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	$	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).

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.)

Answer 1

Wally's Widget Company Journal Enteries Particulars 1.2.2012 Note Receivable a/c Debit in $ Credit in $ Date 1400 Dr. To Accounts Receivable 1400 Insurance expense a/c Dr. 2.2.2012 550 550 To Cash 5.2.2012 Inventory a/c Dr. 10500 To Accounts Payable 1050 5.2.2012 Freight in a/c 420 Dr. To Cash 420 10.2.2012 Accounts Receivable a/c Dr. 18700 To Sales 18700 110 x 170 Cost of goods sold a/c Dr. 8700 To Inventory 8700 15.2.2012 Unearned Revenue a/c Dr 4850 To Sales 4850 Cost of goods sold a/c Dr. 1875 To Inventory 1875 15.2.2012 Sales Return a/c Dr. 1700 To Accounts Receivable 1700 10 x 170

Debit in $ Credit in $ Particulars Date Inventory a/c To Cost of goods sold Dr. 750 750 16.2.2012 Wages expense a/c Dr. 3200 To Cash 3200 17.2.2012 Accounts Payable a/c Dr. 10500 To Cash 10290 210 To Purchase discount 18.2.2012 Allowance for doubtful accounts a/c Dr. 1400 Bad debts a/c Dr. 100 To Accounts Receivable 1500 19.2.2012 Accounts Payable a/c Dr Rent expense a/c 2300 2300 Dr. To Cash 4600 19.2.2012 Cash a/c 8890 Dr. Sales discount a/c Dr. 110 To Accounts Receivable 9000 5500 x 2% 110 26.2.2012 Accounts Receivable a/c Dr 500 To Allowance for doubtful accounts 500 Cash a/c Dr. 500 To Accounts Receivable 500 27.2.2012 Utility expense a/c Dr 450 To Utility payable 450 28.2.2012 Dividend a/c 450 Dr. To Cash 450

Adjusting Enteries Particulars 29.2.2012 Salary expense a/c Dr. To Salary payable Debit in $ Credit in $ Date 3200 3200 29.2.2012 Bad debt a/c Dr. 800 To Allowance for doubtful accounts 800 (16250) 0.08-500 800 Allowance for doubtful accounts 1400 -1400+500 500 29.2.2012 Interest expense a/c Dr 150 To Interest payable 150 15000 12% 1/12 29.2.2012 Interest Receivable a/c Dr. 14 14 To Interest income 1400 0.12 1/12 Closing Enteries Particulars Debit in $ Credit in $ Date 29.2.2012 Income Summary a/c 22595 Dr. To Cost of goods sold 9825 To Sales Return 1700 550 To Insurance expense To Wages expense 3200 To Purchase discount -210 To Bad debts 900 To Rent expense 2300 110 To Sales discount To Utility expense To Salary expense 450 3200 420 To Freight in To Interest expense 150 a/c 29.2.2012 Sales 23550 Dr. Interest Income a/c Dr. 14 To Income Summary 23564 29.2.2012 Income Summary a/c Dr. 969 To Retained Earnings 969 29.2.2012 Retained Earnings a/c Dr. 450 To Dividends 450

Purchase Cost of Merchandise sold Inventory Unit Cost Total Cost Quantity Unit Cost Total Cost Quantity Unit Cost Total CostQuantity Date 2700 1,2.2012 30 90 10500 2700 5.2.2012 140 75 30 90 10500 140 75 10.2.2012 30 90 2700 60 75 4500 6000 80 75 15.2.2012 25 75 1875 35 75 2625 15.2.2012 10 75 750 3375 29.12.2012 45 75 Purchases Ending Inventory 11250 COGS 10575 3375 Returns -750 9825

Unadjusted Trial Balance As at 29.2.2012 Debit in $ Credit in $ Particulars Cash 10000 Accounts Receivable 16250 Allowance for Doubtful Accounts 500 Interest Receivable Prepaid Insurance Note Receivable 1400 3375 Inventory Unearned Revenue 0 Accounts Payable 0 Interest Payable Salary Payable Utility Payable 450 Notes Payable Contributed Capital 15000 6000 Retained Earnings -Feb 1, 2012 4420 Dividend 450 Sales 23550 Sales Return 1700 Interest income Cost of goods sold 9825 Insurance expense 550 Wages expense 3200 Purchase discount 210 Bad debts 100 Rent expense 2300 Sales discount 110 Utility expense 450 Salary expense Freight in 420 Interest expense Totals 50130 50130 0

Adjusted Trial Balance As at 29.2.2012 Debit in $ Credit in $ Particulars Cash 10000 Accounts Receivable 16250 Allowance for Doubtful Accounts 1300 Interest Receivable 14 Prepaid Insurance 0 Note Receivable 1400 3375 Inventory Unearned Revenue Accounts Payable 0 Interest Payable 150 Salary Payable 3200 Utility Payable 450 Notes Payable Contributed Capital 15000 6000 Retained Earnings - Feb 1, 2012 4420 Dividend 450 Sales 23550 Sales Return 1700 Interest income 14 Cost of goods sold 9825 Insurance expense 550 3200 Wages expense Purchase discount 210 Bad debts 900 2300 Rent expense Sales discount 110 Utility expense 450 Salary expense 3200 Freight in 420 Interest expense 150 Totals 54294 54294 0 O C

Statement of Income For the period ending 29.2.2012 Sales 23550 Sales Return -1700 Interest income 14 21864 Less Cost of goods sold 9825 Insurance expense 550 3200 Wages expense Purchase discount -210 Bad debts 900 Rent expense 2300 Sales discount 110 Utility expense 450 Salary expense 3200 Freight in 420 Interest expense 150 20895 Net Income 969 Statement of Retained Earnings For the period ending 29.2.2012 1.1.2012 4420 Add:Net Income 969 5389 Dividend -450 31.12.2012 4939

Balancesheet As at 31.12.2012 Amounts in $ Amounts i Liabilities Amounts in $ Amounts in $ Assets Current Assets Current Liabilities Interest Payable Cash 10000 150 Accounts Receivable 16250 Salary Payable 3200 Allowance for Doubtful Accounts Interest Receivable Note Receivable Utility Payable -1300 450 Notes Payable 14 15000 18800 1400 29739 Owner's Equity Inventory 3375 Contributed Capital 6000 Retained Earnings - Feb 29, 2012 4939 10939 Totals 29739 29739 Totals 0