of 62,754 on December 31, 2010 is based on the following information:

$-Value LIFO index at January 1, 2006      1.0000

$-Value LIFO index at December 31, 2006     1.0425

$-Value LIFO index at December 31, 2007     1.0750

$-Value LIFO index at December 31, 2008     1.0675

$-Value LIFO index at December 31, 2009     1.1400

$-Value LIFO index at December 31, 2010     1.1825

Ending inventory valued at FIFO    $72,000

Ending inventory valued at base     $60,888

Base layer     $35,200

2006 layer at base    $19,250

2009 layer at base      $3,000

2010 layer at base      $3,438

Ending inventory at $-Value LIFO    $62,754

Prepaid insurance is for a six-month policy that expires on April 30, 2011.

The sole Building was purchased in early 2003 for $550,000. At that time, the useful life was expected to be 25 years, and the eventual salvage value was expected to be $0. After a half year of depreciation in 2003, seven years of straight-line depreciation have been recorded at $22,000 per year.

Equipment is recorded using straight-line depreciation.

Accounts payable is comprised of $28,000 owed to various artisans for credit purchases, and $1,000 of accrued utilities.

Wages: A healthcare deduction from employee paychecks is computed at 5% of gross wages. The Widget Company contributes an additional 5% of gross wages (record under Fringe Benefit Expense). 

Federal income taxes average 9% and state income taxes average 4% of income taxable wages (deductions for healthcare are not taxable for federal or state income tax purposes). 

State unemployment taxes are 7% on the first $12,000 of yearly accumulated wages. Federal unemployment taxes are 6.2% (credit of 5.4% granted for state unemployment taxes) on the first $7,000 of yearly accumulated wages. For social security, the tax rate on employees is 4.2%, and on employers is 6.2%. The Medicare tax rate is 1.45% on both employee and employer.

Prepayments and deposits are from customer deliveries that are to be made in 2011.

Note Payable: There are two loans outstanding. One is an interest-bearing note of $100,000, due on October 1, 2014. The annual interest rate is 10%, and semi-annual interest payments are made on April 1 and October 1 of each year. Accrued interest of $2,500 is for three months.

The second is for a 9% installment loan, with annual installments of $44,584 is due on December 31 of each year. The last scheduled payment was made. Its amortization table is:

Cash   Interest    Loan

Date    Payment  Expense  Amort.  Balance