The Widget Company Is A Small Company With Only A Few Employ ✓ Solved

The Widget Company Is A Small Company With Only A Few Employee

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 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, layer at base $19, layer at base $3, 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

Paper For Above Instructions

The Widget Company, a small corporation focused on the purchasing and resale of widgets, operates under a straightforward financial accounting system and adheres to generally accepted accounting principles (GAAP). This paper details its financial practices, the implications of its accounting methods, and an analysis of its fiscal data as it pertains to reporting and overall financial health.

Overview of Accounting Principles

At the core of the accounting practices at Widget Company is the accrual accounting system. Accrual accounting allows for the recognition of revenue and expenses when they are incurred, rather than when cash is exchanged. This method provides a clearer picture of company performance over time.

The company employs the $-Value LIFO (Last In, First Out) method for inventory valuation. This approach assumes that the most recently produced items are sold first, which is especially advantageous in times of inflation as it can defer tax liabilities by lowering reported income. In addition, FIFO (First In, First Out) is used for valuing office supplies, aligning with the typical flow of inventory in retail scenarios.

Inventory Valuation

As of December 31, 2010, Widget Company reported a product inventory balance of $62,754. The ending inventory was evaluated based on several crucial figures. The LIFO index has gradually increased, culminating in a value of 1.1825 at the end of 2010, reflecting a steady inflation of inventory costs since the base year 2006. In contrast, FIFO values the ending inventory at $72,000, indicating a different recognition of inventory costs.

Furthermore, the allowance for doubtful accounts is calculated at 2% of ending accounts receivable. This conservative approach acknowledges the potential risk of uncollectible accounts and ensures a more realistic view of net receivables.

Depreciation Methods

Widget Company utilizes the straight-line method for depreciation of both its building and equipment. The building, purchased for $550,000 in early 2003, has a useful life of 25 years and a salvage value of zero. Thus, the annual depreciation expense is set at $22,000. This method provides consistency in expense recognition throughout the building's life, impacting the company’s profit margin directly.

Employee Compensation and Taxes

Compensation at Widget Company includes various deductions and tax implications. The healthcare deduction is noted to be 5% of gross wages, matched by a similar contribution from the employer under fringe benefits. Taxation on employee wages includes a federal income tax of 9% and a state income tax of 4%. These percentages are calculated on taxable wages after accounting for healthcare deductions.

Unemployment taxes also play a role in overall payroll accounting, with state taxes set at 7% on the first $12,000 of yearly wages, while federal unemployment taxes, after credits, are 6.2% on the first $7,000 of wages. The company’s adherence to these regulations reflects a commitment to maintaining compliance with employment laws.

Debt Obligations

The company carries both an interest-bearing note and an installment loan. The note, amounting to $100,000 with a 10% interest rate, requires semi-annual payments. The accrued interest, noted to be $2,500, illustrates the company's ongoing financial obligations. Additionally, the 9% installment loan necessitates annual payments of $44,584, structured to manage cash flow effectively.

The management of these financial liabilities is crucial for sustaining operational efficiency, allowing Widget Company to balance its investments in inventory and operational expenditures while ensuring it can meet its debt obligations.

Conclusion

In summary, the Widget Company operates with an efficient financial accounting information system underpinned by GAAP. Through strategic inventory valuation methods such as LIFO and FIFO and diligent management of depreciation and employee taxes, the company maintains a solid financial foundation. Understanding these elements is vital for investors and stakeholders as they assess the company’s financial position and make informed decisions moving forward.

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