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).

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.

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	$     11,250
Feb 5	Accounts Payable		$   11,250
Feb 6	Inventory	$           300
Feb 6	Cash		$        300
Feb 10	Accounts Receivable	$     19,200
Feb 10	Sales Revenue		$   19,200
Feb 10	Cost of Goods Sold	$        6,545		(35*90)+(85*77)
Feb 10	Inventory		$     6,545
Feb 15	Unearned Revenue	$        4,900
Feb 15	Sales Revenue		$     4,900
Feb 15	Cost of Goods Sold	$        2,310		30*77
Feb 15	Inventory		$     2,310
Feb 15	Inventory	$        1,155		15*77
Feb 15	Cost of Goods Sold		$     1,155
Feb 15	Sales Return and Allowances	$        2,400		15*160
Feb 15	Accounts Receivable		$     2,400
Feb 16	Wages Expense	$        1,900
Feb 16	Cash		$     1,900
Feb 17	Accounts Payable	$     11,250
Feb 17	Cash		$   11,025
Feb 17	Inventory		$        225	11250*2%
Feb 18	Allowance for doubtful accounts	$        1,550
Feb 18	Accounts Receivable		$     1,550
Feb 19	Accounts Payable	$        2,400
Feb 19	Rent Expense	$        2,400
Feb 19	Cash		$     4,800
Feb 19	Cash	$        8,980
Feb 19	Sales Discounts	$           120		6000*2%
Feb 19	Accounts Receivable		$     9,100
Feb 26	Accounts Receivable	$           510
Feb 26	Allowance for doubtful accounts		$        510
Feb 26	Cash	$           510
Feb 26	Accounts Receivable		$        510
Feb 27	Utilities Expense	$           500
Feb 27	Accounts Payable		$        500
Feb 28	Dividend	$           550
Feb 28	Cash		$        550
Feb 29a	Wages Expense	$        1,900
Feb 29a	Wages Payable		$     1,900
Feb 29b	Bad Debt Expense	$           850
Feb 29b	Allowance for doubtful accounts		$        850
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		$   11,300
	Addition		$   19,710
	Reduction		$ -15,260
	Ending Accounts Receivable		$   15,750
	Allowane for Doubtful Accounts	8%	$     1,260
	Beginning Balance Allowance		$   -1,450
	Less: Written Off		$     1,550
	Add: Collected		$       -510
	Less: Ending Balance		$     1,260
	Bad Debt Expense to be booked		$        850