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	$	20,270		Unearned Revenue (30 units)	$	4,900
Accounts Receivable	$	11,300		Accounts Payable (Jan Rent)	$	2,400
Allowance for Doubtful Accounts	$	(1,450)		Notes Payable	$	15,500
Inventory (35 units)	$	3,150		Contributed Capital	$	6,100
				Retained Earnings – Feb 1, 2012	$	4,370

•	WWC establishes a policy that it will sell inventory at $160 per unit.
•	In January, WWC received a $4,900 advance for 30 units, as reflected in Unearned Revenue.
•	WWC’s February 1 inventory balance consisted of 35 units at a total cost of $3,150.
•	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 150 units of inventory are purchased on account by WWC for $11,250 – terms 2/15, n30.
02/05	WWC paid Federal Express $300 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 30 units that were paid for in advance and recorded in January are delivered to the customer.
02/15	15 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 $1,900.
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 $1,550.
02/19	$4,800 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 $9,100 of customers’ Accounts Receivable. Of the $9,100, the discount was taken by customers on $6,000 of account balances; therefore WWC received less than $9,100.
02/26	WWC recovered $510 cash from the customer whose account had previously been written off (see 02/18).
02/27	A $500 utility bill for February arrived. It is due on March 15 and will be paid then.
02/28	WWC declared and paid a $550 cash dividend.

Adjusting Entries:

02/29	Record the $1,900 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.)

Answer 1

Journal Entries for the month of February
Date	Particulars	Debit	Credit
02/01	Notes Receivable @ 9% A/c	1700
	To Accounts Receivable		1700
	(Being recevable from Kitkat converted into note)
02/02	Entry for paying insurance premium is not required as it
	is alredy booked as expenses correctly.
02/05	Inventory A/c	11250
	To Accounts Payable		11250
	(Being Invetory purchased is recoreded)
02/06	Inventory A/c	300
	To Cash/Bank		300
	(Being federal expenses are added to cost of inventory)
02/10	Accounts Receivable A/c	19200
	To Sales A/c		19200
	(Being sale of 120 units is recorded)
02/15	Unearned Revenue A/c	4900
	To Sales		4900
	(Being sale is recorded as the goods are delivered)
02/15	Sales A/c	2400
	To Accounts Receivable		2400
	(Being sales return recorded by deducting sales & receivables)
02/16	Profit & Loss A/c	1900
	To Cash		1900
	(Being entry passed for wages paid to employees)
02/17	Accounts Payable A/c	11250
	To Discount Received (11,250 x 2%)		225
	To Cash		11025
02/18	Bad Debt A/c	1550
	To Accounts Receivable		1550
	(Being accounts receivable transffered to bad debt as
	non recoverable)
02/19	Cash A/c	3100
	Discount allowed A/c	6000
	To Accounts Receivable		9100
	(Being customer receipt is recorded with discount)
02/26	Cash A/c	510
	To Bad Debt		510
	(Being recovery from customer is recorded)
02/27	Utility expenses A/c	510
	To Utility expenses payable		510
	(Being expenses booked as payable since will be paid in
	march)
02/28	Dividend A/c	550
	To Cash		550
	(Being dividend paid in cash)
02/29	Salary A/c	1900
	To Salary Payable		1900
	(Being salary is recorded)
02/29	Allowance for doubtful debt A/c	1260
	To Accounts Receivable		1260
	(Being allowance for doubtful debt is recorded)
	Balance of Accounts receivable
	Opening	11300
	Add: Account receivabe for sales	19200
	Less: Converted in Noets	1700
	Less: Received	9100
	Less: Sales Returned	2400
	Less: Non recoverable	1550
	Closing Balance	15750
	8% of closing balance	1260
02/29	Profit & Loss A/c	155
	To Interest Payable (15500 x 1%)		155
	(Being interest of feb is recorded)
02/29	Profit & Loss A/c	12.75
	To Interest earned (1700*9%*1/12)		12.75
	(Being interest on note receivable Is recorded)