Question

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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	$	20,120		Unearned Revenue (25 units)	$	4,850
Accounts Receivable	$	11,150		Accounts Payable (Jan Rent)	$	2,300
Allowance for Doubtful Accounts	$	(1,400)		Notes Payable	$	15,000
Inventory (30 units)	$	2,700		Contributed Capital	$	6,000
				Retained Earnings – Feb 1, 2012	$	4,420

•	WWC establishes a policy that it will sell inventory at $170 per unit.
•	In January, WWC received a $4,850 advance for 25 units, as reflected in Unearned Revenue.
•	WWC’s February 1 inventory balance consisted of 30 units at a total cost of $2,700.
•	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 $1,400 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 $1,400 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 140 units of inventory are purchased on account by WWC for $10,500 – terms 2/15, n30.
02/05	WWC paid Federal Express $420 to have the 140 units of inventory delivered overnight. Delivery occurred on 02/06.
02/10	Sales of 110 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 $3,200.
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 $1,500.
02/19	$4,600 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 $9,000 of customers’ Accounts Receivable. Of the $9,000, the discount was taken by customers on $5,500 of account balances; therefore WWC received less than $9,000.
02/26	WWC recovered $500 cash from the customer whose account had previously been written off (see 02/18).
02/27	A $450 utility bill for February arrived. It is due on March 15 and will be paid then.
02/28	WWC declared and paid a $450 cash dividend.

Adjusting Entries:

02/29	Record the $3,200 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).

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.)

          

1-c.	Prepare the financial statements at the end of February. (Balance Sheet only, items to be deducted must be indicated with a negative amount.)

         
WWW, Inc. Balance Sheet Assets Liabilities Current Assets Current Liabilities Total Current Assets 0 Total Current Liabilities $ 0 Total liabilities Stockholders' Equity Total Stockholders' Equity Total Liabilities and Stockholders' Equity Total Assets

         

       

2.	Prepare all February 29 closing entries for WWC. Post to the T-Accounts in requirement 1-b. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

         

Answer 1

Wally's Widget Company (WW) Journal entries Date Account Feb 1. Note Receivable Accounts Receivable Credit Debit 1,400 1,400 Feb 2. 550 Insurance expense Cash 550 Feb 5. 10,500 Inventory Accounts Payable =10,500/140 = 75 per unit 2/15, n30 10,500 Feb 6. 420 -420/140 = 3 per unit Inventory Cash 420 18,700 =110*170 Feb 10a Accounts Receivable Sales Revenue 18,700 8,940 =2700+80*(75+3)) Feb 10b Cost of goods sold Inventory 8,940 4,850 Feb 15a Unearned Revenue Sales Revenue 4,850 1,950 Feb 15b Cost of goods sold Inventory =25* (75+3) 1,950 780 =10*(75+3) Feb 15c Inventory Cost of goods sold 780 1,700 =10*170 Feb 15d Sales Returns and Allowance Accounts Receivable 1,700 3,200 Feb 16. Wages expense Cash 3,200 10,500 Feb 17. Accounts Payable Cash Inventory 10,290 210 =10,500*2% 1,500 Feb 18. Allowance for doubtful accounts Accounts Receivable 1,500 Feb 19a Rent expense Accounts Payable Cash 2,300 2,300 4,600 Feb 19b Cash Sales discount Accounts Receivable 8,890 110 =(9,000-5,500)+(5,500*98%) =5,500*2% 9,000 500 Feb 26a Accounts Receivable Allowance for doubtful accounts 500 500 Feb 26b Cash Accounts Receivable 500 450 Feb 27. Utility expense Accounts Payable 450 Feb 28. Dividend declared 450 Cash 450

Adjusting entries Feb 29a Wages expense Wages Payable 3,200 3,200 900 Workings below Feb 29b Bad debts expense Allowance for doubtful accounts 900 150 =15,000*12%*1/12 Feb 29c Interest expense Interest Payable 150 =1,400*12%*1/12 14 Credit Feb 29d Interest Receivable Interest revenue Closing entries Date Account CJE 1 Sales Revenue Interest revenue Sales Returns and Allowance Sales discount Retained Earnings Debit 23,550 14 1,700 110 21,754 CJE 2 20,860 Retained Earnings Cost of goods sold Bad debts expense Insurance expense Interest expense Rent expense Utility expense Wages expense 10,110 900 550 150 2,300 450 6,400 CJE 3 450 Retained Earnings Dividend declared 450 Feb 18. Feb 26a Feb 29. Workings Allowance for doubful debts Opening balance - Allowance Write off Cash recovered Unadjusted Balance Adjusted Balance @ 8% of AR Bad debt expense 1,400 credit (1,500) debit 500 credit 400 credit 1,300 credit 900 =16,250*8% =1,300-400

Credit $ 8,940 Wally's Widget Company (wwc) T Accounts Date Debit Date Credit Date Cash Op bal $ 20,120 Feb 2. $ 550 Op bal Feb 19 $ 8,890 Feb 6. $ 420 Feb 10a Feb 16. $ 3,200 Feb 17. $ 10,290 Feb 19a $ 4,600 Feb 26a Feb 26b $ 500 Feb 28. $ 450 Debit Date Credit Accounts Receivable $11,150 Feb 1. $ 1,400 $ 18,700 Feb 150 $ 1,700 Feb 18. $ 1,500 Feb 19b $ 9,000 $ 500 Feb 26b $ 500 Date Debit D ate Credit Date Allowance for Doubtful Accounts Feb 18. $1,500 Op bal $ 1,400 Op bal Feb 26a $ 500 Feb 5. Feb 295 $ 900 Feb 6. Feb 150 Debit Date Inventory $ 2,700 Feb 10a $ 10,500 $ 420 $ 780 Feb 15b Feb 17. $ 1,950 $ 210 Bal. Bal. $ 1,300 Bal. $ 10,000 Notes Receivable $ 1,400 $ 16,250 Interest Receivable $ 14 $ 3,300 Unearned Revenue $ 4,850 Op bal Feb 1. Bal. Accounts Payable Op bal $ 10,500 Feb 5. $ 2,300 Feb 27. Feb 290 Feb 15a $ 4,850 Feb 17. Feb 19a $ 2,300 $ 10,500 $ 450 Bal. $ Bal. $ 14 Bal. $ 450 $ - 1,400 Wages Payable Feb 29a Notes payable Op bal Interest payable Feb 290 Contributed Capital Op bal $ 3,200 $ 150 $15,000 $ 6,000 $ 3,200 $ 150 Bal. Retained Earnings $ 20,860 Op bal $ 450 CIE 1 Bal. Dividend 450 CJE 3 Bal. Sales Revenue $ 23,550 Feb 10a Feb 15a $ 15,000 Bal. $ 6,000 Sales Returns & Allowances $ 18,700 Feb 15d $ 1,700 CJE1 $ 1,700 $ 4,850 Feb 28. $ $ 450 CJE1 CJE 2 CJE 3 $ 4,420 $ 21,754 $ 4,864 Bal. $ - Bal. Bal. Sales discounts 110 CJE1 $ . Cost of goods sold $ 8,940 Feb 150 $ 1,950 CJE 2 Bal. Interest Revenue $ 14 Feb 290 $ 1,700 Bad Debt expense $ 900 CJE 2 Feb 19 $ $ 110 CJE1 $ 14 Feb 295 $ 900 Feb 10b Feb 15b $ $ 780 10,110 Bal. Bal. $ - Bal. $ . Insurance expense $ 550 CJE 2 Bal. Rent expense $ 2,300 CJE 2 $ - Utility expense $ 450 CJE2 Feb 2. $ Interest expense $ 150 CJE 2 550 Feb 290 $ 150 Feb 19a $ 2,300 Feb 27. $ 450 Bal. Bal. S - Bal. $ . Bal. $ .. $ . Wages expense $ 3,200 CJE 2 $ 3,200 $ 6,400 Feb 16. Feb 29a Bal. $ .

Adjusted TB Debit Credit 10,000 16,250 1,300 3,300 1,400 14 450 3,200 150 Wally's Widget Company (WWc) Account Names Cash Accounts Receivable Allowance for doubtful accounts Inventory Note Receivable Interest Receivable Accounts Payable Unearned Revenue Wages Payable Interest Payable Notes Payable Contributed Capital Retained Earnings Dividend declared Sales Revenue Sales Returns and Allowance Sales discount Cost of goods sold Interest revenue Bad debts expense Insurance expense Interest expense Rent expense Utility expense Wages expense Totals 15,000 6,000 4,420 450 23,550 1,700 110 10,110 900 550 150 2,300 450 6,400 54,084 54,084

23,550 (1,700) (110) 21,740 10,110 11,630 Wally's Widget Company (WW) Income Statement For the period ended February 29, 2012 Sales Revenue Sales Returns and Allowance Sales discount Net Sales Cost of goods sold Gross Profit Operating expenses Bad debts expense Insurance expense Rent expense Utility expense Wages expense Total Operating expenses Operating Profit Other expenses (income) Interest expense Interest revenue Total Other expenses (income) Net Profit 900 550 2,300 450 6,400 10,600 1,030 150 (14) 136 894 Retained Earnings Statement For the period ended February 29, 2012 Retained Earnings, Beginning of Period Net Profit Dividend Retained Earnings, End of Period 4,420 894 (450) 4,864

Wally's Widget Company (WW) Balance Sheet As of February 29, 2012 Assets Current Assets Cash Accounts Receivable Allowance for doubtful accounts Inventory Note Receivable Interest Receivable Total Current Assets Liabilities & Equity Current Liabilities 10,000 Accounts Payable 16,250 Wages Payable (1,300) Interest Payable 3,300 1,400 14 29,664 Total Current Liabilities 450 3,200 150 3,800 Non-Current Liabilities Notes Payable Total Liabilities 15,000 18,800 Equity Contributed Capital Retained Earnings Total Equity 6,000 4,864 10,864 Total Assets 29,664 Total Liabilities & Equity 29,664