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). Prepare the financial statements at the end of February

Answer 1

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Date	Account	Debit	Credit
Feb 1	Notes Receivable	$    1,700
Feb 1	Accounts Receivable		$     1,700
Feb 2	Insurance Expense	$        600
Feb 2	Cash		$         600
Feb 5	Inventory	$ 12,750
Feb 5	Accounts Payable		$   12,750
Feb 6	Inventory	$        510
Feb 6	Cash		$         510
Feb 10	Accounts Receivable	$ 23,100
Feb 10	Sales Revenue		$   23,100
Feb 10	Cost of Goods Sold	$ 10,980		(30*80)+(110*78)
Feb 10	Inventory		$   10,980
Feb 15	Unearned Revenue	$    5,300
Feb 15	Sales Revenue		$     5,300
Feb 15	Cost of Goods Sold	$    1,950		25*78
Feb 15	Inventory		$     1,950
Feb 15	Inventory	$    1,560		20*78
Feb 15	Cost of Goods Sold		$     1,560
Feb 15	Sales Return and Allowances	$    3,300
Feb 15	Accounts Receivable		$     3,300
Feb 16	Wages Expense	$    2,700
Feb 16	Cash		$     2,700
Feb 17	Accounts Payable	$ 12,750
Feb 17	Cash		$   12,495
Feb 17	Purchase Discount		$         255	12750*2%
Feb 18	Allowance for doubtful accounts	$    1,950
Feb 18	Accounts Receivable		$     1,950
Feb 19	Accounts Payable	$    3,200
Feb 19	Rent Expense	$    3,200
Feb 19	Cash		$     6,400
Feb 19	Cash	$    9,750
Feb 19	Sales Discounts	$        150		7500*2%
Feb 19	Accounts Receivable		$     9,900
Feb 26	Accounts Receivable	$        590
Feb 26	Allowance for doubtful accounts		$         590
Feb 26	Cash	$        590
Feb 26	Accounts Receivable		$         590
Feb 27	Utilities Expense	$        900
Feb 27	Accounts Payable		$         900
Feb 28	Dividend	$        850
Feb 28	Cash		$         850
Feb 29a	Wages Expense	$    2,700
Feb 29a	Wages Payable		$     2,700
Feb 29b	Bad Debt Expense	$    1,990
Feb 29b	Allowance for doubtful accounts		$     1,990
Feb 29c	Interest Expense	$        155		15500*12%*1/12
Feb 29c	Interest Payable		$         155
Feb 29d	Interest Receivable	$          13		1700*9%*1/12
Feb 29d	Interest Revenue		$           13
	Beginning Accounts Receivable		$   12,500
	Addition		$   23,100
	Reduction		$ -16,850
	(1700+3300+1950+9900)
	Ending Accounts Receivable		$   18,750
	Allowane for Doubtful Accounts	8%	$     1,500
	Beginning Balance Allowance		$     1,850
	Less: Written Off		$   -1,950
	Add: Collected		$         590
	Less: Ending Balance		$     1,500
	Bad Debt Expense to be booked		$     1,990

	Beginning		Feb		Final
Accounts	Debit	Credit	Debit	Credit	Debit	Credit
Cash	$       21,470			$ 13,215	$    8,255
Accounts Receivable	$       12,500		$    6,250		$ 18,750
Allowance for Doubtful Accounts		$         1,850		$        630		$    2,480
Inventory	$         2,400		$    1,890		$    4,290
Interest Receivable			$          13		$          13
Note Receivable			$    1,700		$    1,700
Unearned Revenue		$         5,300	$    5,300			$           -
Accounts Payable		$         3,200	$    2,300			$        900
Notes Payable		$       15,500				$ 15,500
Interest Payable				$        155		$        155
Wages Payable				$    2,700		$    2,700
Contributed Capital		$         6,900				$    6,900
Retained Earnings		$         3,620				$    3,620
Dividend			$        850		$        850
Sales Revenue				$ 28,400		$ 28,400
Sales Discounts			$        150		$        150
Sales Return and Allowances			$    3,300		$    3,300
Interest Revenue				$          13		$          13
Purchase Discount				$        255		$        255
Cost of Goods Sold			$ 11,370		$ 11,370
Bad Debt Expense			$    1,990		$    1,990
Insurance Expense			$        600		$        600
Interest Expense			$        155		$        155
Rent Expense			$    3,200		$    3,200
Utilities Expense			$        900		$        900
Wages Expense			$    5,400		$    5,400
Total	$       36,370	$       36,370	$ 45,368	$ 45,368	$ 60,923	$ 60,923
Income Statement
Sales Revenue	$       28,400
Less:Sales Discounts	$           -150
Less:Sales Return and Allowances	$        -3,300
Net Sales		$       24,950
Less: Cost of Goods Sold		$     -11,370
Add: Purchase Discount		$             255
Gross Profit			$ 13,835
Less: Operating Expenses
Bad Debt Expense	$         1,990
Insurance Expense	$             600
Rent Expense	$         3,200
Utilities Expense	$             900
Wages Expense	$         5,400
Total Operating Expenses			$ 12,090
Net Operating Income			$    1,745
Other income		$               13
Interest Revenue
Other Expense
Interest Expense		$           -155
Total Other Expenses			$      -142
Net Income			$    1,603
Retained Earning
Beginning Balance		$         3,620
Add: Net Income		$         1,603
Less: Dividends		$           -850
Ending Balance		$         4,373
Balance Sheet
Assets
Current Assets:
Cash		$         8,255
Accounts Receivable	$       18,750
Allowance for Doubtful Accounts	$        -2,480	$       16,270
Inventory		$         4,290
Interest Receivable		$               13
Note Receivable		$         1,700
Total Assets			$ 30,528
Liabilities
Current Liabilities:
Accounts Payable	$             900
Notes Payable	$       15,500
Interest Payable	$             155
Wages Payable	$         2,700
Total Liabilities		$       19,255
Stockholder's Equity
Contributed Capital	$         6,900
Retained Earnings	$         4,373
Total Equity		$       11,273
Total Equity and Liabilities			$ 30,528