Question

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.

Answer 1

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