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	$	18,920		Unearned Revenue (30 units)	$	4,450
Accounts Receivable	$	9,950		Accounts Payable (Jan Rent)	$	1,500
Allowance for Doubtful Accounts	$	(1,000)		Notes Payable	$	14,500
Inventory (35 units)	$	2,800		Contributed Capital	$	5,200
				Retained Earnings – Feb 1, 2012	$	5,020

•	WWC establishes a policy that it will sell inventory at $165 per unit.
•	In January, WWC received a $4,450 advance for 30 units, as reflected in Unearned Revenue.
•	WWC’s February 1 inventory balance consisted of 35 units at a total cost of $2,800.
•	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 12% 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 130 units of inventory are purchased on account by WWC for $9,750 – terms 2/15, n30.
02/05	WWC paid Federal Express $260 to have the 130 units of inventory delivered overnight. Delivery occurred on 02/06.
02/10	Sales of 100 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 $2,400.
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 $1,100.
02/19	$3,000 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 $8,200 of customers’ Accounts Receivable. Of the $8,200, the discount was taken by customers on $4,500 of account balances; therefore WWC received less than $8,200.
02/26	WWC recovered $420 cash from the customer whose account had previously been written off (see 02/18).
02/27	A $600 utility bill for February arrived. It is due on March 15 and will be paid then.
02/28	WWC declared and paid a $800 cash dividend.

Adjusting Entries:

02/29	Record the $2,400 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).

Required:

1-a.	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.)

No.	Date	General Journal	Debit	Credit
1	Feb. 1	Accounts Payable
		Accounts Receivable
2	Feb. 2	Insurance Expense
		Cash
3	Feb. 5	Inventory
		Accounts Payable
4	Feb. 6	Inventory
		Cash
5	Feb. 10a	Accounts Receivable
		Sales Revenue
6	Feb. 10b	Cost of Goods Sold
		Inventory
7	Feb. 15a	Unearned Revenue
		Sales Revenue
8	Feb 15b	Cost of Goods Sold
		Inventory
9	Feb 15c	Inventory
		Cost of Goods sold
10	Feb 15d	Sales Returns and Allowance
		Accounts Receivable
11	Feb. 16	Wages Expense
		Cash
12	Feb 17	Accounts Payable
		Cash
		Inventory
13	Feb 18	Allowance for Doubtful Accounts
		Accounts Receivable
14	Feb 19a	Accounts Payable
		Rent Expense
		Cash
15	Feb. 19b	Cash
		Sales Discounts
		Accounts Receivable
16	Feb. 26a	Accounts Receivable
		Allowance for Doubtful Accounts
17	Feb. 26b	Cash
		Accounts Receivable
18	Feb. 27	Utility Expense
		Accounts Payable
19	Feb. 28	Dividends Declared
		Cash
20	Feb. 29a	Wages Expense
		Accounts Payable
21	Feb. 29b	Bad Debt Expense
		Allowance or Doubtful Accounts
22	Feb. 29c	Interest Expense
		Interest Payable
23	Feb. 29d	Interest Receivable
		Interest Revenue

Answer 1

No.	Date	General Journal	Debit	Credit
1	Feb. 1	Accounts Payable	1700
		Accounts Receivable		1700
2	Feb. 2	Insurance Expense	600
		Cash		600
3	Feb. 5	Inventory	9750
		Accounts Payable		9750
4	Feb. 6	Inventory	260
		Cash		260
5	Feb. 10a	Accounts Receivable	16500
		Sales Revenue (165 * 100)		16500
6	Feb. 10b	Cost of Goods Sold * [(35 * 80) + (65 * 77)]	7805
		Inventory		7805
7	Feb. 15a	Unearned Revenue	4450
		Sales Revenue		4450
8	Feb 15b	Cost of Goods Sold (30 * 77)	2310
		Inventory		2310
9	Feb 15c	Inventory (15 * 77)	1155
		Cost of Goods sold		1155
10	Feb 15d	Sales Returns and Allowance	2475
		Accounts Receivable (15 * 165)		2475
11	Feb. 16	Wages Expense	2400
		Cash		2400
12	Feb-17	Accounts Payable	9750
		Cash		9555
		Inventory (9750 * 2%)		195
13	Feb-18	Allowance for Doubtful Accounts	1100
		Accounts Receivable		1100
14	Feb 19a	Accounts Payable	1500
		Rent Expense	1500
		Cash		3000
15	Feb. 19b	Cash	8110
		Sales Discounts (4500 * 2%)	90
		Accounts Receivable		8200
16	Feb. 26a	Accounts Receivable	420
		Allowance for Doubtful Accounts		420
17	Feb. 26b	Cash	420
		Accounts Receivable		420
18	Feb. 27	Utility Expense	600
		Accounts Payable		600
19	Feb. 28	Dividends Declared	800
		Cash		800
20	Feb. 29a	Wages Expense	2400
		Accounts Payable		2400
21	Feb. 29b	Bad Debt Expense **	718
		Allowance or Doubtful Accounts		718
22	Feb. 29c	Interest Expense (14500 * 12% * 1/12)	145
		Interest Payable		145
23	Feb. 29d	Interest Receivable (1700 * 12% * 1/12)	17
		Interest Revenue		17

* Calculation of cost of goods sold

Cost of opening inventory = 2800 / 35 = 80

Cost of purchased goods = (9750 + 260) / 130 = 77

As per FIFO, sales of 100 units will be made firstly from 35 units of opening stock at $80 and the remaining 65 units from the purchased units at $77 (the price includes delivery charges)

** Bad debt expense

Beginning accounts receivable	9950
Addition	16920
Reduction	-13895
Ending accounts receivable	12975
Allowance for doubtful debts (8%)	1038
Beginning allowance balance	-1000
Less: Written off	1100
Add: Collected	-420
Less: Ending balance	1038
Bad debt expense to be booked	718