Question

Wally’s Widget Company (WWC) incorporated near the end of 2011. Operations began in January of 2012. WWC prepares adjusting entries and financial statements at the end of each month. Balances in the accounts at the end of January are as follows: Cash $ 21,470 Unearned Revenue (25 units) $ 5,300 Accounts Receivable $ 12,500 Accounts Payable (Jan Rent) $ 3,200 Allowance for Doubtful Accounts $ (1,850) Notes Payable $ 15,500 Inventory (30 units) $ 2,400 Contributed Capital $ 6,900 Retained Earnings – Feb 1, 2012 $ 3,620 • WWC establishes a policy that it will sell inventory at $165 per unit. • In January, WWC received a $5,300 advance for 25 units, as reflected in Unearned Revenue. • WWC’s February 1 inventory balance consisted of 30 units at a total cost of $2,400. • WWC’s note payable accrues interest at a 12% annual rate. • WWC will use the FIFO inventory method and record COGS on a perpetual basis. February Transactions 02/01 Included in WWC’s February 1 Accounts Receivable balance is a $1,700 account due from Kit Kat, a WWC customer. Kit Kat is having cash flow problems and cannot pay its balance at this time. WWC arranges with Kit Kat to convert the $1,700 balance to a note, and Kit Kat signs a 6-month note, at 9% annual interest. The principal and all interest will be due and payable to WWC on August 1, 2012. 02/02 WWC paid a $600 insurance premium covering the month of February. The amount paid is recorded directly as an expense. 02/05 An additional 170 units of inventory are purchased on account by WWC for $12,750 – terms 2/15, n30. 02/05 WWC paid Federal Express $510 to have the 170 units of inventory delivered overnight. Delivery occurred on 02/06. 02/10 Sales of 140 units of inventory occurred during the period of 02/07 – 02/10. The sales terms are 2/10, net 30. 02/15 The 25 units that were paid for in advance and recorded in January are delivered to the customer. 02/15 20 units of the inventory that had been sold on 2/10 are returned to WWC. The units are not damaged and can be resold. Therefore, they are returned to inventory. Assume the units returned are from the 2/05 purchase. 02/16 WWC pays the first 2 weeks wages to the employees. The total paid is $2,700. 02/17 Paid in full the amount owed for the 2/05 purchase of inventory. WWC records purchase discounts in the current period rather than as a reduction of inventory costs. 02/18 Wrote off a customer’s account in the amount of $1,950. 02/19 $6,400 of rent for January and February was paid. Because all of the rent will soon expire, the February portion of the payment is charged directly to expense. 02/19 Collected $9,900 of customers’ Accounts Receivable. Of the $9,900, the discount was taken by customers on $7,500 of account balances; therefore WWC received less than $9,900. 02/26 WWC recovered $590 cash from the customer whose account had previously been written off (see 02/18). 02/27 A $900 utility bill for February arrived. It is due on March 15 and will be paid then. 02/28 WWC declared and paid a $850 cash dividend. Adjusting Entries: 02/29 Record the $2,700 employee salary that is owed but will be paid March 1. 02/29 WWC decides to use the aging method to estimate uncollectible accounts. WWC determines 8% of the ending balance is the appropriate end of February estimate of uncollectible accounts. 02/29 Record February interest expense accrued on the note payable. 02/29 Record one month’s interest earned Kit Kat’s note (see 02/01).

Answer 1

In the books of Wally's Widget Company:

Transaction	Account Titles	Debit	Credit
2012		$	$
Feb 1	Note Receivable	1,700
	Account Receivable		1,700
Feb 2	Insurance Expense	600
	Cash		600
Feb 5	Inventory ( 170 x $ 78)	13,260
	Accounts Payable		12,750
	Cash		510
Feb 10	Accounts Receivable ( 140 x $ 165)	23,100
	Sales		23,100
Feb 10	Cost of Goods Sold ( 30 x $ 80 + 110 x $ 78)	10,980
	Inventory		10,980
Feb 15	Unearned Revenue	5,300
	Sales Revenue		5,300
Feb 15	Cost of Goods Sold ( 25 x $ 78)	1,950
	Inventory		1,950
Feb 15	Sales Returns and Allowances ( 20 x $ 165)	3,300
	Accounts Receivable		3,300
Feb 15	Inventory ( 20 x $ 78)	1,560
	Cost of Goods Sold		1,560
Feb 16	Salaries & Wages Expense	2,700
	Cash		2,700
Feb 17	Accounts Payable	12,750
	Purchase Discount		255
	Cash		12,495
Feb 18	Allowance for Doubtful Accounts	1,950
	Accounts Receivable		1,950
Feb 19	Rent Expense	3,200
	Prepaid Rent	3,200
	Cash		6,400
Feb 19	Cash	9,750
	Sales Discount	150
	Accounts Receivable		9,900
Feb 26	Accounts Receivable	590
	Allowance for Doubtful Accounts		590
Feb 26	Cash	590
	Accounts Receivable		590
Feb 27	Utilities Expense	900
	Accounts Payable		900
Feb 28	Dividends	850
	Cash		850

Adjusting Entries:

Adjustment #	Account Titles	Debit	Credit
Feb 29		$	$
a.	Salaries and Wages Expense	2,700
	Salaries and Wages Payable		2,700
b.	Bad Debts Expense *	1,010
	Allowance for Doubtful Accounts		1,010
c.	Interest Expense ( $ 15,500 x 12 % x 1 / 12 )	155
	Interest Payable		155
d.	Interest Receivable ( $ 1,700 x 9 % x 1 / 12)	12.75
	Interest Revenue		12.75

Workings:

Accounts Receivable:

Beginning Balance	12,500	Cash	9,750
Sales	23,100	Sales Discount	150
Allowance for Doubtful Accounts	590	Allowance for Doubtful Accounts	1,950
		Sales Returns and Allowances	3,300
		Cash	590
		Note Receivable	1,700
		Ending Balance	18,750
	36,190		36,190

Allowance for Doubtful Accounts:

Accounts Receivable	1,950	Beginning Balance	1.,850
		Accounts Receivable	590
		Bad Debt Expense * ( Balancing Amount)	1,010
Ending Balance ( $ 18,750 x 8 %)	1,500
	3,450		3,450