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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-b.	Post all February entries (transactions and adjustments) to the T-accounts.

  

Answer 1

Cash
Beg. bal.	20,720	02/02	750
02/19	9,280	02/05	360
02/26	540	02/16	2,200
		02/17	13,230
		02/19	5,400
		02/28	850
End. bal	7,750
Accounts Receivable
Beg. bal.	11,750	02/01	2,000
02/10	25,500	02/15	3,400
02/26	540	02/18	1,700
		02/19	9,400
		02/26	540
End. bal.	20,750
Allowance for Doubtful Accounts
02/18	1,700	Beg. bal.	1,600
		02/26	540
		Bad debt expense	1,220
		End. bal.	1,660
Inventory
Beg. bal.	2,550	02/10	11,790
02/05	13,500	02/17	270
02/05	360
02/15	1,540
End. bal.	5,890
Interest Receivable
02/28 Adj.	20
End. bal.	20
Notes Receivable
Beg. bal.	0
02/01	2,000
End. bal.	2,000
Unearned Revenue
02/15	5,050	Beg. bal.	5,050
Accounts Payable
02/17	13,500	Beg. bal.	2,700
02/19	2,700	02/05	13,500
		02/27	650
		End. bal.	650
Salaries Payable
		02/28 Adj.	2,200
		End. bal.	2,200
Interest Payable
		02/28 Adj.	130
		End. bal.	130
Sales
		02/10	25,500
		02/15	5,050
		End. bal.	30,550
Sales Returns and Allowances
02/15	3,400
End. bal.	3,400
Sales Discounts
02/19	120
End. bal.	120
Cost of Goods Sold
02/10	11,790	02/15	1,540
End. bal.	10,250
Rent Expense
02/19	2,700
	2,700
Utilities Expense
02/27	650
	650
Salaries Expense
02/16	2,200
02/28 Adj.	2,200
	4,400
Insurance Expense
02/02	750
	750
Interest Expense
02/28 Adj.	130
	130
Bad Debt Expense
02/28 Adj.	1,220
	1,220
Interest Revenue
		02/28 Adj	20
			20