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Project 2: Review of Merchandising Cycle [The following information applies to the questions displayed below.] Wally’s...

Project 2: Review of Merchandising Cycle [The following information applies to the questions displayed below.] 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 $ 20,870 Unearned Revenue (30 units) $ 5,100 Accounts Receivable $ 11,900 Accounts Payable (Jan Rent) $ 2,800 Allowance for Doubtful Accounts $ (1,650) Notes Payable $ 13,500 Inventory (35 units) $ 2,975 Contributed Capital $ 6,500 Retained Earnings – Feb 1, 2012 $ 6,195 • WWC establishes a policy that it will sell inventory at $165 per unit. • In January, WWC received a $5,100 advance for 30 units, as reflected in Unearned Revenue. • WWC’s February 1 inventory balance consisted of 35 units at a total cost of $2,975. • 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 $1,300 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 $1,300 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 $800 insurance premium covering the month of February. The amount paid is recorded directly as an expense. 02/05 An additional 190 units of inventory are purchased on account by WWC for $14,250 – terms 2/15, n30. 02/05 WWC paid Federal Express $380 to have the 190 units of inventory delivered overnight. Delivery occurred on 02/06. 02/10 Sales of 160 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 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 $2,300. 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 $1,750. 02/19 $5,600 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 $9,500 of customers’ Accounts Receivable. Of the $9,500, the discount was taken by customers on $6,500 of account balances; therefore WWC received less than $9,500. 02/26 WWC recovered $550 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 $950 cash dividend. Adjusting Entries: 02/29 Record the $2,300 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).

Journal entries needed 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 the cost of goods sold for 30 units.

Solutions

Expert Solution

DATE PARTICULARS REF. NO. DEBIT($) CREDIT($)
02/02/2012 PREPAID INSURANCE 800
CASH 800
02/05/2012 PURCHASES 14250
ACCOUNTS PAYABLE 14250
FREIGHT 380
CASH 380
02/10/2012 ACCOUNTS RECEIVABLE 26400
SALES 26400
COGS 12350
INVENTORY 12350
UNEARNED REVENUE 5100
SALES 5100
(RECOGNITION OF UNEARNED REVENUE)
02/15/2012 SALES 4125
ACCOUNTS RECEIVABLE 4125
(SALES RETURN AND CAN BE RESOLD 25 UNITS @ $165)

INVENTORY

1875
COGS 1875
(INVENTORY RETURN 25 UNITS @ $75 per unit)
02/16/2012 WAGES 2300
CASH 2300
02/17/2012 ACCOUNTS PAYABLE 14250
DISCOUNT RECEIVABLE 285
CASH 13965
02/18/2012 BAD DEBTS 1750
ACCOUNTS RECEIVABLE 1750
02/19/2012 RENT 5600
CASH 5600
02/26/2012 ACCOUNTS RECEIVABLE 550
ALLOWANCE FOR DOUBTFUL ACCOUNTS 550
CASH 550
ACCOUNTS RECEIVABLE 550
02/28/2012 DIVIDEND PAID 950
CASH 950
02/29/2012 UTILITY EXPENSES 700
UTILITY EXPENSE PAYABLE 700
02/29/2012 WAGES 2300
WAGES PAYABLE 2300
INTEREST 135
INTEREST PAYABLE 135
INTEREST RECEIVABLE 13
INTEREST 13

NOTES-1)SINCE INSURANCE EXPENSES ARE PERTAINIG TO FEBURARY , IT IS ADVANCE PAYMENT AND SHOULD NOT BE RECORDED AS EXPENSE

2)THE SALES THAT OCCURED DURING PERIOD OF 2/07/2012 TO 02/10/2012. THE SALES TERMS ARE 2/10 NET 30(MEANING IF YOU PAY WITHIN 10 DAYS THERE IS 2% DISCOUNT OR PAY FULL AMOUNT WITHIN 30 DAYS)

THE WWC SOLD 160 UNITS @ $165 =$26,400

THE BUSINESS USES FIFO , SO 35 UNITS CAME FOM BEGINNING INVENTORY(JANUARY END) AND 125 CAME FROM PURCHASES MADE ON 02/05/2012

$14,250/190=$ 75 PER UNIT PURCHAES COST OF PURCHASES MADE ON 02/05/2012

$2975 (BEGINNING INVENTORY)+$9375(125UNITS*$75)=$12,350

COGS =$12,350 FOR 160 UNITS

3.ON 02/17/2012 FULL PAYMENT IS MADE FOR PURCHASES MADE ON 02/05/2012 THEREFORE DISCOUNT WILL BE ALLOWED

4.ON 02/26/2012 ACCOUNT IS FIRST REINSTATED AND THEN CASH ENTRY IS RECORDED

5. ADJUSTING ENTRIES:a)RECORD EMPLOYEE EXPENSE $2,300 THAT IS OWED BUT PAID ON MARCH 1,2012

b)INTEREST ACCRUED ON NOTE PAYABLE: ONE MONTH'S INTEREST

$13,500*12%*1/12=$135

c) one month's Interest on KIT KAT'S Note=1300*12%*1/12=13


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