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 $ 19,220 Unearned Revenue (40 units) $ 4,550   
  Accounts Receivable $ 10,250 Accounts Payable (Jan Rent) $ 1,700   
  Allowance for Doubtful Accounts $ (1,100) Notes Payable $ 15,500   
  Inventory (45 units) $ 3,600 Contributed Capital $ 5,400   
Retained Earnings – Feb 1, 2012 $ 4,820   

• WWC establishes a policy that it will sell inventory at $175 per unit.
• In January, WWC received a $4,550 advance for 40 units, as reflected in Unearned Revenue.
• WWC’s February 1 inventory balance consisted of 45 units at a total cost of $3,600.
• 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 $1,900 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 $1,900 balance to a note, and Kit Kat signs a 6-month note, at 12% annual interest. The principal and all interest will be due and payable to WWC on August 1, 2012.

02/02

WWC paid a $700 insurance premium covering the month of February. The amount paid is recorded directly as an expense.

02/05

An additional 150 units of inventory are purchased on account by WWC for $9,000 – terms 2/15, n30.

02/05

WWC paid Federal Express $600 to have the 150 units of inventory delivered overnight. Delivery occurred on 02/06.

02/10

Sales of 120 units of inventory occurred during the period of 02/07 – 02/10. The sales terms are 2/10, net 30.

02/15

The 40 units that were paid for in advance and recorded in January are delivered to the customer.

02/15

25 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 $2,600.
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 $1,200.
02/19

$3,400 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 $8,400 of customers’ Accounts Receivable. Of the $8,400, the discount was taken by customers on $5,500 of account balances; therefore WWC received less than $8,400.

02/26

WWC recovered $440 cash from the customer whose account had previously been written off (see 02/18).

02/27

A $700 utility bill for February arrived. It is due on March 15 and will be paid then.

02/28 WWC declared and paid a $400 cash dividend.

Adjusting Entries:

02/29

Record the $2,600 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).

Prepare all February journal entries and adjusting entries. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

- Record the cost of goods sold for 120 units

- Record the unearned revenue for 40 units paid in advance

-Record the cost of goods sold for 40 units

-Record the 25 units of inventory returned

- Record the sales return and allowance

- WWC pays the first two weeks wages to the employees. The total paid is $2600

-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.

-Wrote off a customers account in the amount of $1200

-$3400 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.

- Collected $8400 of customers Accounts Receivable. Of the $8400, the discount was taken by customers on $5500 of account balances ; therefore WWC received less than $8400

-Record the entry to reversal of allowance for doubtful accounts

-Record the entry to recovered $440 cash from the customer

-A $700 utility bill for February arrived. It is due on March 15th and will be paid then.

-WWC declared and paid a $400 cash dividend

-Record the $2600 employee salary that it owed but will be paid March 1st

-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.

-Record February interest expense accrued on the note payable

- Record one month's interest earned Kit Kats note (see 02/01)

Answer 1

ANSWER:

Books of Wally's Widget Company:

Journal Entries:

Date	Account Titles	Debit	Credit
2012		$	$
02/01	Notes Receivable	1,900
	Accounts Receivable		1,900
02/02	Insurance Expense	700
	Cash		700
02/05	Inventory $ ( 9,000 x 98% + 600)	9,420
	Accounts Payable		8,820
	Cash		600
02/10	Accounts Receivable ( 120 x $ 175)	21,000
	Sales		21,000
	Cost of Goods Sold ( 3,600 + 75 x $ 9,420/150)	8,310
	Inventory		8,310
02/15	Unearned Revenue	4,550
	Sales		4,550
	Cost of Goods Sold ( 40 x $ 62.8)	2,512
	Inventory		2,512
02/15	Sales Returns and Allowances ( 25 x $ 175)	4,375
	Accounts Receivable		4,375
	Inventory ( 25 x $ 62.8)	1,570
	Cost of Goods Sold		1,570
02/16	Wages Expense	2,600
	Cash		2,600
02/17	Accounts Payable	8,820
	Cash		8,820
02/18	Allowance for Doubtful Accounts	1,200
	Accounts Receivable		1,200
02/19	Cash	8,290
	Sales Discounts ( $ 5,500 x 2%)	110
	Accounts Receivable		8,400
02/26	Accounts Receivable	440
	Allowance for Doubtful Accounts		440
	Cash	440
	Accounts Receivable		440
02/27	Utilities Expense	700
	Accounts Payable		700
02/28	Dividends	400
	Cash		400

Adjusting Entries:

Date	Account Titles	Debit	Credit
		$	$
02/29	Wages Expense	2,600
	Wages Payable		2,600
	Bad Debts Expense	3,090
	Allowance for Doubtful Accounts		3,090
	Interest Expense ( $ 15,500 x 1% )	155
	Interest Payable		155
	Interest Receivable ( $ 1,900 x 1%)	19
	Interest Revenue		19