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 straightforward 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 the year of acquisition and disposition), and earnings per share. Widgets fiscal year extends from January 1 through December 31.

Additional information

Accounts receivable are 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 employees and employers.

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.

It's amortization table is:

 

Date                    Cash Payment              Interest Payment            Amort.                   Loan Balance

1/1/08                                                                                                                              200,000

12/31/08                 44,584                             18,000                      26,584                    173,416

12/31/09                 44,584                             15,607                      28,977                    144,439

12/31/10                 44,584                             13,000                      31,584                    112,855

12/31/11                 44,584                            10,157                       34,427                    78,428

12/31/12                 44,584                             7,059                        37,525                    40,903

12/31/13                 44,584                              3,681                       40,903                           0

 

Common stock issued and outstanding (December 31, 2010) consists of 47,000 shares of $1 par value.

 Trial Balance (post-closing ) December 31, 2010

Here is a trial balance prepared on December 31, 2010. It includes all accounts that you are to use. Closing entries can be made using an income summary account, or you can omit the income summary account and make closing entries directly to retained earnings.

 

1. Cash DR 210,326
   Accounts receivable DR 34,512
   Allowance for uncollectible accounts CR 690
2. Office supplies inventory DR 2,000
3. Product inventory DR 62,754
   Prepaid insurance DR 3,000
   LandDR 75,000
   Building DR 550,000
   Accumulated depreciation building CR 165,000
4. Equipment Group CR 316,000
   Accumulated depreciation equipment CR 126,400
5. Accounts payable CR 29,000
   Wages payable CR 30,000
   Federal income taxes payable CR 3,420
6. State income taxes payable CR 1,520
   Social security payable CR 4,960
   Medicare payable CR 1,160
   State unemployment tax payable CR 350
7. Federal unemployment tax payable CR 16
8. Health care payable CR 4,000
   Prepayments & deposits CR 17,500
   Interest payable CR 2,500
   Note payable CR 212,855
9. Common stock CR 47,000
10. Additional paid-in capital CR 24,000
11. Retained earnings CR 583,221
12. Dividends DR 0
    Income summary 0
13. Sales revenue 0
    Cost of goods sold expense 0
14. Utilities expense 0
    Wages expense 0
    Payroll taxes expense 0
15. Fringe benefits expense 0
16. Bad debt expense 0
    Supplies expense 0
17. Insurance expense 0
18. Depreciation expense 0
    Gain on sale 0
    Loss on sale 0
    Interest expense 0

Transactions to account for during 2011

1. 1/1Reversing entries made where appropriate.
2. 1/1 Purchased on credit and received $160,000 of product inventory.
3. 1/1 Purchased on credit and received $5,000 of office supplies inventory.
4. 1/5 Made all payments related to 4th quarter payroll.
   1/10 Paid $1,000 utility bill for 4th quarter.
5. 3/31 Sold product inventory for $320,000 on credit and shipped to customers.
   3/31 Made payments to suppliers $for 125,000.
   3/31 Receipts on account and prepayments from customers total $290,000. AR of $1,800 written off.
6. 4/1 Purchased on credit and received $185,000 of product inventory.
7. 4/1 Purchased on credit and received $3,000 of office supplies inventory.
8. 4/1 Made a $5,000 interest payment on the first loan.
   4/1 Paid dividends of 13,000
9. 4/5 Made all payments related to 1st quarter payroll. Gross wages of $65,000, income taxes wages of $61,750, social security wages of $65,000, medicare wages of $65,000, state unemployment wages of $52,000, federal unemployment wages of $49,000.
10. 4/10 Paid $1,200 utility bill for 1st quarter.
11. 5/1 Sold 80,500 shares of common stock for $140,000
12. 5/1 Purchased $5,000 insurance policy for May 1 to October 31.
13. 6/30 Sold product inventory for $280 000 on credit and shipped to customers.
    6/30 Made payments to suppliers $for 130,000.
    6/30 Receipts on account and prepayments from customers total $310,000. AR of $1,700 written off.
14. 7/1 Purchased on credit and received $165,000 of product inventory.
    7/1 Purchased on credit and received $11,000 of office supplies inventory.
    7/1 Sold equipment with an original historical cost of $20,000 for $3,000. Its depreciation table is:
15. Equipment #315
16. Date purchased May 1, 2007
17. Purchase cost $20,000
18. Salvage value $0

Year             Depreciation Expense               Accumulated Depreciation                   Book Value

2007                        2,000                                             2,000                                         18,000

 

2008                        4,000                                             6,000                                         14,000

2009                        4,000                                            10,000                                        10,000

2010                         4,000                                           14,000                                          6,000

2011                         4,000                                           18,000                                          2,000

2012                        2,000                                            20,000                                              0

 

1. 7/1 Purchased equipment (5 years useful life and 0 salvage value) for $80,000. This will be identified as Equipment #512
2. 7/5 Made all payments related to 2nd quarter payroll. Gross wages of $70,000, income taxes wages of $66,500, social security wages of $70,000, medicare wages of $70,000, state unemployment wages of $37,000, federal unemployment wages of $11,000.
3. 7/10 Paid $800 utility bill for 2nd quarter.
4. 9/30 Receipts on account and prepayments from customers total $270,000. AR of $1,600 written off.
   9/30 Sold product inventory for $487,000 on credit and shipped to customers.
   9/30 Made payments to suppliers $for 135,000.
5. 10/1 Made $5,000 interest payment on the first loan.
   10/1 Purchased on credit and received $110,000 of product inventory.
   10/1 Purchased on credit and received $5000 of office supplies inventory.
   10/1 Paid dividends of 10,000
   10/5 Made all payments related to 3rd quarter payroll. Gross wages of $60,000, income taxes wages of $57,000, social security wages of $60,000, medicare wages of $60,000, state unemployment wages of $17,000, federal unemployment wages of $5,000.
   10/10 Paid 1,100 utility bill for 3rd quarter.
   10/25 Purchased land for 60,000
6. 11/1 Purchased $6,000 insurance policy November 1 to April 30.
7. 12/31 Sold product inventory for $430,000 on credit and shipped to customers.
   12/31 Receipts on account and prepayments from customers total $330,000. AR of $1,500 written off.
   12/31 Made payments to suppliers $for 125,000.
   12/31 Made $44,584 installment payment on the second loan.

ADJUSTED ENTRIES:

12/31 Accrued for 4th quarter payroll. Gross wages of $70,000, income taxes wages of $66,500, social security wages of $70,000, medicare wages of $70,000, state unemployment wages of $9,000, federal unemployment wages of $0.
12/31 Ending product inventory of $85,000 valued at FIFO. The index value for $-Value LIFO on December 31, 2011, is 1.2333.

1. 12/31 Office supplies on hand, 500.
   12/31 Record accrued interest for loans.
   12/31 Record accrued utilities of 1,900.
   12/31 Record time passage on insurance policy.
   12/31 Record adjustment for uncollectible accounts.
2. 12/31 Prepayments still owed to customers amount to $18,000.
3. 12/31 Record depreciation for the building.
4. 12/31 Depreciation for equipment (not including #512 or #315) is $45,200.

Required:

Your assignment is to set up a journal and general ledger to account for transactions during 2011. This should all be set up in an Excel Workbook. You may use different worksheets but only one workbook. The general ledger can be comprised of a set of T- accounts.

To assist your preparation of financial statements, you should generate post-transaction (unadjusted), pre-closing (adjusted), and post-closing trial balances for each year. (A worksheet like you used in Accounting Principles 1 may be helpful.)

You should also create a set of financial statements (balance sheet, income statement, statement of cash flows, and notes to the statements) for 2011. The balance sheet should also have a comparison for 2010.

You should have notes to the financial statements as necessary but as a minimum should include significant accounting policies, current assets, depreciable assets, and long-term debt.

Finally, compose a reflective paragraph describing the concepts learned from this assignment and assess whether financial statements are easier to understand as a result of this assignment.