LAB 9 – CURRENT LIABILITIES AND PAYROLL ACCOUNTING

FATA Company’s balance sheet at December 31, 2017, is presented below.

FATA COMPANY
Balance Sheet
At December 31, 2017

Cash $ 30,000 Account Payable $ 13,750

Inventory $ 30,750 Interest Payable $ 250
Prepaid Insurance $ 6,000 Notes Payable $ 50,000
Equipment $ 38,000 Owner’s Capital $ 40,750
Total Assets $ 104,750 Total Liabilities and Equities 104,750

During January 2018, the following transactions occurred. (FATA Company uses the perpetual
inventory system.)
1. FATA paid $250 interest on the note payable on January 1, 2018. The note is due December
31, 2018.
2. FATA purchased $261,100 of inventory on account.
3. FATA sold inventory for $440,000 cash, which cost $265,000. FATA also collected $28,600
in sales taxes.
4. FATA paid $230,000 in accounts payable.
5. FATA paid $17,000 in sales taxes to the state.
6. Paid other operating expenses of $30,000.
7. On January 31, 2018, the payroll for the month consists of salaries and wages of $60,000. All
salaries and wages are subject to 7.65% FICA taxes. A total of $8,900 federal income taxes are
withheld. The salaries and wages are paid on February 1.
Adjustment data:
8. Interest expense of $250 has been incurred on the notes payable.
9. The insurance for the year 2018 was prepaid on December 31, 2017.
10. The equipment was acquired on December 31, 2017, and will be depreciated on a straight-
line basis over 5 years with a $2,000 salvage value.
11. Employer’s payroll taxes include 7.65% FICA taxes, a 5.4% state unemployment tax, and an
0.8% federal unemployment tax.
Instructions (You may need to set up T-accounts to determine ending balances.)
(a) Prepare journal entries for the transactions listed above and the adjusting entries.
(b) Prepare an adjusted trial balance at January 31, 2018.