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	$	18,770		Unearned Revenue (25 units)	$	4,400
Accounts Receivable	$	9,800		Accounts Payable (Jan Rent)	$	1,400
Allowance for Doubtful Accounts	$	(950)		Notes Payable	$	14,000
Inventory (30 units)	$	2,400		Contributed Capital	$	5,100
				Retained Earnings – Feb 1, 2012	$	5,120

•	WWC establishes a policy that it will sell inventory at $160 per unit.
•	In January, WWC received a $4,400 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 $1,600 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 $1,600 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 $550 insurance premium covering the month of February. The amount paid is recorded directly as an expense.
02/05	An additional 120 units of inventory are purchased on account by WWC for $9,000 – terms 2/15, n30.
02/05	WWC paid Federal Express $240 to have the 120 units of inventory delivered overnight. Delivery occurred on 02/06.
02/10	Sales of 90 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	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 $2,300.
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 $1,050.
02/19	$2,800 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 $8,100 of customers’ Accounts Receivable. Of the $8,100, the discount was taken by customers on $4,000 of account balances; therefore WWC received less than $8,100.
02/26	WWC recovered $410 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 $700 cash dividend.

Adjusting Entries:

02/29	Record the $2,300 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 10% 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). Record the Journal Entries for: Feb. 10, Feb. 15, Feb. 29

Answer 1

Journal entries for Feb.10, Feb.15 and Feb.29
Date	Account	Debit	Credit
2/10/2012	Accounts receivable	14400
	Sales revenue		14400
	(To record sales of 90 units from 02/07 to 02/10)
	Cost of goods sold	7020
	Inventory		7020
	(To record cost of goods sold for 90 units)
02/15/2012	Unearned revenue	4400
	Sales revenue		4400
	(To record delivery of 25 units against advance received in January)
	Cost of goods sold	1925
	Inventory		1925
	(To record cost of goods for 25units sold @$77 per unit)
02/15/2012	Sales revenue	1600
	Accounts receivable		1600
	(To record return of 10 units sold on 02/10)
	Inventory	770
	Cost of goods sold		770
	(To record cost of the 20 units returned)
02/29/2012	Salaries and Wages expense	2300
	Salaries and Wages payable		2300
	(To record wages accrued)
02/29/2012	Bad debt expense	875
	Allowance for doubtful accounts		875
	(To record the provision for bad debts expense )
02/29/2012	Interest expense	140
	Interest payable		140
	(To record interest on note payable for February @12% p.a. 14,000*12% /12)
02/29/2012	Interest receivable	16
	Interest revenue		16
	(To record interest earned on note receivable @9% of Kit Kat -- 12%*1,600 / 12)

Workings:
Cost of goods sold
Sale of 90 units from 02/07 to 02/10
Beginning inventory of 30 units	2400
Balance 60 units from 02/05 purchase	4620
@$77 per unit (9,000+240)/120
	7020
Allowance for doubtful accounts
Ending Balance of accounts receivable		11850
Allowance @10%	A	1185
Allowance account:
Beginning balance	950
Writtne off in February	-1050
Recovered from customer written off	410
Ending balance for February	B	310
Balance to be provided now	(A - B)	875