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 $ 19,820 Unearned Revenue (35 units) $ 4,750 Accounts Receivable $ 10,850 Accounts Payable (Jan Rent) $ 2,100 Allowance for Doubtful Accounts $ (1,300) Notes Payable $ 14,000 Inventory (40 units) $ 2,800 Contributed Capital $ 5,800 Retained Earnings – Feb 1, 2012 $ 5,520 • WWC establishes a policy that it will sell inventory at $150 per unit. • In January, WWC received a $4,750 advance for 35 units, as reflected in Unearned Revenue. • WWC’s February 1 inventory balance consisted of 40 units at a total cost of $2,800. • 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 $450 insurance premium covering the month of February. The amount paid is recorded directly as an expense. 02/05 An additional 190 units of inventory are purchased on account by WWC for $14,250 – terms 2/15, n30. 02/05 WWC paid Federal Express $380 to have the 190 units of inventory delivered overnight. Delivery occurred on 02/06. 02/10 Sales of 160 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 25 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 $3,000. 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 $1,400. 02/19 $4,200 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 $8,800 of customers’ Accounts Receivable. Of the $8,800, the discount was taken by customers on $4,500 of account balances; therefore WWC received less than $8,800. 02/26 WWC recovered $480 cash from the customer whose account had previously been written off (see 02/18). 02/27 A $900 utility bill for February arrived. It is due on March 15 and will be paid then. 02/28 WWC declared and paid a $800 cash dividend. Adjusting Entries: 02/29 Record the $3,000 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). 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-b. Post all February entries (transactions and adjustments) to the T-accounts. 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.) 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 Journal Enteries Date Particulars 1.2.2012 Note Receivable a/c Dr. To Accounts Receivable Debit in $Credit in $ 1400 1400 2.2.2012 450 Insurance expense a/c Dr. To Cash 450 Dr. 14250 5.2.2012 Inventory a/c To Accounts Payable 14250 5.2.2012 Dr. 380 Freight in a/c To Cash 380 24000 24000 10.2.2012 Accounts Receivable a/c Dr. To Sales 160 x 150 Cost of goods sold a/c Dr. To Inventory 11800 11800 4750 15.2.2012 Unearned Revenue a/c Dr. To Sales 4750 Dr. 2625 Cost of goods sold a/c To Inventory 2625 15.2.2012 Sales Return a/c Dr. To Accounts Receivable 25 x 150 3750

Date Particulars Inventory a/c To Cost of goods sold Dr. Debit in $ Credit in $ 1875 1875 Dr. 3000 16.2.2012 Wages expense a/c To Cash 3000 14250 17.2.2012 | Accounts Payable a/c Dr. To Cash To Purchase discount 13965 285 1300 18.2.2012 | Allowance for doubtful accounts a/c Dr. Bad debts a/c Dr. To Accounts Receivable 100 1400 19.2.2012 Accounts Payable a/c Dr. Rent expense a/c Dr. To Cash 2100 2100 4200 8710 90 8800 19.2.2012 Cash a/c Sales discount a/c Dr. To Accounts Receivable 4500 x 2% = 90 26.2.2012 Accounts Receivable a/c Dr. To Allowance for doubtful accounts 480 1 480 Cash a/c Dr. To Accounts Receivable 480 27.2.2012 Utility expense a/c Dr. To Utility payable 9000 1 900 Dr. 800 28.2.2012 Dividend a/c To Cash 800

Adjusting Enteries Date Particulars 29.2.2012 Salary expense a/c Dr. To Salary payable Debit in $ Credit in $ 3000 3000 1080 29.2.2012 Bad debt a/c Dr. 1080 To Allowance for doubtful accounts (19500) * 0.08 - 480 = 1080 Allowance for doubtful accounts = 1300-1300+480 = 480 29.2.2012 Interest expense a/c Dr. 140 To Interest payable 14000 * 12% * 1/12 140 29.2.2012 Interest Receivable a/c Dr. To Interest income 1400 * 0.12 * 1/12 Closing Enteries Date Particulars 29.2.2012 Income Summary a/c Dr. To Cost of goods sold To Sales Return To Insurance expense To Wages expense To Purchase discount To Bad debts To Rent expense To Sales discount To Utility expense To Salary expense To Freight in To Interest expense Debit in $Credit in $ 27255 12550 3750 450 3000 -285 1180 2100 90 900 3000 380 140 28750 29.2.2012 Sales a/c Dr. Interest Income a/c Dr. To Income Summary 28764 1509 29.2.2012 Income Summary a/c Dr. To Retained Earnings 1509 Dr. 800 29.2.2012 Retained Earnings a/c To Dividends 800

Purchase Cost of Merchandise sold Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Quantity Date 1.2.2012 5.2.2012 70 Inventory Unit Cost Total Cost 2800 70 2800 14250 5250 190 75 14250 40 10.2.2012 40 120 70 75 75 2800 9000 2625 35 2625 75 1875 15.2.2012 15.2.2012 25 29.12.2012 Purchases 60 75 4500 4500 16125 Ending Inventory COGS Returns 14425 -1875 12550

Debit in $ Credit in $ 6215 19500 480 1400 4500 Unadjusted Trial Balance As at 29.2.2012 Particulars Cash Accounts Receivable Allowance for Doubtful Accounts Interest Receivable Prepaid Insurance Note Receivable Inventory Unearned Revenue Accounts Payable Interest Payable Salary Payable Utility Payable Notes Payable Contributed Capital Retained Earnings - Feb 1, 2012 Dividend Sales Sales Return Interest income Cost of goods sold Insurance expense Wages expense Purchase discount Bad debts Rent expense Sales discount Utility expense Salary expense Freight in Interest expense Totals 900 14000 5800 5520 800 28750 3750 12550 450 3000 285 100 2100 90 900 380 55735 55735

Debit in $ Credit in $ 6215 19500 1560 14 1400 4500 Adjusted Trial Balance As at 29.2.2012 Particulars Cash Accounts Receivable Allowance for Doubtful Accounts Interest Receivable Prepaid Insurance Note Receivable Inventory Unearned Revenue Accounts Payable Interest Payable Salary Payable Utility Payable Notes Payable Contributed Capital Retained Earnings - Feb 1, 2012 Dividend Sales Sales Return Interest income Cost of goods sold Insurance expense Wages expense Purchase discount Bad debts Rent expense Sales discount Utility expense Salary expense Freight in Interest expense Totals 140 3000 900 14000 5800 5520 800 28750 3750 12550 450 3000 285 1180 2100 90 900 3000 380 140 5996959969

Statement of Income For the period ending 29.2.2012 Sales Sales Return Interest income 28750 -3750 14 25014 Less : Cost of goods sold Insurance expense Wages expense Purchase discount Bad debts Rent expense Sales discount Utility expense Salary expense Freight in Interest expense Net Income 12550 450 3000 -285 1180 2100 90 900 3000 380 140 23505 1509 Statement of Retained Earnings For the period ending 29.2.2012 1.1.2012 Add:Net Income 5520 1509 7029 -800 6229 Dividend 31.12.2012

Amounts in $ Amounts in $ 140 Balancesheet As at 31.12.2012 Assets Current Assets Cash Accounts Receivable Allowance for Doubtful Accounts Interest Receivable Note Receivable Inventory Amounts in $ Amounts i Liabilities Current Liabilities 6215 Interest Payable 19500 Salary Payable -1560 Utility Payable Notes Payable 1400 4500 30069 Owner's Equity Contributed Capital Retained Earnings - Feb 29, 2012 30069 Totals 3000 900 14000 14 18040 5800 6229 12029 30069 Totals