Question

Cash	$	20,420		Unearned Revenue (35 units)	$	4,950
Accounts Receivable	$	11,450		Accounts Payable (Jan Rent)	$	2,500
Allowance for Doubtful Accounts	$	(1,500)		Notes Payable	$	16,000
Inventory (40 units)	$	3,600		Contributed Capital	$	6,200
				Retained Earnings – Feb 1, 2012	$	4,320

WWC establishes a policy that it will sell inventory at $145 per unit.
•	In January, WWC received a $4,950 advance for 35 units, as reflected in Unearned Revenue.
•	WWC’s February 1 inventory balance consisted of 40 units at a total cost of $3,600.
•	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 $1,800 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 $1,800 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 $650 insurance premium covering the month of February. The amount paid is recorded directly as an expense.
02/05	An additional 160 units of inventory are purchased on account by WWC for $12,000 – terms 2/15, n30.
02/05	WWC paid Federal Express $320 to have the 160 units of inventory delivered overnight. Delivery occurred on 02/06.
02/10	Sales of 130 units of inventory occurred during the period of 02/07 – 02/10. The sales terms are 2/10, net 30.
02/15	The 35 units that were paid for in advance and recorded in January are delivered to the customer.
02/15	10 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 $2,000.
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 $1,600.
02/19	$5,000 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 $9,200 of customers’ Accounts Receivable. Of the $9,200, the discount was taken by customers on $6,500 of account balances; therefore WWC received less than $9,200.
02/26	WWC recovered $520 cash from the customer whose account had previously been written off (see 02/18).
02/27	A $550 utility bill for February arrived. It is due on March 15 and will be paid then.
02/28	WWC declared and paid a $650 cash dividend.

Adjusting Entries:

02/29	Record the $2,000 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. what is the WWC's gross profit for feburary?

2. What is the gross profit percentage?

3. What were WWC’s net sales for February?

4. How many units are in ending inventory?

5. What is the cost per unit of the ending inventory?

6. If WWC had chosen LIFO, calculate its February cost of goods sold.

Answer 1

In the books of WWC:

Date	Account Titles	Debit	Credit
		$	$
02/01	Note Receivable	1,800
	Accounts Receivable		1,800
02/02	Insurance Expense	650
	Cash		650
02/05	Inventory	12,000
	Accounts Payable		12,000
02/05	Inventory	320
	Cash		320
02/10	Accounts Receivable ( 130 units x $ 145)	18,850
	Sales		18,850
02/10	Cost of Goods Sold ( $ 3,600 + 90 x ( 12,000 + 320) / 160	10,530
	Inventory		10,530
02/15	Unearned Revenue	4,950
	Accounts Receivable	125
	Sales		5,075
02/15	Cost of Goods Sold ( 35 x $ 77)	2,695
	Inventory		2,695
02/15	Sales Returns and Allowances	1,450
	Accounts Receivable		1,450
02/15	Inventory	770
	Cost of Goods Sold		770
02/16	Wages Expense	2,000
	Cash		2,000
02/17	Accounts Payable	12,000
	Purchase Discounts		240
	Cash		11,760
02/18	Allowance for Doubtful Accounts	1,600
	Accounts Receivable		1,600
02/19	Accounts Payable	2,500
	Rent Expense	2,500
	Cash		5,000
02/19	Cash	9,070
	Sales Discounts	130
	Accounts Receivable		9,200
02/26	Accounts Receivable	520
	Allowance for Doubtful Accounts		520
02/26	Cash	520
	Accounts Receivable		520
02/27	Utilities Expense	550
	Accounts Payable		550
02/28	Dividends	650
	Cash		650

Adjusting Entries:

Date	Account Titles	Debit	Credit
02/28		$	$
1.	Salaries and Wages Expense	2,000
	Salaries and Wages Payable		2,000
2.	Bad Debt Expense	890
	Allowance for Doubtful Accounts		890
3.	Interest Expense	160
	Interest Payable		160
4.	Interest Receivable	13.50
	Interest Revenue		13.50

1. Computation of gross profit for February:

Net Sales	$ 22,345
Cost of Goods Sold	12,215.00
Gross Profit	$ 10,130

2. Gross profit percentage = $ 10,130 / $ 22,345 * 100 = 45.33 %.

3. Net sales for February = $ 22, 345.

4. Units in ending inventory = 40 + 160 - 130 - 35 + 10 = 45 units.

5. Cost per unit of ending inventory = $ ( 12,000 + 320) / 160 x 45 = $ 3,465.