Question

Project 2: Review of Merchandising Cycle

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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	$	20,720		Unearned Revenue (25 units)	$	5,050
Accounts Receivable	$	11,750		Accounts Payable (Jan Rent)	$	2,700
Allowance for Doubtful Accounts	$	(1,600)		Notes Payable	$	13,000
Inventory (30 units)	$	2,550		Contributed Capital	$	6,400
				Retained Earnings – Feb 1, 2012	$	6,270

•	WWC establishes a policy that it will sell inventory at $170 per unit.
•	In January, WWC received a $5,050 advance for 25 units, as reflected in Unearned Revenue.
•	WWC’s February 1 inventory balance consisted of 30 units at a total cost of $2,550.
•	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 $2,000 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 $2,000 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 $750 insurance premium covering the month of February. The amount paid is recorded directly as an expense.
02/05	An additional 180 units of inventory are purchased on account by WWC for $13,500 – terms 2/15, n30.
02/05	WWC paid Federal Express $360 to have the 180 units of inventory delivered overnight. Delivery occurred on 02/06.
02/10	Sales of 150 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 $2,200.
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 $1,700.
02/19	$5,400 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 $9,400 of customers’ Accounts Receivable. Of the $9,400, the discount was taken by customers on $6,000 of account balances; therefore WWC received less than $9,400.
02/26	WWC recovered $540 cash from the customer whose account had previously been written off (see 02/18).
02/27	A $650 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 $2,200 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).

1	Feb. 1	Notes Receivable
		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
13	Feb. 18	Allowance for Doubtful Accounts
		Accounts Receivable
14	Feb. 19a	Accounts Payable
		Rent Expense
15	Feb. 19b	Cash
		Sales Discounts
		Accounts Receivable
16	Feb. 26a	Allowance for Doubtful Accounts
17	Feb. 26b	Cash
		Allowance for Doubtful Accounts
18	Feb. 27	Utility Expense
		Accounts Payable
19	Feb. 28	Dividends Declared
		Cash
20	Feb. 29a	Wages Expense
		Wages Payable
21	Feb. 29b	Bad Debt Expense
		Allowance for Doubtful Accounts
22	Feb. 29c	Interest Expense
		Interest Payable
23	Feb. 29d	Interest Receivable
		Interest Revenue

Answer 1

Wally's Widget Company

Journal Enteries

Date	Particulars	Debit in $	Credit in $
1.2.2012	Notes Receivable a/c Dr.	1600
	To accounts receivable		1600
2.2.2012	Insurance Expense Dr.	950
	To cash		950
5.2.2012	Inventory a/c Dr.	12000
	To accounts payble		12000
5.2.2012	Inventory a/c Dr.	320
	To cash		320
10.202012	Accounts Receivable a/c Dr.	22750
	To sales		22750
	Cost of goods sold a/c Dr.	10410
	To inventory		10410
15.2.2012	Unearned revenue a/c Dr.	5250
	To sales		5250
	Cost of goods sold a/c Dr.	3465
	To inventory		3465
15.2.2012	sales return a/c Dr.	2625
	To accounts receivable		2625
	Inventory a/c Dr.	1201
	to cost of goods sold		1201
16.202012	Wages expense a/c Dr.	2600
	To cash		2600
17.2.2012	Accounts payble a\c Dr.	12000
	To cash		11760
	To purchase discount		240
18.2.2012	Allowable for doubtful accounts a/c Dr.	1800
	Bed debts a/c Dr.	100
	To accounts receivable		1900
19.2.2012	cash a/c Dr.	3100
	Rent expense a/c Dr.	3100
	To cash		6200
19.2.2012	Cash a/c Dr.	9660
	Sales disacount a/c Dr.	140
	To accounts recievable		9800
26.2.2012	Accounts recivable a/c Dr.	580
	To allowance of doubtful accounts		580
	Cash a/c Dr.	580
	To accounts recievable		580
27.2.2012	Utility expense a/c Dr.	850
	To utility payble		850
28.2.2012	Dividend a/c Dr.	750
	To cash		750

Adjusting Enteries

Date	Particulars	Debit in $	Credit in $
29.2.2012	Salary expense a/c Dr.	2600
	To salary payble		2600
29.2.2012	Bad debt a/c Dr.	1534
	To allowance for doubtful accounts		1534
	19175*0.08
29.2.2012	Interest expense a/c Dr.	150
	To interest payble		150
	15000*12%*1/12
29.2.2012	interst receivable a/c Dr.	16
	To interest income		16
	1600*0.12*1/12

Purchase Cost of Merchandise sold Inventory

Date	Quantity	Unit Cost	Total Cost	Quantity	Unit Cost	Total Cost	Quantity	Unit Cost	Total Cost
1.2.2012							50	85	4250
5.2.2012	160	77	12320				50	85	4250
							160	77	12320
10.2.2012				50	85	4250	80	77	6160
				80	77	6160
15.2.2012				45	77	34365	35	77	2695
15.2.2012	15	77	1155				50	77	3850
29.2.2012							50	77	3850
	Purchases		13475		COGS	13875	ending	inventory	3850
					Returns	1201
						12674

Trail Balance

As at 29.2.2012

Particulars	Debit in $	Credit in $
Cash	8980
Accounts receivable	19175
Allowance for doubtful accounts		2114
Interest receivable	16
Preapid insurance
Note receivable	1600
Inventory	3896
Unearned Revenue		0
Accounts Payble		0
Interest Payble		150
Salary Payble		2600
Utility Payble		850
		15000
Contributed caapital		6800
Retained earnings-Feb1,2012		5970
Dividend	750
Sales		28000
Sales Return	2625
Interest income		16
Cost of good sold	12674
Insurance expense	950
Wages expense	2600
Purchase discount		240
Bad debts	1634
Rent expense	3100
Sales discount	140
Utility expense	850
Salary expense	2600
interest expense	150
Totals	61740	60740

Statement Income

Sales		28000
Sales Return		-2625
Interst Income		16
		25391

Less:

Cost of goods sold	12674
Insurance expense	950
wages expense	2600
Purchase discount	-240
Bad debts	1634
Rent expense	3100
sales discount	140
Utility expense	850
Salary expense	2600
Interest expense	150	24458
Net Income		933

Statement of Retained Earnings

1.1.2012	5970
Add: Net Income	933
	6903
Dividend	-750
31.2.2012	6153

Balancesheet

As at 31.12.2012

Assets	Amount in $	Amounts In $	Liabilities	Amounts In $	Amounts In $
Current assets			Currents Liabilities
Cash	8980		Interest Payable	150
Accounts Receivable	19175		Salary Payable	2600
Allowance for doubtful accounts	-2114		Utility Payable	850
Interest Receivable	16		Notes Payable	15000	18600
Note Receivable	1600
Inventory	3896	31553	Owners Equity
			Contributed Capital	6800
			Retained Earnings-Feb29,2012	6153	12953
Totals		31553	Totals		31553